Early (and recent) speculative bubbles

[20000miles]

[COLOR=black][FONT=Verdana]As all good economists of the "Austrian" persuasion know, a boom-bust cycle begins with monetary intervention in the economy. This expansion of money, or in modern times, unbacked banknotes or fiduciary media, leads to artificially lowered interest rates. The interest rate is an important indicator for entrepreneurs in deciding how and when to invest, and how much consumers should spend. [/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Now that the boring introduction is over...[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]It appears some guy at Oxford [COLOR=#800080]claims[/COLOR] he has discovered the world's first "credit crunch". It occured in 88BC, in Rome. The causes:[/FONT][/COLOR]

[COLOR=black][FONT=Verdana][Cicero] told his audience: "Defend the republic from this danger and believe me when I tell you - what you see for yourselves - that this system of monies, which operates at Rome in the Forum, is bound up in, and is linked with, those Asian monies; the loss of one inevitably undermines the other and causes its collapse."[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]...the words were "remarkable" for their contemporary tone. "Substitute US sub-prime for 'the Asian monies' and the UK banking system for 'the system of monies which operates in the Roman Forum' and it could have been written about the current credit crisis,"...[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]In second-century and early first-century BC Rome, increased inflows of bullion combined with an expansion in the availability of credit to produce a massive growth in Rome's money supply. This increase in the supply and availability of money in turn resulted both in a major increase in Roman economic activity and, eventually, in the credit crisis which Cicero describes."[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Although not mentioned, there was a war on at precisely the same time.[/FONT][/COLOR]


[COLOR=black][FONT=Verdana]It is also my pleasure to announce that the mystery of Tulipmania has finally been solved. Writes Doug French in [COLOR=#800080]Early Speculative Bubbles and Increases in the Supply of Money[/COLOR]:[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]As the above evidence indicates, free coinage, the Bank[/FONT][/COLOR]
[COLOR=black][FONT=Verdana]of Amsterdam, and the heightened trade and commerce in Holland served to attract coin and bullion from throughout the world. As Del Mar writes:[/FONT][/COLOR]
[COLOR=black][FONT=Verdana]Under the stimulus of "free" coinage, an immense[/FONT][/COLOR]
[COLOR=black][FONT=Verdana]quantity of the precious metals now found their way[/FONT][/COLOR]
[COLOR=black][FONT=Verdana]to Holland, and a rise of prices ensued, which[/FONT][/COLOR]
[COLOR=black][FONT=Verdana]found one form of expression in the curious mania[/FONT][/COLOR]
[COLOR=black][FONT=Verdana]of buying tulips at prices often exceeding that of[/FONT][/COLOR]
[COLOR=black][FONT=Verdana]the ground on which they were grown.[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Under the Free Coin Laws, an abundance of debased, "sweated" and shaved coins found their way to Amsterdam. This expansion triggered Tulipmania.[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Flashing forward to the 1920s[/FONT][/COLOR][COLOR=black][FONT=Verdana], and eminent Austrian School economist Murray Rothbard sums up the inflationary policies of the US Federal Reserve. From [COLOR=#800080]America's Great Depression[/COLOR]:[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Over the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight-year period. This is an average annual increase of 7.7 percent, a very sizable degree of inflation. Total bank deposits increased by 51.1 percent, savings and loan shares by 224.3 percent, and net life insurance policy reserves by 113.8 percent. The major increases took place in 1922-1923, late 1924, late 1925, and late 1927. The abrupt leveling off occurred precisely when we would expect in the first half of 1929, when bank deposits declined and the total money supply remained almost constant. To generate the business cycle, inflation must take place via loans to business, and the 1920s fit the specifications.[/FONT][/COLOR]


[COLOR=black][FONT=Verdana]Through causing a sustained increase in bank reserves, the US Central Bank generated a bubble that broke the world.[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Flash forward to the current crisis:[/FONT][/COLOR][COLOR=black][FONT=Verdana] The same entity that engendered the Great depression has again recently engaged in the loosest monetary policy in decades. Interest rates fell to record lows in the United States, and indeed the world's central banks also came to the party...but only to spike the punch:[/FONT][/COLOR]

[COLOR=black][FONT=Courier][/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Fortunately, even economists like [COLOR=#800080]John Taylor[/COLOR]*, and the eminent monetarist [COLOR=#800080]Anna J. Schwarz[/COLOR] have come to realise this is indeed the case.[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Conclusion:[/FONT][/COLOR]

[COLOR=black][FONT=Verdana]Some have constantly, yet fallaciously, argued that a system of private property rights and voluntary exchange goes through cycles of boom and bust naturally. They claim that a cycle is an endogenous feature of the market system. Some** have argued that business cycles are psychological phenomena, owing to the "animal spirits" of investors. However this is an incorrect idea, after all where do these animals get the money necessary to bid up scarce resources to such soaring heights. [/FONT][/COLOR]

[COLOR=black][FONT=Verdana]The chief cause of the business cycle is the expansion of money and credit. Nothing more, nothing less. [/FONT][/COLOR]


[SIZE=1][COLOR=black][FONT=Verdana]*Sadly, John Taylor is completely bat-sh*t insane, as he has argued that the Federal Reserve should lower real interest rates even further, to negative 5%! However, [/FONT][/COLOR][COLOR=black][FONT=Verdana][COLOR=#800080]it appears[/COLOR][/FONT][/COLOR][COLOR=black][FONT=Verdana] that even the calculations made by [COLOR=#800080]his own interest rate rule[/COLOR] were incorrect, and that the interest rate should really be +0.5%![/FONT][/COLOR][/SIZE]
[SIZE=1] [/SIZE]
[COLOR=black][FONT=Verdana][SIZE=1]** See John Maynard Keynes' discussion of aminal spirits, and the role they play in his [COLOR=#800080]General Theory[/COLOR].[/SIZE][/FONT][/COLOR]

[cd27]

Interesting post, thanks

[ibis]

Under the Free Coin Laws, an abundance of debased, "sweated" and shaved coins found their way to Amsterdam. This expansion triggered Tulipmania.

I look forward to seeing this advanced in future as the standard Austrian explanation of how you can have bubbles in non-fiat monetary systems. Naturally, there is a large gap between the observation made and its relevance as an actual explanation, but I likewise look forward to that gap failing to trouble any Austrians.

[Christel]

2000miles,

do you mean something like that if money is artificially caused to be in oversupply, a money bubble so to say, like the property bubble, then an artificial boom occurs that will burst at some time? And that without such money oversupply economy will better regulate itself? I might have totally misunderstood given my knowledge of economics.

The Roman example is interesting!