Why the Deflationists' Argument Is Wrong in Both
Theory and Historical Fact
Tea Party Economist
by Gary North: Quarantining
the Spanish Flu
An inflationist is someone who believes that price inflation is
the result of two things: (1) monetary inflation and (2) central
is someone who believes that deflation is inevitable, despite (1)
monetary inflation and (2) central bank policy.
says that price inflation is inevitable. Every deflationist says
that price deflation is inevitable.
have been wrong ever since 1933.
is most famous for his book, A
Monetary History of the United States (1963), which relies
on facts collected by Anna Schwartz, who died recently.
It is for one
argument: the Federal Reserve caused the Great Depression because
it refused to inflate.
as quoted by mainstream economists, is factually wrong.
I often cite
a study, where you can see that the monetary base grew under the
Federal Reserve, 1931 to 1932. This graph is from a speech given
by the Vice President of the Federal Reserve Bank of St. Louis.
You can access it here.
posted this first in early 2010.
We can see
that there was monetary deflation of the money supply, beginning
in 1930. This continued in 1931 and 1932, despite a deliberate policy
of inflation by the FED, beginning in the second half of 1931 and
continuing through 1932.
kept pulling currency out of banks and hoarding it. They did not
re-deposit it in other banks. This imploded the fractional reserve
banking process for the banking system as a whole. M1 declined:
The FED could
not control M1. It could only control the monetary base.
of Friedman and Schwartz was picked up by mainstream economists.
It is his most famous and widely accepted position. Bernanke praised
him for it on
Friedman's 90th birthday in 2002.
Why was the
argument wrong, as applied to 1931-33? I must tell the story one
more time. Four letters tell it: FDIC. Well, nine: FDIC + FSLIC.
They did not exist.
froze all bank deposits in early March 1933, immediately after his
inauguration. This calmed the public when the banks re-opened a
few days later. Her verbally promised people that the banks were
The U.S. government
created federal bank depositor insurance in 1933. The Wikipedia
article describes the Banking Act of 1933, which was signed into
law in June.
the FDIC as a temporary government corporation
- Gave the
FDIC authority to provide deposit insurance to banks
- Gave the
FDIC the authority to regulate and supervise state non-member
- Funded the
FDIC with initial loans of $289 million through the U.S. Treasury
the bank runs. The money supply reversed. It went ballistic. So
did the monetary base.
The key event
was therefore the Banking Act of 1933. After that, the money supply
never fell again. After that, prices never fell again by more than
one percent. That was in 1955.
All it took
for prices to reverse and rise was this: an expansion of the monetary
base coupled with bank lending.
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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