Are there any books that deal with the 1970's recession specifically?
I remember my dad's peers taking jobs at 7-11 and my own dad scrambling to start a business from his home. Of course, since Keynes has taught us that business activity can never decline if we just keep printing money fast enough, I think the official view is that the stagflation of the 1970's never happened. ;^)
The State has suddenly and quietly gone mad. It is talking nonsense; and it can’t stop. —G.K. Chesterton
I would say that when Paul Volcker remarkably increased the interest rates, it was because there was much inflation, so, easy credit had already flooded the economy before increasing the interest rates. Juan, as I guess you read Spanish, this is interesting:
http://www.juandemariana.org/comentario/1857/shocks/oferta/inflacion/costes/
Funny you should ask that, because I'm just writing a paper on energy and its role in the economy and came across this rather fascinating reference:
"A Monetary Explanation of the Great Stagflation of the 1970s" - it's a pdf file, about 181kb big.
Abstract – The origins of stagflation and the possibility of its recurrence continue to be an importantconcern among policymakers and in the popular press. It is common to associate the origins of the GreatStagflation of the 1970s with the two major oil price increases of 1973/74 and 1979/80. This paperargues that oil price increases were not nearly as essential a part of the causal mechanism generatingstagflation as is often thought. We provide a model that can explain the bulk of stagflation by monetaryexpansions and contractions without reference to supply shocks. Monetary fluctuations also help toexplain variations in the price of oil (and other commodities) and help to account for the strikingcoincidence of major oil price increases and worsening stagflation. In contrast, there is no theoreticalpresumption that oil supply shocks are stagflationary. In particular, we show that oil supply shocks mayquite plausibly lower the GDP deflator and that there is little independent evidence that oil supply shocksactually raised the deflator (as opposed to the CPI). The oil supply shock view also fails to explain thedramatic surge in the price of other industrial commodities that preceded the 1973/74 oil price increaseand the fact that increases in industrial commodity prices lead oil price increases in the OPEC period.
Hope this helps.
The other factor was Nixon's then-recent close of the gold widnow. Hence the dollar plunged and prices rose which again, as we are told by government economists, should have triggered a enormous trade surplus that enabled every family in America to retire by the end of the decace.
dietwald, thanks for the link to that paper. It's interesting, specially because their conclussions seem to be similar to Austrians in this issue. Although, they don't talk about the ABCT and don't mention Mises or Hayek at all. It might be an empirical study that supports the ABCT. What do you think? I have only read the abstract
Juan:I've got a question... It seems that from 1970 to 1980 the fed's interest rate never went below 5%. It hit 13% in 1975 and 17% in 1980. Looking at the chart the rate seems rather 'high'(scientific term, ha). http://research.stlouisfed.org/fred2/fredgraph?s[1][id]=FEDFUNDS So, how was the new money injected into the system ? Was there actually 'easy' credit at that time ?
Juan, during this time, the main focus for injecting liquidity was through the process of the open market operations, Volcker's favorite method during the 70's to simply increase the stock of money without decreasing the Federal Funds rate.
I often think that the FFR is too often looked at as the main tool of the fed when it's really the open market operations.
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The irony is that open market operations are often conducted under the banner of attempting to reach the target federal funds rate. I believe this is only true when the target interest rate is lower than the actual interest rates, as in the current day scenario.
Did Volker enact any clear policies (Open Market Op's) to reduce any part of the money supply?
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Niccolò: Juan, during this time, the main focus for injecting liquidity was through the process of the open market operations, Volcker's favorite method during the 70's to simply increase the stock of money without decreasing the Federal Funds rate. I often think that the FFR is too often looked at as the main tool of the fed when it's really the open market operations.
Agreed. Once the open market operations increased the money supply, nominal interest rates started to go up to reflect the inflation (keeping in mind that nominal interest rates are comprised of 1) real interest (originary time-preference interest), 2) specific risk factor, and 3) inflation rate).
"He that struggles with us strengthens our nerves, and sharpens our skill. Our antagonist is our helper." Edmund Burke
Little confused - if open market operations are adding reserves to the FED system, who then lend them out increasing money supply and price inflation, why wouldn't this push down all interest rates made by FED banks, even between each other? The federal funds rate set by the FR board is simply a target rate. Banks won't abide by it if they won't make profit or can't make a sale.
I read a part of "The Creature from Jekyll Island" last night, and Griffin said that if consumers simply refuse to borrow, the money supply will shrink, no matter what the FED does. Perhaps the opposite happened -> people became quite willing to borrow, pushing up interest rates, while adding new reserves pushed the rates down. This seems the opposite of what happens in most economic scares, however. Then again, high inflation does encourage debt.
What were the savings rates like in the 70's? It seems like as inflation began to creep up, people would move their savings from bank accounts to commodities. This would require the banks to add reserves to cover the ones being removed, otherwise interest rates could skyrocket and we'd see deflation.
I think seeing gold go from $35 - $800 was crucial. People had to be trying to get out of the dollar. Yet if you look at the money supply figures, every component of money supply increased, including savings accounts. Perhaps after adjusting for inflation, the value of total savings accounts in '79 was less than in '71.
Forsmant: Are there any books that deal with the 1970's recession specifically?
"Secrets of the Temple" is a large, dense, book about the history of the Fed written for a popular audience. It spends a lot of time on the Volcker era. It's accepts the prevailing fallacies of the time it was written (1980's), but it's worthwhile for the detailed information.
The state won't go away once enough people want the state to go away, the state will effectively disappear once enough people no longer care that much whether it stays or goes. We don't need a revolution, we need millions of them.