OK, back to theory

I am  revisit  Economic Theory because DeLong wants  wants us to read Hawtry,lthe English banker who wrote books on the Art of Central banking, and Bank rates over a Century.  He is a good economist, and the books are good, I am half way through.  I am stopped when he takes up speculation, and up to that point have found no indication that medium term changes in bank policy had much effect on the Real Economy in Europe prior to the Great Depression.  I did find a struggle to convert from Gold to Fiat money technology in France.

But one point Hawtry makes is that during the 1920s run up in American productivity, long term rates fell.  Why did long term rates fall, if rates match economic yield?  It is because one has to integrate the entire yield curve to get aggregate yields.  In the mid 20s, America was using new technology to find outlets for smaller groups of consumers, extending the distribution chain to make it more accurate.  This was the age of the franchise or chain store and the age of increase economies of scale as electricity reduces transaction costs.

American industry was confidant in the technology and allowed themselves to increase the stages of production,  adding one more link in the distribution chain allows them to subdivide goods and add variety at the retail level.  This extra stage of production is the inflated state of production, and we expect less inventory at each stage of production but a total inventory increases as there is now one additional stage.  So, the yield curve should be flatter, but much wider, extending out 30 years where previous it extended realistically out 20 years.  So once we have adapted the technology, there is a period in which the total area of the curve is higher, the extra area coming, not from high long term yields, but a flatter and wider shape.

If I continue reading, which I will, I suspect the punchline will be about the relationship between speculation and banking.  This is the punchline I am supposed to get, but in the meantime, Hawtry actually confirms much of our theory of the economy as an orthogonalization procedure performed in stages of production.  Hawtry, in 1960, does not quite get the extra step the theory needs, that variances in everyday inventory events drive toward a biological constant over time.