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Comment by bhaak | Hacker News Reader

The sub title of the article is "History ain't changed" and the article starts with "In the late summer of 1929 [...]" and I already knew that I shouldn't have read any further.

Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself.

There have been calls for a big crash for decades now but no crash in this millennium was the big one.

"The S&P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression."

We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I'm not convinced that we'll be seeing a crippling crash again.

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Market crashes, much like forest fires, used to return things to a baseline. Now that we know how to prevent crashes - and forest fires - we risk creating an unhealthy environment which keeps growing until the inevitable catastrophe, where the underlying forces are beyond our means to control.

To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.

>... Now that we know how to prevent crashes - and forest fires ...

So we shall read your comment as irony?

The analogy here is that we knew enough about forest fires to stop them from happening in a way that later on causes much worse catastrophic wildfires. The recent Californian and Australian wildfires were both worsened by previously putting out any and all fires and not letting burn-off of risk (brush/fuel) happen at a manageable scale.

I don't know anything about the stock market, mind. But I get their analogy.

> We are no longer on the gold standard

This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.

Can you elaborate? I'd like to know why this is the case

i suspect the OP is suggesting that you can print your way out of a depression.

What could possibly go wrong!

This strategy of financializing governments debt to deal with financial difficulties led to the south sea bubble. MMT is an old lie, oft repeated.

Print money, buy assets, raise price floor.

If printing money can resolve all problems, Zimbabwe must have become the strongest nation in the world.

They do have the best-performing stock market.

You can't print your way out of debt held in foreign currency. That's different.

Begs the question why anyone would lend US corps and institutions US dollars. In fact, increasingly, they're not. Which can create its own problematic scenarios.

It solves some problems, not all.

Printing money really isn't that big a problem if you know how to take it back from the public(aka taxes).

In fact if you have a strong enough tax collection system, printing is actually good because it cleans up debt by inflating it, provides liquidity, and has other benefits.

You just need to pull it back from the public intelligently.

DDC (dollar-denominated currency). That’s why. No such thing as a Zimbabwean denominated currency. That the rest of the world uses USD is the reason.

The Great Depression was caused by the gold standard. The initial crash caused a panic, which caused a run on the banks. Banks did not have the cash on hand to return all deposits, and many failed. This was before the FDIC existed, so when banks failed anyone with outstanding deposits just lost their balance. The ripple effect of this disruption through the economy was dramatic, and caused a deflationary spiral.

- Many companies and individuals had lost their money and desperately needed cash to meet ongoing obligations.

- Many banks had failed, and were not available to make loans.

- Banks that hadn't failed were much more cautious about extending loans.

- Faith in banks had cratered, and people were far less likely to deposit their money in banks, leading to even the banks that wanted to make loans not having sufficient deposits with which to meet demands for loans.

- Without access to loans, many businesses failed, leading to mass unemployment, creating strong downward pressure on wages.

- Large numbers of people lost their jobs and couldn't find new ones. They spent down their savings and didn't deposit any new money in banks.

- etc.

With the value of the dollar rapidly increasing, there was no incentive for banks to loan out their deposits or for investors to risk making investments in a shaky economy. Better to sit on your cash if you had it. This vicious cycle was only eventually broken by the massive federal spending programs of the New Deal, and arguably not until the even more significant spending and hiring programs of WWII.

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So why was the gold standard at the root of the Great Depression? It allowed what should have been limited to a stock market crisis to metastasize into a depression by toppling banks and crippling the availability of dollars. At that point in time very few people owned stocks, so the blast radius of a market crash should have been very limited. But huge swaths of the economy had exposure to banks, and so bank failures had far-reaching impacts. If the federal government had not been constrained by the artificial limitation of the gold standard, it would have been able to step in and provide a liquidity backstop to prevent banks from failing, preventing a financial panic and the knock-on effect of mass bank failure. This is also why something (exactly) like the Great Depression can't happen anymore, it's impossible in a world where the federal government (or its proxy, the Federal Reserve Bank) can extend loans to tide consumer banks over until panic subsides. A stock market crash will not cause consumer banks to fail, people to lose their deposits, lending to cease, and the economy to grind to a halt.

And we've seen this in action in the great financial crisis. A financial market crisis threatened the stability of banking in general, lending froze up in response to uncertainty about what banks might be insolvent, and the federal government and federal reserve stepped in with loans, bailouts, and forced consolidation of failing banks to mitigate economic disruption, with the result that the impact of the great financial crisis was far less than that of the great depression.

The Fed started printing fiat money in 1914. This results in inflation. However, gold does not inflate, and the fiat money was, by law, exchangeable for gold at a fixed rate.

By 1929, people finally realized that they could double their money by cashing in their dollars for gold. Hence the runs on the banks, which only stopped when FDR repudiated the gold backing.

What you’re saying is flat out wrong, please don’t post things like this… you have a lot of HN karma so people wrongly assume you might have a source. You do not. You’re making up a revisionists rendition of events to fit your narrative. Using the word “fiat” screams “I don’t know economics, but I have the confidence to say I do.” You certainly aren’t telling people with physics backgrounds that they’re wrong or pushing tachyons down their throats.

HN, on both sides, left and right gets economics profoundly wrong as though it was being taught in the year 1850. Its a science, not a belief, you just have to like… you know, put effort into it and your intuition is probably wrong.

There certainly are a lot of beliefs in economics. It is not as easy to run experiments on economical theories as it is in physics, so saying "it is a science" may give people the wrong impression. I agree it is a science in a way, but not really a hard science like physics or medicine.

Check out the history of pegged exchange rates, and what happens when the values of each side changes.

https://en.wikipedia.org/wiki/Gresham%27s_law

Not a very convincing reply. Are you claiming that the printing of money unbacked by gold in a gold standard system didn't matter at all?

Printing of money unbacked by gold in the gold standard system doesn't appear to have been significant, if it happened at all - the amount of gold reserves that the US treasury held and the money supply look like they grew proportionally during the period 1913-1929 [1, 2]. It would be nice to see user WalterBright's citation for this.

Meanwhile, if WalterBright's explanation is to be believed we'd expect it to have manifested as high inflation rates during the period 1913-1929, and spiking inflation during the 1929-1930 economic crisis as everyone realizes that the jig is up and their dollars aren't actually backed by gold and are worth less than expected.

Instead, that's not at all what happens [2]. The inflation rate is all over the place between 1913 and 1929, dramatically positive from 1916 to 1920, dramatically negative from 1921 to 1923, and then relatively stable until the Great Depression, including being slightly negative for the 4 years leading up to the Great Depression. Then the Great Depression hits and inflation becomes dramatically negative. The Great Depression starts in 1929, but FDR doesn't suspend the gold standard until 1933 in the interest of being able to expand the money supply and cause inflation. Inflation finally goes above 0% in late 1933, but even then doesn't spike dramatically - it spends a couple months in the 5% range before falling back and spending the next several years in the 2%-4% range.

So WalterBright's explanation just doesn't line up.

Credit to user the_why_of_y for pulling up sources in a different thread.

[1] https://www.swcs.com.au/goldreserves.htm#Table1

[2] https://www.longtermtrends.net/m2-money-supply-vs-inflation/

Net inflation from 1914-1929 nearly halved the value of the dollar w.r.t. the official exchange rate with gold. I cited this with references.

There's no way you can talk your way out of that.

Pegging a currency against something one has no control over, then inflating the heck out of the currency, always results in a crash. The banks continued to fail until FDR suspended convertibility to gold.

Last time I checked, inflation from 1914 to 1929 had nearly halved the value of the dollar, but the exchange rate of dollars for gold was the same (by law).

You can check inflation 1914-1929 for yourself:

https://www.in2013dollars.com/us/inflation/1914?endYear=1929...

Dollars were exchangeable for gold at $20.67 from 1914-1927:

https://onlygold.com/gold-prices/historical-gold-prices/

Anyone can see this will cause a collapse of the banks. Why do you think FDR suspended gold exchanging? This sort of thing happens every time a country pegs their currency to a fixed exchange rate and then inflates it.

Apparently gold itself suffered quite the inflation in that timeframe, from 8097 tonnes in 1913 to 16469 tonnes in 1930.

US reserves went from 2293 to 6358 tonnes.

https://www.swcs.com.au/goldreserves.htm#Table1

Scroll down to table 8, sum of the newly mined gold is ~8800 tonnes from 1915-1929.

Good try! But inflation is not the same thing as an increase in the supply. Inflation is the excess of an increase in supply vs the value in the economy it represents. I.e. you have to discount the increase in supply by the growth in the GDP.

For more evidence, consider the gold bonds. The US government sold gold bonds and dollar bonds. The gold bonds offered a lower interest rate than the dollar bonds, because the buyers trusted the gold more than they trusted the fiat money.

The buyers were right. But the buyers were wrong about trusting the government. FDR repudiated the gold bond contracts, paying the holders off in inflated dollars. They basically stole the money from the bond holders.

This wouldn't have happened if gold had inflated along with the dollar.

Sorry for the sloppy language. The question I have is, what is the value of gold relative to other commodities (preferably the same ones that are used to measure inflation of the dollar) in 1914 vs. in 1929. Unfortunately I don't have an idea where to get the data to answer this question.

I found that M2 in 1914 was 24.62, up to 66.61 in 1929. This is quite similar to the increase in gold reserves, not much of a surprise.

Second graph here:

https://www.longtermtrends.net/m2-money-supply-vs-inflation/

It's more likely that the cause was that governments failed to respect the gold standard. There was way more money in the system than there was gold backing it. Like any centralized monetary system, it couldn't resist the temptation to create money from thin air.

Pretty sure economists are still debating what caused and ended the Great Depression. Some have ideological incentives to come to the conclusion that the gold standard was to blame and government spending is the answer to all problems.

The active debate surrounds the relative roles that the consumption/investment crisis and monetary supply crisis played in causing and persisting the Great Depression, i.e. which one played the greater role. One group would say that the gold standard was a primary cause, the other would say that it only worsened a situation that was already going to end very badly.

Meanwhile, the actual ideologists are the persistent minor branch of heterodox economists with an ideological incentive to resist any explanation that suggests that the cause was the gold standard or that the fix was government spending (and thus oppose both the consumption crisis and monetary supply crisis explanations), because they hold various libertarian-ish sorts of political views and would like to believe that high government spending and government control of the money supply are both uniformly bad. I get the impression from how your comment is worded that perhaps you endorse the heterodox position on this topic.

The intro to this wiki article has a decent summary of the various positions.

https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

Interesting read, thanks, but so far I don't get the impression that the gold standard features as prominently in the explanations as you claim?

I don't know enough about the Great Depression to have a good opinion, but the discussion seems to rage on in present times, and there certainly are points of views that I consider unlikely to be correct. As an example, I don't think Krugman's babysitting circle is sufficient proof to bet the fate of nations on printing money.

Economics is also not my specialisation, I only find it interesting.

Science is also not a democracy - scientific truth is not decided by democratic vote, and there are many examples throughout history when the mainstream consensus was wrong. Therefore I admit I find statements like "only ideologists still peddle other theories" a bit odd. Not saying ideology does not affect things, I said so myself. It may be more likely that a theory is affected by ideology than not.

> Interesting read, thanks, but so far I don't get the impression that the gold standard features as prominently in the explanations as you claim?

To preface this, I think a combination of the two mainstream proposals (Keynesian, Monetarist) provide the best explanation, rather than an either/or approach.

* https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression...

The Keynesian and Monetarist explanations are slightly different, but both point fingers at insufficient money supply. But why was the money supply insufficient? Well, because of the gold standard. The federal government would trade dollars for gold at a fixed conversion rate, so the supply of dollars was fixed against the supply of gold that the treasury was holding. As demand for dollars grew faster than the treasury could expand its gold reserves, deflation happened. As banks started to fail the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to extend loans to failing banks, touching off waves of failures and economic crisis. And then with the economy stagnated due to demand shocks, business failures, and unemployment, the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to loan to the federal government to boost spending. Instead the federal government raised taxes to strengthen government finances, taking even more money out of the economy at a critical time, because it could not originate money without buying gold from somewhere, and nobody was selling, including other countries that themselves needed gold for their gold-backed currencies. (The money shortage was at this point basically global.)

It wasn't until FDR suspended redemption of dollars for gold and forced everyone with gold to turn it over to the treasury in exchange for dollars that the money supply could be meaningfully expanded (and then only in proportion to the amount of surrendered gold). Then, with the nation's stock of gold under the control of the treasury and redemptions of dollars for gold suspended, the federal government could go about meaningfully expanding the money supply, which it did by announcing that the value of gold had increased from $20/ounce to $35/ounce, which allowed the federal government to issue 70% more dollars, since the money supply was still actually restricted to the amount of gold held by the treasury. (Though if the government owns all the gold, and doesn't actually allow redemptions of dollars for gold, and gets to set the price of gold, you basically have a fiat currency with additional steps).

Since WWII started, I don't think it automatically followed that leaving the gold standard did the trick. War economics are bound to have had at least some impact.

Also isn't printing money equivalent to raising taxes?

Ultimately, isn't the issue how to distribute and produce goods, not spending in itself? It seems to me there needs to be some indication that spending even helps with the distribution.

I can imagine the economy needing a kickstart like a motor, but whether simply distributing money is sufficient to do that seems not obvious.

Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?

> Since WWII started, I don't think it automatically followed that leaving the gold standard did the trick. War economics are bound to have had at least some impact.

Banking panics and deflation ceased in 1933/1934 with FDRs gold-confiscating shenanigans, and at that point things started to recover, which was well before WWII.

> Also isn't printing money equivalent to raising taxes?

No, because creating money expands the money supply and raising taxes does not.

> Ultimately, isn't the issue how to distribute and produce goods, not spending in itself?

The Keynesian approach says that government spending is necessary to restore the confidence of businesses that demand will be high, so that private investment will resume, businesses will hire, and unemployment will fall. Once velocity is restored to the cycle of businesses earning money and using it to pay wages, the government can step out of the picture as the workers with their wages will take up the demand slack. Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work.

> Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?

Not if the government won’t deficit spend, and doesn’t have an institution to borrow from that can loan money by creating it rather than borrowing it.

"Banking panics and deflation ceased in 1933/1934 with FDRs gold-confiscating shenanigans, and at that point things started to recover, which was well before WWII."

Maybe all the bad banks had been consolidated by then, after years of Depression?

"No, because creating money expands the money supply and raising taxes does not."

But why would money supply matter - you can simply raise the value of the existing supply to the same effect? What does "money supply" mean, the number of coins?

"The Keynesian approach "

yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.

For starters, why does "economy" even depend on a government? It sounds like a special case where a meddling government is present.

"Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work."

You have to admit it does sound slightly crazy, though? Interesting point about the useless war equipment, but again it seems like that is not the only thing war does. Maybe it simply took millions of otherwise useless workers out of the picture by killing them, for example? There seem to be more aspects to war than useless spending. "Confidence" may have risen by winning the war, too, not just by government spending?

After all, if the government spends too much, then trust in the money is also being eroded.

"Not if the government won’t deficit spend"

But then you can't say it is the gold standard, but the unwillingness to deficit spend?

> Maybe all the bad banks had been consolidated by then, after years of Depression?

Sure, maybe after 4 years of issues things just happened to naturally get better right when the federal government carried out a targeted intervention.

> But why would money supply matter - you can simply raise the value of the existing supply to the same effect?

This is called deflation, and tends to both cause and worsen economic contractions for reasons discussed previously.

If all financial obligations happened to somehow be pegged to inflation, then the actual money supply wouldn’t matter. But the purpose of a currency is denominating prices and debts, so it does matter.

> What does "money supply" mean, the number of coins?

Literally the number of dollars that exist. At that point in time this would have been the sum of all cash and all bank accounts balances.

> yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.

Profound insights today in the HN comments section.

> For starters, why does "economy" even depend on a government?

Perhaps look into Locke or Hobbes for some background here. Economic activity is for the most part predicated on some concept of property rights, which are a legal construct and thus predicated on the existence of a government and its monopoly on the use of force.

> You have to admit it does sound slightly crazy, though?

Does it? The argument isn’t that paying people to dig holes and fill them back in (or build warships and sink them in the ocean) creates economic value, only that it creates demand, which is self-evidently true.

Usually, demand from workers earning wages drives businesses to supply goods, so an economy generally sits at a supply/demand equilibrium. But a bunch of people who are unemployed and have no money do not contribute to demand. A negative demand shock can cause an economy to contract to a new lower equilibrium. A positive demand shock can drive it back to a higher equilibrium.

> But then you can't say it is the gold standard, but the unwillingness to deficit spend?

Deficit spending doesn’t expand the money supply if the government has to borrow to spend, it just draws money out of the private sector. Hence we’re back to the gold standard as the root of the problem.

"Sure, maybe after 4 years of issues things just happened to naturally get better right when the federal government carried out a targeted intervention."

It seems possible that the story is more complicated than that.

"But the purpose of a currency is denominating prices and debts, so it does matter."

I don't think currencies can change the value of things, so I am not convinced the denomination aspect is really the most important aspect of what currencies do.

"Economic activity is for the most part predicated on some concept of property rights, which are a legal construct and thus predicated on the existence of a government and its monopoly on the use of force."

That seems obviously false. Animals have territories, and they don't have governments. It requires use of force, but that doesn't require governments. Just because governments tend to monopolize use of force, doesn't imply they are required for enforcing property "rights".

"The argument isn’t that paying people to dig holes and fill them back in (or build warships and sink them in the ocean) creates economic value, only that it creates demand, which is self-evidently true."

What demand does the hole digging worker create - demand for shovels?

"A negative demand shock can cause an economy to contract to a new lower equilibrium"

I would agree that equilibriums are the right way to look at it, and "pushing to a higher equilibrium" would be what I called "kickstarting" like a motor. Still not convinced that simply distributing money does the trick, though.

"Deficit spending doesn’t expand the money supply if the government has to borrow to spend, it just draws money out of the private sector. Hence we’re back to the gold standard as the root of the problem."

If you assume money supply is the problem.

Governments are quite good at managing the financial system with the tools currently in use. But there is a chance that we will see change to those tools.

Like we previously abandoned the gold standard to get to the current system, there is a good chance, that we will need to abandon the current system to get to a post-current system to avoid a "depression-level crash".

What could be the cause for the need to abandon the current system? Well, this is where we go into the realm of prediction. But there are quite some technological tooling to outperform current economic and governmental structures. Those are currently in their infancy, but we will probably be forced to make some serious changes when they reach maturity.

There is the possibility of a debt bomb once we run out of safe assets for QE. That rubber band will snap if you stretch it long enough, and it will snap hard.

People are also not allowed to trade stocks at such a massive leverage as they did in 1929 (which was the actual reason for crash - massive volume of leveraged trades and thus, margin calls and forced sales). And investment banks are separated from banks holding people's deposits, so you can be sure your deposits aren't participating in stock trading - especially not leveraged trading. They massively did in 1929, however batshit crazy it may sound today.

Vaguely competent financial management is by no means assured. I suggest reading Tim Geithner's "Stress Test" to to see how hard he had to fight to get some basic things done.

So its different this time?

An inflated asset is only a bubble if it bursts.

> with a decent credit rating

That's the thing... what happens next year when Biden in a lame-duck President and the GOP end up blocking the next debt ceiling raise? The US would then be unable to pay bond coupons which would trigger a default. This would cause America's credit rating to tank.

The only thing I would say is that goverments have only so many levers they could pull and some of those are already to pulled close to their max capacity.

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