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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: Ilaine who wrote (13865)1/24/2002 12:33:41 PM
From: Don Lloyd  Read Replies (1) of 74559
 
CB -

What is surprising is that it's the details that matter. You can't just say inflation or deflation or just talk about the money supply.

When people refuse to consign the 1920's to an Austrian Boom/Bust cycle, they cite a lack of inflation and a lack of basic money supply expansion. And, they are correct, as far as they go.

From starting to reread Rothbard (America's Great Depression) with a much better background, things start to make sense.

The driving force of the investment boom was not an increase in the narrow money supply driven by the FED, but rather a credit expansion driven by the commercial banks applying their fractional reserve requirements. In particular, one factor was a shift in reserves from demand deposits to time deposits. For commercial member banks, this represented a reduction in the reserve requirements from 13% to 3%, allowing a large credit expansion.

According to Austrian theory, the boom must end when credit growth ceases. This is reflected in the broad measure of money supply. The following series shows the trailing 12 months money supply growth for every 6 months between June 1923 and June 1929 -

9.8%
4.9
6.1
11.6
7.1
9.2
3.3
4.2
6.0
8.1
4.4
5.2, Dec 1928
0.7, June 1929

Regards, Don
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