August Unemployment Down 6.3 Points in Four Months: Comparing the 2020 Jobs Recovery to the 2008 Recession

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Unemployment rate: 2008-2020

4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff analyzes the stark contrast between the 2020 jobs recovery and that of the Obama years… even if the media won’t.

Today the Bureau of Labor Services announced that 1.4 million jobs were created in August.

But more importantly, the August unemployment rate fell to 8.4%, far below the consensus forecast of 9.8%.

Four months ago, the unemployment rate peaked at 14.7%, accompanied by endless media headlines comparing the Coronavirus recession to the Great Depression.

The Economics Correspondent, himself author of twenty CO articles on the Great Depression, thought from the beginning that such comparisons were uninformed and ridiculous.

During the Great Depression, unemployment not only peaked at 25.9% (1933) but it remained over 10% for more than a decade (October 1930 - February 1941 to be exact).

In 2020 unemployment hovered in the double-digits just four months before making its exit.

That’s 124 months versus four. “Not comparable” would be an understatement.

But what’s even more striking about the August unemployment rate is that it’s already down 6.3 percentage points from the peak in just four months.

Let’s contrast this to the jobless picture after the 2008 financial crisis.

Under Barack Obama the unemployment rate peaked in October of 2009 at 10.2% and reached full employment, loosely defined as 5% joblessness, in September of 2015 nearly six years later.

Even as Obama was on his way out in January of 2017 unemployment was at 4.8% or down 5.4 percentage points, and it took a Trump administration to get the rate down to 3.8% (finally down 6.3 points) in May of 2018 or 8 years and 8 months later.

See chart for a dramatic visual representation:

https://fred.stlouisfed.org/graph/fredgraph.png?g=vefK

Granted, once you’re down to full employment it’s more difficult to reduce the jobless rate as quickly, but the comparison is still worth repeating: In 2020 it’s taken four months for unemployment to fall 6.3 points from the peak. In 2009 it took 104 months. So the job recovery in the Trump era is so far moving 26 times faster than that of the Obama era.

The press was rapid-fire, trigger-happy quick to compare joblessness under Trump to the Great Depression just a few months ago, but today it’s dead silent when it comes to comparing job recoveries under Trump and Obama... or the Great Depression, or any other recovery for that matter.

So why was unemployment so much slower to fall during the Obama years? The Economics Correspondent sees two primary reasons: one beyond Obama’s control, and the other quite Obama-specific.

First, what Obama had little control over was the nature of the recession he was handed. After the 2008 financial crisis the economy was highly imbalanced and had to undergo fundamental readjustments. There was a huge bad mortgage overhang, many banks were reeling from massive deterioration in their assets and loan portfolios, and an oversized portion of the economy that had been misallocated to real estate and finance had to be diverted away to more rational lines of business.

Those kinds of adjustments take time. Not necessarily six years but they don’t fix themselves overnight either.

By contrast the economy was doing extremely well in early 2020 when it was suddenly hit by an exogenous shock. The introduction and spread of Covid-19 into the USA disrupted the behavior of consumers and businesses—even on a voluntary basis. People stopped flying and avoided restaurants, bars, movie theaters, concerts, cruise ships, public transportation, and countless other venues. Spectator sports closed their doors to fans. Many businesses told workers not to come to the office and laid off those who couldn’t work remotely.

This isolation problem was further compounded by government lockdowns that prohibited even those consumers, businesses, and workers who wanted to participate in the economy from doing so.

But there was no major fundamental problem with the economy itself.

As soon as lockdowns were loosened across the country, economic activity partially resumed and moved closer to its pre-pandemic levels. Thus unemployment has fallen rapidly from the April peak. However it will likely take a full resolution of the virus problem before full employment is possible again, and monthly job gains will probably slow from the torrent pace of the summer.

One could argue the economy was already in great shape because of Trumponomics policies and there would be some truth to that. But even a President Hillary Clinton would likely be looking at a healthier economy in early 2020 than Barack Obama was faced with in early 2009.

Second, the policy responses by the Trump and Obama administrations couldn’t be more different.

President Obama took a fragile economy barely starting to recover and hindered it further with thousands of new regulations, raised taxes (in 2012), and launched a nonstop rhetorical war on the employers who he also expected to reduce unemployment. 

Obamacare itself was a huge job killer, as businesses 50 fulltime employees or over were required to provide health insurance and thus small businesses refused to grow to over 50 workers or even laid off enough to get below 50. And large corporations cut hours to convert millions of workers from full to part time.

It’s no coincidence that the job recovery to full employment—when measured from the date of a banking crisis to when 5% unemployment was reached—was the second longest in American history at exactly seven years, only after the Great Depression itself.

Now *there* was a valid Great Depression comparison, but the press was silent on that one too.

President Trump’s response to his recession has been fairly hands off and if anything gone in the opposite direction. There have been tax refunds instead of tax hikes, and he has signed emergency deregulation instead of adding regulations, although most of the rules suspensions have been designed to speed up and facilitate fighting the virus.

Both Presidents signed stimulus legislation. While the Economics Correspondent is not generally a fan of stimulus spending, there have been key differences there as well.

The Obama stimulus focused heavily on channeling government deficit spending towards green energy companies—nearly all of which failed—and overpriced/wasteful public works programs, many of them politically motivated. 

The Trump stimulus has been focused more on government deficit financing of "bridge support" to a post-Covid recovery for existing businesses and industries, not ones he’d like to create himself.

Both stimulus plans expanded unemployment benefits. While the Correspondent doesn’t think it was a good idea to offer low-skilled workers additional payments that were more lucrative than working, the Obama stimulus extended unemployment checks for up to 99 weeks which incentivized millions to put off looking for work longer. And of course the current recession only began about 20 weeks ago so there hasn’t even been a reason to offer 99 weeks of benefits.

So the current job recovery is to date the fastest in American history, the press has suddenly gone silent with amnesia, and the contrast between 2020’s job market and that of 2009-2018 couldn’t be greater. The fast-track to reemployment under Trump is due in part to the unique and shorter-term nature of the recession, but it’s also an indictment of the job-killing policies of the Obama administration and the generally job-friendly policies under Donald Trump.

And don’t expect to hear that from the press, especially two months before the election.

Inflation and Deflation Fallacies Part 2: "Deflation Plunges Economies Into Depression"

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Apoplithorismosphobia: (n.) The fear of monetary and economic deflation.

5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues with the his series on inflation and deflation fallacies

The view that falling prices invariably produce rapid and painful recessions and depressions is accepted almost as religious dogma among central bankers, government policymakers, the press, and many academics. 

The hypothesis, which has clearly not been closely examined historically or theoretically, is that if consumers and businesses see prices falling they will put off purchases and the loss of demand will plunge the economy into a “deflationary spiral” from which it will need decades to recover.

And according to many deflationphobists, prices don’t even have to fall. In the minds and writings of mainstream economists like Paul Krugman, Ben Bernanke, and Larry Summers no inflation or even too little inflation—say, prices rising only 0.5% or 1% per year—is enough to produce a recession or stymie a recovery

II. THEORETICAL PROBLEMS: TIME PREFERENCES

To quote British Keynesian economist Duncan Wheldon:

"Falling prices might sound like a good thing, and in individual cases they often are, but a falling general price level is usually associated with severe economic strains. Why buy anything today if it will be cheaper next week? The end result tends to be falling output, rising unemployment, falling wages and a large increase in the real burden of debt."

What could be wrong with that reasoning? Surely if prices fall, or even stay flat, no one will buy anything and we will experience another Great Depression, right?

Actually there are plenty of glitches in this reasoning. 

First, consumer and business time preferences have to be factored in. All things being equal, consumers and especially businesses tend to prefer consumption in the present over consumption in the future. 

In fact at the extreme no one really stops buying completely. Imagine if everyone stopped buying food because they felt food prices will be cheaper in a year. All of humanity would starve to death. 

The same is true for not paying rent or the mortgage or the power and gas bill. In most places we’d die from exposure to the elements. Clothes, medicine, and many other consumables are absolute necessities and no one is going to stop buying them just because they might be 1% cheaper in a year.

But what about discretionary goods? Surely if discretionary consumables fall in price then purchases will grind to a halt, right?

No. Consumer time preferences play a strong role even with nonessential purchases. 

Let’s take Starbucks coffee with 0.5% annual deflation for example. To paraphrase Austrian economic historian Thomas Woods, does anyone really believe Starbucks customers are thinking “I’m not going to have that cup of coffee this morning, because next year it will be two cents cheaper?” 

A year later are consumers thinking “Those Starbucks people must think I’m some kind of a sucker, it’s going to be another two cents cheaper next year?”

Of course not. Starbucks customers, even armed with an expectation that prices may fall 0.5% a year, are still going to buy their coffee today—because of time preferences.

But Starbucks coffee is a relatively cheap item. The savings are much larger on big ticket items so consumers will certainly hold off on those purchases, right?

Well let’s look at one of the biggest ticket consumer goods there is: cars. 

With 0.5% deflation a consumer who really wants a new car for $25,000 might be able to get it for $125 less if they wait a year ($24,875).

If they put 5% down and take out a car loan, as most consumers do, for 60 months at 4% interest their monthly payment will fall from $437.39 to $435.21: a savings of $2.18. How many people would really postpone buying a car they want or need for one year because they anticipate they might save $2.18 a month?

According to Woods, in the deflationphobists' view of the world “None of us are going to buy anything until we’re on our deathbed and then we’ll finally reach out and grab an iPhone just as we’re expiring.”

The same time preference paradigm is even truer for businesses. 

Companies that need to make their capital purchases and investments now in order to secure greater revenues and a return on investment tomorrow aren’t going to defer their plans by a year hoping to save 0.5%. In the year they wait their operations will be so disrupted (not to mention the loss of their higher revenue streams) that the costs would be far greater.

OK, well what if prices fall faster, like 1% or even 2%? 

Well no need for theory. Let’s just look at actual evidence in possibly the most deflationary sector of the economy: consumer electronics. Everyone knows if they buy a phone or a TV or a computer today, a better version will come out in six months for less money, often at a discount greater than 1% or 2%. It’s been that way for decades.

Are the phone, TV, or computer industries in Great Depression as a result? Has there been a 30 or 40 or 50 year slump in consumer electronics because no one is buying? Of course not. It’s been possibly the hottest growth industry all that time. Because there are some things that human beings just want now and they’re not going to put their entire lives on hold for a year or two just to save 0.5%... or 1%... or 2%.

III: THEORETICAL PROBLEMS: CONSUMPTION VS SAVING

And to the extent that consumers might really curb their purchases slightly the necessary result would be greater savings (ie. deferral of consumption), an indispensable key to economic growth. 

Real savings were a critical component fueling the explosive growth of the American economy in the late 19th century, or Great Britain during the Industrial Revolution, or Japan after World War II, or China in the last 30 years, as opposed to the sluggish growth plaguing most of the overconsumption world in the 2000’s. 

Because the actual physical tools and machines that make workers more productive and new technologies available don’t exist if consumers spend all their income on immediate gratification now instead of preserving some share of the productive economy to produce the advanced tools and machines that will fuel a larger, more prosperous economy tomorrow.

Deflationphobic economists assume that spending and consumption are the key to economic growth, neglecting the critical precondition of saving. Someone must forgo consumption in the present, but many mainstream economists—particularly Keynesians—believe central banks printing more money and transferring it to banks in exchange for bonds (their idea of saving) is a credible substitute for tangible capital resources. It’s not.

(Note: this is the larger concept of capital theory which the Correspondent will write about in greater detail later).

IV. HISTORICAL EVIDENCE

OK so the theory all sounds good, but surely empirical evidence supports the deflationphobia view, doesn’t it?

Well it just so happens we have historical evidence in the United States and plenty of it: over 100 years in fact.

From 1800 to the establishment of the Federal Reserve in 1914, prices nationwide fell about 42%. That’s slightly faster than a compounded average of 0.5% deflation per year. 

Granted there were some ups and downs in that century-plus, namely inflations during wars such as the War of 1812 and the Civil War, and an experiment with artificial bimetallic inflation in the early 1890’s, accompanied by slightly more rapid deflations between inflationary periods.

But for the vast majority of those 114 years prices fell in the United States.

Was the result a 114 year Great Depression that dwarfed the 1929-1946 Great Depression? No, the United States grew into the world’s largest economy in what’s considered an economic miracle of that period by all but the most hardcore Marxist economists and economic historians. 

This presents quite a quandry for the deflationphobists who warn 0.5% deflation or even zero inflation will lead to disaster.

The same story holds true in Great Britain, Canada, Germany and the industrialized European nations of the 19th century. Prices gently fell and far from tanking, their economies boomed. So both the empirical evidence, as well as the more closely examined theory, contradict the mainstream view that insufficient inflation or even benign deflation will plunge economies into deep depression.

We’ll examine the economics profession’s deflation blind spot in more detail in Part 3.

California Legislature Proposes New "Wealth Tax" Plus 16.8% Top Income Tax Rate

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“[California Democratic State Assembly Member Rob] Bonta said he would like to see a wealth tax passed in addition to the “millionaires tax” proposed in a bill introduced in late July. AB1253 would add surcharges … …bringing the top rate to 16.8%. California’s top rate today, at 13.3%, is already the highest in the nation.”

“We must consider revenue generation.”

1 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff recalls well the recent history of California’s income tax brackets.

1) Up until the Great Financial Crisis the top tax rate for single adjusted gross incomes above $47,000 was 9.3%.

2) In the budget crisis that ensued during the depths of the 2009 recession Governor Arnold Schwarzenegger hinted at a compromise to allow some temporary tax hikes until the recession was over. Sacramento Republicans walked away, all voting no, and Schwarzenegger worked exclusively with majority Democrats to raise taxes on higher incomes.

The rate increase would be “temporary” and rise from 9.3% to 11.3% for incomes over $1 million.

Of course we all know what “temporary” tax hikes mean in government.

3) Well technically Schwarzenegger did keep his promise. The 11.3% rate was indeed temporary, but only because in 2012 Governor Jerry Brown raised the top rate again to 13.3%, easily the highest in the nation. 

The average top state income tax bracket across the 50 states + DC is 5.25%.

4) And now California Democrats are proposing to raise the top rate again to 16.8% on incomes over $5 million, plus a 0.4% “wealth tax” on their net assets, year after year after year.

So with the top federal rate of 37%, California’s top earners would surrender 53.8% of their income before they even get a paycheck. Add to that property taxes on even modest homes assessed at millions of dollars, sales taxes, the Obamacare 3.8% net investment tax, utility taxes, car taxes, tolls, and 0.4% of their net assets, and the Golden State’s highest earners are out close to 60% of their income at least. And the higher their home value and the higher their assets the more their paycheck vanishes.

This doesn’t even address how they’re supposed to raise cash to pay the wealth tax on illiquid assets like land, commercial real estate, or a business.

So you’re a business owner or corporate executive who makes $5 million a year, but you’re lucky to take home $2 million. Meaning every year you work into August for free.

And if you make $5 million a year, moving from California to Texas, Florida, or any of the other zero income tax states nets you nearly $1 million annually just for changing your address. 

But of course a 16.8% state income tax won’t compel anyone to move out. Because Sacramento Democrats said so.

More details at:

https://www.sfchronicle.com/business/networth/article/California-lawmakers-propose-a-15482011.php

ps. The Economics Correspondent would still prefer a 16.8% top income tax rate imposed on California's overwhelmingly liberal populace over House Speaker Pelosi's attempt to extort one or two trillion federal dollars from coronavirus relief bill negotiations to bail out fiscally irresponsible states like her own.

Responsible red state voters shouldn't be forced to bail out blue state fiscal recklessness, and a 16.8% tax bracket would force Sacramento and its voters to deal with the repercussions of their progressive policies: angry taxpayers leaving for redder pastures.

Postscript to the New York Times' Critique of the Gold Standard: Banking Stability Under Fiat vs Gold

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2 MIN READ - A quick postscript to the Cautious Optimism Correspondent for Economic Affairs’ recent critique of the New York Times’ own critique of the gold standard. 

Former Obama administration Treasury official and “Car Czar” Steven Rattner recently accused the gold standard of promoting financial instability and bona fide banking crises in contrast to the allegedly more stable fiat money standard managed by central bank technocrats and government regulators.

Perhaps Rattner should have read a little history before writing his column.

“Only five countries experienced severe waves of bank insolvency worldwide in the years 1875-1913.”

“Banking Crises Yesterday and Today" by Charles Calomiris, Columbia University

“According to Calomiris (2010) there were only 10 banking crises worldwide between the years 1875 and 1913, and five occurred in the United States” [1884, 1890, 1893, 1896, 1907: Correspondent’s note]

“Government-Cheerleading Bias in Money and Banking Textbooks” by Nicholas Curott and Ben Thrasher, Ball State University and Tyler Watts, Ferris State University

“Only 34 of those 117 countries [with population greater than 250,000] were crisis free from 1970 to 2010. Sixty-two countries had one crisis. Nineteen countries experienced two crises. One country underwent three crises and another weathered no less than four.”

“Fragile by Design: The Political Origins of Banking Crises and Scarce Credit” by Charles Calomiris, Columbia University and Steven Haber, Stanford University

Summary…

The classical gold standard era: 38 years. Ten crises in five countries. 

The fiat money, central bank-managed era: 40 years. 107 crises in 83 countries.

It’s also worth mentioning that the world classical gold standard of approximately 1879-1914, while not a 100% perfectly free market system, was as close as the entire globe has ever come and would still be considered virtually laissez-faire by today’s regulation-happy politicians and mainstream economists. And the most regulated banking system in the industrialized world during that period by far was the United States. 

Most American banks were restricted from branching beyond their sole headquarters office making it impossible for them to diversify their loan portfolios and depositors.

Banks were forbidden from issuing paper currency without holding 111% the equivalent value of U.S. Treasury bonds—bonds that became increasingly scarce as the federal government paid down the national debt after the Civil War—thus creating regular currency shortages. 

Perverse regulations made the American banking system weak and inherently fragile. Thus it’s no coincidence that the USA accounts for a full half of only ten banking crises that occurred worldwide in the 1875-1913 period.

The Economics Correspondent’s original critique of the New York Times’ uninformed gold standard column can be read at:

http://www.cautiouseconomics.com/2020/07/monetary-policy-14.html

For voracious readers the Economics Correspondent highly recommends Calomiris and Haber’s “Fragile by Design” which provides detailed introductions to the banking histories of the United States, Canada, England, Scotland, Latin America, explores the regulatory roots of the 2008 Great Financial Crisis, and analyzes the conflicting experiences of financial stability and crisis among the world’s nations.

https://www.amazon.com/Fragile-Design-Political-Princeton-Economic/dp/0691155240

Left Coast Correspondent: Video Reveals San Francisco Residential Parking Woes

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A Tenderloin alleyway

1 MIN READ - As CO readers know, the Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena is quite familiar with the People's Republic of San Francisco. So here's a good one minute visual of what a $4,000-month one bedroom gets you.

Click at:

https://www.facebook.com/watch/?v=2698392343783954&extid=RVzsJb423ywQBybt

Utilities not included but sewage is free, pets not allowed but no shortage of two-legged strays looking for a home.

The Left Coast Correspondent feels it necessary to point out that many parts of San Francisco remain fabulously beautiful and that this alleyway looks like the city's worst of the worst—likely the notorious Tenderloin District or possibly 6th Street south of Market.

However the problem is spreading.

Even before the Covid came to the Bay Area tents were springing up near Japantown, and since the pandemic exploded tent cities and needle-littered sidewalks have dotted the once well-decorated Castro District.

The Left Coast Correspondent's more high dollar area is so far untouched, but city officials have given their blessing to homeless tent cities in his district albeit a good twelve blocks away in a commercial corridor, safely out of sight of the rich liberals' mansions.

Nevertheless, this is what decades of liberal/socialist policies have reduced the beautiful City by the Bay to. And remember, San Francisco liberals and progressives never promised they would simply "keep up" with cities in red states. Rather they set out to demonstrate that true enlightened left-wing values could produce a society beyond anything conservatives imagined possible.

No question they've done that.

ps. First thought that passes through conservative/libertarian's mind upon viewing: "My God, what a sewer San Francisco has become!"

First thought that passes through San Francisco liberal's mind upon viewing: "Is the BMW driver white? Yes, we can accuse him of callously honking due to his white privilege!"

Congressional Democrats Propose Fed Third Policy Mandate: Fixing Racial Income Inequality

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1 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff believes this is the next-to-last thing either the Federal Reserve or the U.S. economy need… one place above a Stalin/AOC 2020 presidential ticket.

Federal Reserve Chairman Jay Powell

From the Washington Post:

“Congressional Democrats introduced new legislation on Wednesday that would make reducing racial inequality in the U.S. economy an official part of the Federal Reserve’s mission.

“The Federal Reserve Racial and Economic Equity Act requires the central bank to take action “to minimize and eliminate racial disparities in employment, wages, wealth, and access to affordable credit.”"

“It would be the first major change to the Fed’s mandate since 1977 and would significantly alter the central bank’s focus. The Fed’s current mandate from Congress is to keep prices stable and maximize the number of Americans with jobs.”

“Presumptive Democratic presidential nominee Joe Biden recently released a similar proposal calling on the Fed to “aggressively enhance” its monitoring and targeting of “persistent racial gaps in jobs, wages, and wealth.” This latest bill in Congress goes a step further by explicitly requiring the Fed to work to close the gaps."

“The legislation was written by Sen. Elizabeth Warren (D-Mass.) on the Senate Banking Committee, Sen. Kirsten Gillibrand (D-N.Y.) and Rep. Maxine Waters (D-Calif.), chairwoman of the House Financial Services Committee.”

(Correspondent’s commentary) The Fed’s “dual mandate” of price stability and full employment is already controversial enough, the two policy objectives often deemed in conflict with one another especially when combined with the central bank’s unwritten third mandate of “financial stability” which it failed to achieve in the 1970’s inflation era, the 1990’s S&L crisis, and the 2008 financial crisis.

But whatever sliver of a chance the Fed has of meeting its conflicting mandates would be thoroughly shattered if forced to adopt “racial economic and credit equality” as its third official and fourth unofficial objective.

A proposal requiring the Fed to make race-based monetary and regulatory policy decisions would have been considered unthinkable even just ten years ago, a brazen attempt to stamp social engineering upon about the most color-blind institution left implementing government economic policy. But in 2020, the idea has crept its way into the mainstream of an increasingly radicalized and left-leaning Democratic Party, achieving Congressional bill status this week.

CO readers know the Economics Correspondent is no fan of the Fed, but this proposed legislation would make an already bad institution worse… much worse. 

If passed, the Correspondent believes the practical application of the law would produce Congressional oversight Democrats (think Maxine Waters) constantly pressuring the Fed for lower interest rates for longer periods of time, and demanding the Fed use its regulatory powers to force banks to lend more to uncreditworthy minority borrowers.

In case that two-pronged strategy doesn’t sound familiar, it’s precisely the formula that inflated the mid-2000’s housing bubble and precipitated the 2008 financial crisis and Great Recession which, ironically enough, resulted in widespread foreclosures and layoffs for minorities and ultimately further widened the racial wealth gap.

Read details in the Washington Post at:

https://www.washingtonpost.com/business/2020/08/05/fed-racial-inequality-democrats/

Once Again the New York Times Proves it’s Clueless About the Gold Standard

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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff dispels yet another fallacious New York Times anti-gold standard column with factual historical corrections.

Federal Reserve Board of Governors nominee Judy Shelton

This week the Times ran yet another piece attacking Trump Federal Reserve Board of Governors nominee Judy Shelton, mostly aimed at her past statements supporting the dollar’s return to some form of gold standard.

Although Shelton has walked back her pro-gold stance to better her odds of confirmation, her revised position suggesting the Fed should follow some form of rules-based policy—akin to the well known Taylor Rule developed by Stanford economist John B. Taylor—has nevertheless drawn the ire of central bank apologists everywhere.

This time the paper has wheeled out former Obama administration Treasury official and SEC fraud lawsuit defendant Steven Rattner who predictably recycles the same fallacies and myths about gold that informed proponents of the gold standard have dispelled countless times before, and the Economics Correspondent does so again.

https://www.nytimes.com/2020/07/22/opinion/federal-reserve-judy-shelton.html

Rattner begins his anti-gold crusade by blaming it for the Great Depression:

1) “there’s the gold standard, a significant culprit in deepening the Great Depression and abandoned decades ago by every country in the world.”

Rattner leaves out that during the 1920’s and early 30’s the world was not operating under the genuine classical gold standard of the 1879-1914 period but rather a paper-gold hybrid “gold exchange standard” engineered by Great Britain.

This interwar pseudo-gold standard largely substituted central bank paper notes as “equal to gold” which allowed Europe in particular to print far more currency than it could ever possibly hope to convert from its finite gold reserves—a destabilizing inflation that the honest classical gold standard would never have permitted.

When recession struck in 1930 the result was a predictable deflation and suspension of gold convertibility since world central banks had circumvented the traditional discipline of gold and printed far more redemption promises than they could keep.

It is noteworthy that the USA was an exception, still operating on a purely gold coin standard but with an activist central bank. The Fed engineered its own QE inflation to help Britain with its chronic trade deficits in the late 1920’s and in doing so created the stock market and real estate bubbles of 1927-1929.

Furthermore, when the USA entered recession in 1929 a European-style deflation was not inevitable as the Fed still had plenty of gold to support the dollar (the U.S. held by far the largest gold reserves in the world at the time) but it chose to sit on its hands and do nothing as the money supply contracted back to its pre-1929 levels.

Even worse, as small unit banks began experiencing depositor runs across rural America, the Fed refused to carry out the very role it was created to perform: lender of last resort, providing short term loans to prevent liquidity failures just as larger banks had done in the pre-Fed era—a responsibility the Fed nationalized in 1914 and then neglected.

Far from gold being the culprit during the Great Depression, it was the “managed” gold standard of the Fed itself which overrode what normally would have been natural market adjustments to the economic downturn, an observation Milton Friedman won the Nobel Prize for.

Put more simply, had the world been on a genuine gold standard in the 1920’s and 1930’s instead of a paper-gold hybrid in Europe and the Fed suppressing the normal market movements of gold in America, there would never have been a Great Depression in the first place.

Or as George Mason University monetary economist Lawrence H. White has noted

“The interwar period shows us a case where central banks—not the gold standard—ran the show”

…and…

“Several authors identify genuine historical problems that they blame on the gold standard, when they should instead blame central banks for having contravened the gold standard.”

But of course Rattner leads his readers to blame “the gold standard” as primary culprit.

For a more detailed reading on the Fed’s role in starting and worsening the Great Depression, you can read the Economics Correspondent’s articles on 1920’s and 1930’s monetary policy at:

http://www.cautiouseconomics.com/2018/11/the-great-depression-01.html

http://www.cautiouseconomics.com/2018/11/the-great-depression-002.html

http://www.cautiouseconomics.com/2018/11/the-great-depression-03.html

http://www.cautiouseconomics.com/2019/01/the-great-depression-04a.html

http://www.cautiouseconomics.com/2019/02/the-great-depression-04b.html

http://www.cautiouseconomics.com/2019/02/the-great-depression-05a.html

http://www.cautiouseconomics.com/2019/03/the-great-depression-05b.html

2) Rattner then goes back to the late 19th century to blame the gold standard for repeated banking panics in the USA. The suggestion is that a return to gold means a return to more frequent financial crises.

“Between 1880 and 1933, the United States experienced at least five full-fledged banking crises"

The first problem with this “analysis” is that three of the “full-fledged banking crises” were during the Great Depression itself (1930, 1931, and 1933), a period of gross central bank malfeasance that we’ve already discussed. That leaves two bona fide crises under the more genuine classical gold standard: 1893 and 1907.

More importantly Rattner seems to be unaware that many other countries were on the gold standard at the same time but suffered no banking crises. Great Britain experienced one very brief, short panic in 1890 (The Barings Crisis) even with its problematic monopoly central bank, and Canada experienced none.

In fact Canada was on gold and had no central bank from 1817 until 1935, when the Bank of Canada was established, and in that 118 years experienced no banking panics at all. Even in the early 1930’s when 10,000 U.S. banks closed their doors for good, not a single bank failed in Canada even though the country was hurt at least as badly by the Great Depression.

The same story of stability is true for Scotland which from 1716 to 1845 (129 years) was on a gold or silver standard with no central bank and experienced not a single banking panic.

Over a century free of financial crises: the gold-based decentralized systems produced a far superior track record to Rattner’s vaunted Fed fiat era.

3) More on the 19th century. While it’s true the United States had the most unstable banking system in the industrialized world during the classical gold standard period, it wasn’t gold—as evidenced by the stable experiences of Canada, Scotland, Great Britain, and others—but rather America’s peculiar but deadly mix of horrendous bank regulations to blame.

During the 19th and early 20th centuries most American states restricted bank branching, forcing banks to operate as “unit banks” with only one office in one location. At the founding of the Fed in 1914, the U.S. had over 25,000 banks, but over 95% of them had no branches.

Unit banking was a scourge for most of America’s history as a tiny unit bank could not diversify its loan portfolios or even its depositors. A unit bank in a farming region, for example, was completely tied to the fate of the local crop or a local industry. So if the price of corn plummeted, most of the banks in the corn belt failed.

Also, small unit banks were highly dependent on a handful of local wealthy depositors. During an economic downturn if one large depositor withdrew his funds the bank could fail overnight.

There are other hugely destabilizing consequences to America’s perverse unit banking design, but it suffices to say Canada and Scotland allowed nationwide branch banking from their industries’ inceptions. And England dropped unit banking in the early 1800’s, a decision that contributed to greater stability in the latter half of the century.

When depressions hit countries with nationwide branch banking, no one or two hard hit industries or wealthy depositors could bring a bank down since it had such a wide range of nationwide loans and depositors to draw from.

Incidentally, unit banking was still law in over two-thirds of U.S. states during the Great Depression which explains why so many small banks failed. In states that at least allowed unrestricted branching within state lines (interstate branching was still completely illegal during this period) banking was much more stable. In California, for example, even though banks were temporarily ordered to close their doors during FDR’s bank holiday, not a single bank actually failed.

The 1880-1914 experience in the U.S. was made even more volatile by backwards Civil War era legislation known as the National Banking Acts. These laws, designed to finance a war, required banks to back any currency/notes they issued 110% by U.S. Treasury bonds. If banks didn’t hold U.S. bonds, they weren’t allowed to issue currency. And after the war as the federal government retired "greenback" notes, private banks were once again the nation’s primary source of paper currency (as was the case in Canada and Scotland).

When the Civil War ended, the government consistently paid down the national debt and Treasury bonds began to disappear. But the regulations remained, tying banks’ hands and making them unable to issue currency since the bonds they needed no longer existed. So during harvest seasons when farmers came to withdraw cash to pay their hired hands regulations prohibited banks from issuing cash.

Since most laborers had no checking accounts in those days farmers, needing something to pay their workers with, then demanded gold coins which resulted in a drain on reserves from the banking system—which in turn precipitated a contraction of credit and often times recession. Combined with the instability of unit banking, these perverse regulations often created full-blown banking panics including major ones in 1873, 1893, and 1907 along with smaller incipient crises in 1884, 1890, and 1900. It's no coincidence that most of the era's crises began in the autumn.

While banking panics raged in America, across the border the Canadian banking system—also on gold—continued to operate smoothly.

The demonstrative stability of the unregulated, decentralized, gold-standard systems of Canada and Scotland are even more impressive when considering all the contemporary crises that occurred in the USA and England. The instability of such large economies could easily have spread to their smaller neighbors to the north, but the Canadian and Scottish banking systems were so strong and diversified that they remained solvent throughout.

So Rattner deceives his readers when blaming gold for the U.S. banking panics of the 19th century. The true blame lies with lousy bank regulations.

4) Rattner then contrasts the post-gold standard era and boasts that the U.S. has experienced only two banking crises since:

“in the past 87 years, we’ve had two [panics].”

Rattner doesn’t mention the U.S. was still on the international gold standard from 1933-1973, nearly half of those 87 years. If correlation equals causation then he must give gold half the credit.

More importantly, knowledgeable economists understand that it was the introduction of federal deposit insurance in 1933 that mitigated bank runs afterwards, not delinking the dollar from gold. As Milton Friedman and Anna Schwartz pointed out in their classic 1963 book “A Monetary History of the United States”…

“Federal insurance of bank deposits was the most important structural change in the banking system to result from the 1933 panic, and, indeed in our view the structural change most conducive to monetary stability since state bank notes were taxed out of existence immediately after the Civil War.”

In fact delinking the dollar from gold domestically doesn’t even pass the common sense test. Of the two policies, which is more likely to prevent depositors from withdrawing their money in a panic: Telling them they can’t redeem their funds for gold coins? Or that their funds are safe and insured up to $250,000 by the federal government?

5) Rattner moves on from gold and criticizes Shelton’s modified view that the Fed should at least be disciplined by some set rules.

But his contention that “[Shelton’s] view that interest rates should be ‘rules based’ would have prevented the central bank’s emergency cuts” is simply false.

Rules based policies for central banks process inputs such as inflation, unemployment, and GDP growth and given a slow enough economy can guide policy to lower rates in response. In fact the Taylor Rule itself produced a policy recommendation of slightly negative interest rates for a brief period in early 2009, right after the financial crisis (see Taylor Rule chart).

While the Economics Correspondent is no fan of negative interest rates, it’s absurd to argue a regime that can guide the central bank towards a negative rate policy under emergency conditions “prevents” a central bank from making emergency rate cuts.

6) Finally Rattner decides to take a swipe at President Trump himself, accusing “Mr. Trump… [of] doing his best to politicize this remarkable institution.”

The criticism of Trump is unremarkable in that it’s completely expected for a paper that would attack Trump for curing cancer or solving cold fusion.

But what’s laughable is calling the Federal Reserve a “remarkable institution.” Since opening its doors the Federal Reserve has only started a dozen-plus recessions, turned its own recession in 1929 into the Great Depression, raised the price level by 2,500% since its inception, and presided over higher overall unemployment and slower economic growth during its 106-year tenure than in the 106 years that preceded it.

For a more detailed comparison of the Fed’s economic performance against the pre-Fed era, see George Selgin’s excellent analysis at:

https://www.youtube.com/watch?v=yLynuQebyUM#t=00m32s