On Free Marketism

So, not in the general vein of what I wanted this blog to be about, but I'm getting tired of having to continually retype this on the forum I hang out on, so I'm just going to get it in nice detail here so I can just post a link instead.

One of the major claims of Free Marketist Economists (specifically Austrians) is that all depressions are caused by government intervention in the economy. Now, this should be fairly easy to find out by checking when the US has had the most depressions.

Here is a good source that has a complete list since the founding of the US. The first US Depression was in 1797, and from then until 1913 when the Fed was founded, we spent 57 out of 116 years in depression, meaning we had a growth:depression ratio of about 1:1. Since 1913 that numbers change quite a bit. 94 years later and we've spent 22 years in depression (I stopped at 2007). The new growth:depression ratio is now about 4:1. Also of note is that our longest period in depression was the Long Depression (at 23 years), and happened before the Fed, and that after the Fed was enacted we've had our longest period of growth (preceding the Recession of 1953 at 24 years)

Now, the argument could be made that a decrease in depression frequency should be to be excepted since as time goes on the technology and international trade increases stability. OK, well, let's divide the time into sections of 30 years (I'll be calling them 'generations'), and go back three of those generations before the fed, and three after (3 after brings us to now).  So, here's how this breaks down:
1821-1851: 9 years
1852-1882: 18 years
1883-1913: 18 years
1914-1944: 13 years
1945-1975: 4 years
1976-2006*: 5 years

Now, that raw data shows a few things. First of all, the first to second generation literally doubled the amount of time in depression. What happened? I'll get there in a moment. Also notice that the time went from 18 to 18, to 13, to 4. What's with the major drop? Well, first of all, the 30%  drop over the previous generation is most easily accountable to the implementation of the Fed. And then there's the drop from 13 to 4. That 60% drop is probably because of the major financial regulations that were put in place under FDR. And they were getting repealed in the 80s to the early 90s.

Now, the obvious reply would be to point out that the US has had several different periods of Central Banking over the years, and each of those could have accounted for our different depression. Unfortunately, it doesn't work out that way.
First Central Bank: 1791-1811. There was 7 years in depression out of 20. (approx 30%)
Non-Banking: 1812-1815. There was 2 year in depression out of 4. (approx 50%)
Central Bank: 1816-1836. There was 6 years in depression out of 20. (approx 30%)
"Free Banking Period"**: 1837-1863. There was 9 years in depression out of 26 (approx 30%)
Central Bank***: 1863-1913 There was 33 years in depression out of 50 (approx 66%)
The Fed: 1913-2006: There was 22 years of depression out of 93 (approx 23%)

So, what this means is that since our first depression we had one non-central banking period where we spent half of our time in a depression, and the only time we had a central bank with more than 30% of our time in depression was under the 1863 National Bank. And what was the reason for it? Likely the gold standard, actually. The banks were issuing paper money that was redeemable in gold, in theory. But, it is virtually impossible to actually run an economy off of gold without a fractional system, where the banks issue more paper currency than they can redeem in gold. The reason is that a certain amount of inflation is needed for an economy to grow, and the growth of gold is incredibly slow compared to what is economically desirable. So, banks used a fractional system, and eventually people realized that their bank couldn't redeem all of their currency, so it caused 'bank runs' where people would rush to their bank to trade in their paper currency for gold. Which their bank didn't have. And this would cause an otherwise healthy bank to go under from lack of funds, which would cause a chain reaction toppling the whole system.

So, why didn't this happen periodically prior to the 1863 National Bank? Simple, people didn't notice. We only really hit the Industrial Revolution in full swing in the 1860s. When we had a new central bank. So, what stopped Bank Runs during the Fed? Simple: they did. While the Central Bank existed and it's currency was the medium of trade, it was still based on the value of, and redeemable in gold. So, yes, Bank Runs did happen under the Fed. Infact, one happened immediately prior to the Great Depression. What's stopped Bank Runs from happening since? Well, we stopped backing our currency in gold, of course. A series of acts of Congress were implemented in 1933, collimating in the Gold Reserve Act, which outlawed private ownership of gold, making Bank Runs to get gold impossible, and that any gold in the US had to effectively be returned to the banking system (in exchange for cash, of course). Effectively forcing people to return money to their banks.

After WWII (and until the '71) we were using the BrettonWoods System, which had the reserve currency of the world tied to the US dollar, which was in theory based on the gold standard, but whose currency was not actually redeemable for gold. In effect, there has not been a gold standard since 1933.

Now, the next place a person could go to reply to this is by saying that the US is only one case. And that's fair enough. For the sake of time, I'm going to focus on three countries: Japan, the UK, and Chile.

Japan is a fun case in economics. They were out of the Great Depression in 1932 by significantly devaluing the Yen, and starting deficit spending (both only possible under a Central Banking system, and are remarkably similar to Keynesian Economics). Since post-WWII Reconstruction Japan has had two depressions. Two. The first lasted 13 years, and is the so-called Lost Decade of Japan from 1990 to 2003, with the second being caused primarily because of Japan's ties to the US economy during the 2007 Depression.

The UK is a somewhat similar story, having spent just 11 years in depression from 1919 to 2007. Also, the US entered the current Depression in December 2007, whereas the UK entered in November 2008. And the UK and the general Eurozone's banking regulations are tighter and more consistent than those of the US.

And finally Chile. Chile had the crap metaphorically kicked out of it during the Great Depression. It's economy focused heavily on the export of materials used for war, so when WWI ended, their economy tanked almost instantly. And during this time they restructured their economy with the government taking a more active role in the administration of the economy, specifically by a number of public works projects. This made is easy for them to experience a rocketing economy from 1945 to 2000, with only two depressions in that time. Both were under Pinochet, if you look. Pinochet's government significantly cut a number of the public works projects, which made it so that their economy destabilized. And in 1990 they had what have easily been labelled an economic miracle.

In summation, an unregulated Free Market is economically unstable. End of discussion. No matter how you look at it, Free Markettism is unstable. You cannot claim that government regulations are the cause of depressions, and you cannot claim that central banking, regulation, and market intervention destabilize the economy. Well, ok, you could, you would just have to ignore the last few hundred years of economic history.

* The ending of the Third Post-Fed Generation is why I stopped counting at 2006 in the first section.
** The Free Banking Period was when there was no central bank in the whole of the US, and instead individual states had their own central banks.
*** States still had their own central banks, but also competed against the federal central bank. By 1865 non-federal bank notes were taxed out of existence.