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It ain’t so, Joe

Commenting on the appearance of the 100th issue of the Journal of Economic Perspectives, its founding editor, Joseph Stiglitz, remarks (page 22) that a diversity of perspectives is

“especially important in a field known for having certain orthodoxies—orthodoxies that dominate for a while and then fade, making the profession sometimes look less like a science than it would pretend to be. A case in point is the well-known and widely documented belief within the profession as the economy entered the Great Depression that markets were self-correcting and that government intervention would be a mistake. Another is the monetarist fad a half-century later.”

It takes a lot of chutzpah to offer the Great Depression as a counterexample to the claim that government intervention is a mistake. Thanks to the evidence and arguments made by the monetarists Stiglitz also derides, it is now generally accepted that the major fault for the Depression lies with the Federal Reserve System and the Bank of France, which as central banks were creatures of government intervention. (And here is the connection to free banking: the actual or plausible hypothetical behavior of free banks offers a standard of comparison to what central banks did, especially the massive accumulation of gold by the Federal Reserve and the Bank of France. Because gold earned no interest, it is implausible that free banks would have accumulated it on such a large scale, creating deflationary pressure. I know of no actual large-scale free banks that held such high ratios of gold reserves.)

I recommend for Stiglitz or anybody else who thinks as he does the sections on the Depression from the books below:

Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 (this had better be a re-reading for any economist who is beyond graduate school)

Benjamin Anderson, Economics and the Public Welfare (an account of the period by a first-hand observer)

Richard Vedder and Lowell Galloway, Out of Work: Unemployment and Government in Twentieth-Century America (describes labor market interventions that kept unemployment high in the United States during the Depression)

H. Clark Johnson, Gold, France, and the Great Depression, 1919-1932 (the Bank of France’s role in the Depression)

Jim Powell, FDR’s Folly (a well-written popular survey of the multitude of regulations imposed during the Depression in the United States and how they impeded recovery)

And, David Glasner would add, Ralph Hawtrey, Trade Depression and the Way Out.

UPDATE: Now I know where Stiglitz gets his  ideas on the Great Depression: he makes them up. In an interview broadcast on National Public Radio on June 17, I heard him claim that Herbert Hoover imposed austerity.  Under Hoover, though, federal spending increased from 3.4 percent of GDP in fiscal 1930 (July 1929-June 1930) to 8.0 percent in fiscal 1933 (July 1932-June 1933). A budget surplus of 0.8 percent of GDP in fiscal 1930 turned to a deficit of 4.5 percent in fiscal 1933. (See page 24 of this.  Remember that at the time, presidential terms began in March.) Hoover's decision to raise tax rates was an austerity-type decision. But here is Stiglitz saying in 2010 not to extend the Bush tax cuts, or in other words, to imitate Hoover. For more details, see a recent paper by Steve Horwitz.


  1. There was indeed massive state intervention during the Great Depression – most famously the increases in taxes on imports and other restrictions on international trade (the so called "trade wars").

    Also Herbert The Forgotten Progressive Hoover engaged (for the first time in American peace time history) in active domestic economy intervtion designed to PREVENT markets clearing.

    Hoover was the first President to act upon the "Demand" fallacy – i.e. the docrtine that wage rates must be kept UP duing a slump.

    During the 1921 credit-money bust wages were allowed to fall and the economy was in recovery within six months.

    But with the credit-money bust of 1929 the government sprang into action – doing everthing they could to keep wages UP.

    The result was that markets did not clear – and the United States was "locked in" to mass unemployment (when wartime inflation led to the fall of real wages – especially if one measures wages in relation to REAL i.e. "black market" prices for goods).

    However Kurt Schuler's mention of the "montetarists" is very odd.

    The montetarists do not denounce the Benjamin Strong credit-money inflation of hte 1920s (the thing that made the bust of 1929 inveitable) – on the contrary Milton Friedman praised Benhamin Strong (of the New York Federal Reserve) many times, and held Irving Fisher (a man unable to see that "inflation" does NOT mean an increase in the "price level", but means a increase in the money supply – especially the credit money supply via bubble building) to be a "great economist".

    Even Benjamin Anderson (a lifelong credit bubble banker) had no time for the Fisherites (which is what the "monetarists" really are) Anderson (in THE VERY BOOK KURT SCHULER CITES) denounces both Irving Fisher and Benjamin Strong.

    This is a very important matter.

    Either money (credit money) should be increased in line with economic activity (to "serve the needs of trade" as the early 19th century "Banking School" put it) or it should not.

    If one holds (like Irving Fisher and the "montarists") that the credit-money should be so increased (in order to "maintain a stable price level") then one be unable to see the credit-money inflatins that led to the 1921 and the 1929 busts.

    And one will be unable to more recent busts – such as the Lawson bubble in Britain in the 1980s (no great increase in the "price level" but a terrible inflation) and the Alan Greenspan inflation (again no great increase in the "price level" that led to the current crises).

    Why do people think that people like Ludwig Von Mises and F.A. Hayek were able to predict the bust and the Fisherites (the "montetarists") were not?

    Why was Irving Fisher unable to see the bust even AFTER IT HAD HAPPENED?

    The reason is that the "price level" idea that a "moderate" credit-money expansion is O.K. (indeed beneficial) is false. It is a false understanding of economics.

    As for the idea that hair-of-the-dog money supply expansion is the correct response to a bust……

    Well I must be polite – so I will just say that such an idea is a classic example of missing-the-point.

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