Is this guy saying that a decrease in the monetary base caused a recession?
Is this guy saying that a decrease in the monetary base caused a recession?”
There is some evidence that it contributed. Money is a measure of value of the goods and services in the economy. As more goods are produced the total aggregate wealth increases (assuming the goods are needed and useful), so the aggregate supply of money needs to increase to reflect the increased wealth. If the two get out of whack, bad things happen.
If you increase the money supply faster than you increase total wealth, you get inflation. More and more money is chasing the same unit amount of goods, so money becomes worth less relative to the goods. Anyone old enough to remember the 1970s and early 1980s remembers that situation. And other may have read about the German hyperinflation of the 1920s and 1930s.
What people have less experience or knowledge of is what happens when the opposite happens — more wealth is produced, but the money suppy remains constant (or shrinks). In that case, all goods become worth less, and the value of money increases.
In the 1880s and early 1990s, when the United States was on the gold standard, something like this happened. The industrial revolution drastically increased productivity. A laborer could produce hundreds of widgets where twenty, thirty years earlier he could have only produced a dozen. Farmers, using McCormick reapers and other new farm equipment increased production by factors of ten to twenty times the yields they were getting earlier. So everyone was producing a LOT more.
But, there was still the same amount of gold. So when you produced a dozen bushels of wheat where previously you had produced one, that dozen bushels was worth the same amount of gold. So each bushel was worth a lot less. Not only that, but your farm was worth a lot less — because it represented a smaller percentage of the total gold available (due to all that extra wheat) than when you purchased it. And you could not produce your way out of the problem because the more you produced, the less everything you owned was worth.
This is what caused the Panic of the 1890s. And the call to go to a bi-metal (gold and silver) currency. Making silver a monetary metal increased the money supply. We did not do that because of major gold strikes in Australia and the Yukon. Because more gold was found, the money supply increased enough that the wheat (and farm, and widgets) were worth more because they represented more gold.
Same type of thing happened in the 1930s. Roosevelt's brain trust got in their heads the idea that the money supply was too large because the economy had shrunk. So they reduced it. Drastically. So much so that manufacturers could not afford to produce. Purchasing labor and material to produce goods cost more than what those goods could be sold for (especially since manufacturers could not reduce wages due to government pressure and the goods had to be sold for less money than previously due to the small supply of available money). So they shuttered their factories.
One of the major reasons that WWII ended the Great Depression was that in 1942 the government could not borrow money to pay for the war (no one had any) and could not pay for the war through taxes (it took a year to raise and collect taxes), so they simply printed money. Under more normal circumstances this would have caused severe inflation. But since the money supply had been so much smaller than appropriate for the size of the American economy, all this did was restore the money supply to the appropriate size. Businesses could now recover their manufacturing costs, they started hiring, and the economy boomed — without inflation.
Had the government continued wildly printing in 1943, we would have gone into hyperinflation, but by then new war taxes were being collected, and the delta between revenues and spending was being covered by borrowing (anyone remember War Bonds?) from newly-employed citizens who were saving a good chunk of their new income to provided a safety cushion for the recession they knew was coming when the war ended.
But basically, yes. Reduce the money supply enough and you will cause a recession. Increase it too much and you will cause a recession. Think of it as fuel going into a carburetor — too rich a mixer and the engine chokes. Too lean and it stalls.
RE: Is this guy saying that a decrease in the monetary base caused a recession?
If I read him correctly, he is saying that it is ONE OF THE MANY REASONS for the slowdown. Not the only one mind you, but one of many.
Similarly, it takes more than one blow to send our economy reeling. But if a perfect storm strikes, depending on the ferocity of the storm, it will send the economy in a tailspin ( e.g. the threat of increased taxes, healthcare mandates, over-regulation, high oil prices, uncertainty about the direction of government and debt, etc.). All of these factors seem to be coming to a head in America today.