But let us not dwell on generalities when specifics lie so close at hand. Consider food. As all travelers have learned, the authorities strictly forbid passengers from bringing onboard an aircraft any food that has not been purchased in the airport outlets available to them after they have successfully navigated past the checkpoints. Moreover, U.S. authorities forbid travelers entering the United States from bringing various food items into the country with them. Nevertheless, because the Turks make scrumptious candies and pastries - I particularly recommend the baklava with finely ground pistachio nuts - we decided to bring some of these treats home with us despite the security prohibition, being confident that the security employees’ abysmal level of competence gave us a good chance of success in the commission of this forbidden act. Suffice to say that our packages of candy and pastries sailed though all of the checkpoints ever so smoothly.
To compound the absurdity of the enforcement apparatus, a U.S. Immigration and Customs Enforcement agent with a sniffing dog stopped by our bags as we were collecting them after entering the United States at the Atlanta airport. Uh, oh, I thought, as the dog took a distinct interest in our luggage and would not move along on his appointed rounds. The agent asked, “Are these your bags.” I confessed that they were. “You have any food in them?” “Yes, we have some sweets.” “Okay.” Still the dog would not move on. “You have any pets at home?” “Oh, yes, we have tons of pets at home - cats, and dogs, and what have you.” “Okay,” he said, dragging the unfortunate Gestapo-pooch away from our luggage. We were greatly relieved, first that the airport thugs had not gunned us down on the spot for our admitted violation of the no-food rule, and second, for our good fortune in getting the cherished treats to their intended destination in St. Tammany Parish, Louisiana, where we have been enjoying them for the past several days. (Note to unfriendly readers: don’t bother to report us; by the time the gendarmes get here, we certainly shall have eaten all of the evidence.)
Not all airport security is created equally idiotic. I hereby award the blue ribbon to the Charles de Gaulle International Airport outside Paris, where we transferred from one aircraft to another on our trip from Istanbul to New Orleans. Many people think of Paris as a romantic place. Get over it. It’s actually an asylum for persons deemed incapable of holding down a real job, as opposed to a job in airport security. The queues seemed interminable - at least the ones into which we were herded, notwithstanding that nearby queues had hardly anyone in them. This lop-sided arrangement was probably a test setup arranged by a security expert with a minor in queuing theory (his identity will be revealed, no doubt, when he is awarded a future Nobel Prize in Economic Science). The French authorities seemed to be mightily exercised about the threat posed by swine flu, completely overlooking the greater threat posed by the fool flu that was manifestly running rampant at the airport.
My wife Elizabeth was traveling with a lead-lined bag, approximately six inches by ten inches in size, to shield her photographic film from damage by the X-ray machines. When an X-ray machine produces an image of such a bag, it shows up on the screen as a large totally black rectangle, a fact that induces some of the less idiotic airport-security personnel to panic and inquire into what it is, and even to open it and paw through the rolls of film in search of those containing plastic explosive, fuses, and timing mechanisms. Shoe bombs are passé; film-pack bombs are now all the rage among fashionable terrorists. To make my story short, I can state for the record that the Parisian X-ray personnel blinked not an eye upon seeing a large black blob on their screens. Move along, mes amis; you may proceed with your parcel of explosives and whatever other hidden items your black blob contains. Bon voyage!
It would be droll to maintain that we did enjoy a Ibonne journée, but the imperative of telling the truth forbids me from maintaining that we did so. The time spent - in truth, more suffered than merely spent - in enduring our passages through three of the world’s more prominent security theaters guaranteed that whatever other indignities might have dimmed the sunlight of our travels, the airport Gestapos in themselves were more than adequate to ruin the entire experience. Elizabeth declared most emphatically that she will never travel again, except by ship.
Like Paris, foreign travel used to be seen as romantic, or at least as interesting and enjoyable. Gone are the days. Today’s world traveler is little more than a guinea pig in a diabolical experiment designed to determine how much abuse the masses will take before either lapsing into complete madness or taking up pitchforks and torches and coming after the Dr. Frankensteins who created these “security” monstrosities.
“Mankind,” declared the American revolutionaries of 1776, “are more disposed to suffer, while Evils are sufferable, than to right themselves by abolishing the Forms to which they are accustomed.” I submit that the mass endurance of “airport security” illustrates the truth of this statement. The American Declaration, however, went on to say: “But when a long Train of Abuses and Usurpations, pursuing invariably the same Object, evinces a Design to reduce them under absolute Despotism, it is their Right, it is their Duty, to throw off such Government, and to provide new Guards for their future Security.” Amen, brothers and sisters. Moreover, if not us, who? If not now, when?
Today’s news brings us a perfect illustration—one of many during the past year of financial debacle and worsening economic recession. According to an AP report, “Treasury Secretary Geithner asked Congress on Tuesday for broad new powers to regulate nonbank financial companies.” Geithner, of course, earnestly expressed the finest motives: “We must ensure that our country never faces this situation again.” Geithner’s partner in crime, Fed chief Ben Bernanke, joined him in “calling for greater governmental authority over complicated and troubled financial companies.” These rulers of the universe want the legal power “to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.” (Extra-credit question: haven’t they been taking precisely such actions for the past year or so?)
Given what a manifestly big deal this bureaucratic power-grab appears to be, why would anyone in Congress want to go along with it? Simple: failure to hand over these powers to the apparatchiks might result in the complete destruction of civilization. Speaking of the government’s having already poured more than $180 billion into AIG, Bernanke told the House Financial Services Committee that the big insurance company’s “failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.” You heard him — catastrophic implications for jobs. That’s all that members of Congress needed to hear. Faux job creation is their very lifeblood when they run for reelection.
Since the onset of the current financial troubles, government officials have made repeated use of a new mantra to justify shoveling mega-tons of the taxpayers’ money to favored firms: systemic risk. So, naturally, at today’s hearings, Geithner trotted out this new hobby-horse: “As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can.” But did we really see systemic risk hovering over AIG, or have we merely been told repeatedly that it was hovering? One wonders whether Bernanke and Geithner are also on record as having reported that they have definitely sighted flying saucers.
In the true spirit of neoclassical economic scientism, I say let’s stage an empirical test: let AIG or Citi or B of A or some other giant, mismanaged financial institution go down, and then let’s see whether the world comes to an end. If it does, we’ll know that these transparent power-grabbers were right about systemic risk; but if it goes right on spinning more or less as before, we’ll know that they’ve been selling us a bill of goods. I think the odds are so greatly in our favor that I’m more than willing to see the experiement carried out. After all, it’s not as though these financial geniuses have demonstrated a great deal of prowess so far, despite having tossed more than $8 trillion to the wind.
It’s possible, of course, that some people failed to see what was going on at today’s hearing, because, as usual, all parties tried to throw the bloodhounds off the scent by dragging a red herring across the trail. This time the rotten herring is the $165 million in bonuses that AIG recently attempted to pay certain employees to retain their services. Joe Sixpack got mighty hot under the collar about these bonuses, of course, goaded by the news media’s usual efforts to make their emphasis inversely proportional to an event’s actual importance. Yes, people are furious about the bonuses; these payments are the populist outrage d’jour. People seem not to have noticed, however, that the $165 million scheduled to be paid in AIG bonuses amounts to approximately 0.00002 of the total amount the government has dispensed in its recent commitments for loans, capital infusions, “stimulus” spending, loan guarantees, asset swaps, and other utter (and utterly destructive) wastes. The public might just as well have become inflamed about how Tim Geithner combs his hair.
Each year, my accountant sends his customers a tax planner with a cover letter. This year’s letter includes the following paragraph:
There are many new tax laws this year. Every one of the Stimulus, Reform, Recovery, Correction, Relief, Equity, Protection and Prevention Acts contains hundreds of pages of tax law changes. My favorite is the Heartland, Habitat, Harvest & Horticulture Act of 2008, which changes the depreciation rules for race horses. We have reviewed them all and are prepared to take you through this complex mess. It’s not that confusing after you remove the exceptions to the exceptions. IRS is not smart enough to make it really hard.I have been doing business with this accountant for about thirty years, and in that time his letters have always ended with the same words: God bless the IRS.
Pressed by advisers, Roosevelt decided to go on the offensive to dispose of this point against him. In a speech in Pittsburgh on October 1, 1936, he explained:
The only way to keep the Government out of the red is to keep the people out of the red. And so we had to balance the budget of the American people before we could balance the budget of the national Government.
A few days ago, while introducing the Obama administration’s budget for fiscal year 2010, President Barack Obama said:
While we must add to our deficits in the short term to provide immediate relief to families and get our economy moving, it is only by restoring fiscal discipline that we can produce sustained growth and shared prosperity.
Many people have been calling for a new New Deal. The Obamistas seem to have heard their plea.
McLean relates how “on July 13, [Treasury Secretary Henry] Paulson announced a plan under which Treasury would backstop all of the G.S.E.’s debt and buy equity if needed. ‘If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out,’ Paulson told lawmakers.” Paulson’s plan was enacted into law shortly afterward. But, as Robert Burns’s poem warns us, “The best laid schemes o’ mice an’ men / Gang aft a-gley.”
Paulson’s bazooka to help Fannie and Freddie failed. . . . Investors were unsure what their eventual losses would be. Both companies announced terrible 2008 second-quarter results, with Fannie losing $2.3 billion and Freddie losing $821 million. But investors were also unsure what the new legislation meant. No one wanted to risk putting money into the G.S.E.’s, only to have the government radically raise capital requirements—or step in and wipe the shareholders out. And so, as if the second-quarter results hadn’t caused enough alarm on their own, the legislation had the perverse effect of ensuring the companies would be unable to raise new capital, even as everyone began to say that they had to do so.
For the past six months or more, the entire U.S. economy has been subject to increasing regime uncertainty, as the government has adopted, almost daily, gigantic new schemes to subsidize, bail out, prop up, take over, recapitalize, guarantee, stimulate, or otherwise interfere with formerly private enterprises, markets, and other arrangements. It seems likely that the recession’s continued worsening may be attributed in substantial part to the regime uncertainty the government’s frantic actions have created, and bid fair to continue creating. When private parties need reassurance the most, the government continues only to roil the waters.
H.T. Elizabeth
Given the gargantuan amount of money being appropriated in this bill, you might think that it certainly must portend a great deal of economic stimulus, especially if you, like most Americans, labor under vulgar Keynesian misconceptions about the effects of government spending — you know, more government spending is always good (it has a “multiplier” effect) and more government debt is no problem (we’ll be dead before our kids and grandkids get saddled with the lion’s share of the burden of paying off this additional debt, directly or indirectly, and nobody really gives a damn about future generations, right? What did they ever do for us?).
Well, those might have been your feelings if you hadn’t bothered to look inside this stimulus-sausage factory, to see what ingredients go into the product. I can’t recite all of them here, complete with all of the preservatives and the spices, but some are as follows:
Amtrak, $1 billion; child-care subsidies, $2 billion; National Endowment for the Arts, $50 million; global-warming research, $400 million; carbon-capture demonstration projects, $2.4 billion; digital TV conversion coupons, $650 million; renewable energy funding, $8 billion; mass transit, $6 billion; new cars for the federal government, $600 million; modernizing federal buildings and other facilities, $7 billion. These items are only some of the small potatoes, however. Note that, in most cases, the amounts given are actually additions to amounts made available elsewhere in the budget.
Bigger-ticket items include: bridge repairs and other highway projects, $30 billion; broadband and electric-grid development, airports, and clean-water projects, $40 billion. Notice that these are the sorts of public-works projects usually implied when the legislation is discussed in general terms, yet they add up to less than 10 percent of the total spending.
Almost a third of the total spending is targeted for income-transfer programs, including: refundable tax credits, $82.7 billion; Medicaid, $81 billion; food stamps, $20 billion; public housing, $7.5 billion; COBRA insurance extension, $30.3 billion; unemployment insurance, $36 billion; and various others. Education will get $66 billion more than it gets elsewhere in the budget. The motto there: no education bureaucrat or teacher-union member left behind.
Call me old-fashioned, but when I gaze upon all of this booty, I don’t see stimulus; I see rip-off. The Democrats are using the alleged crisis as the pretext for a monumental looting of the taxpayers (present and future) in the service of rewarding – whuda thunk? — the interest groups that put them in power.
All of this comes, of course, close on the heels of the gigantic Republican rip-off of last October’s bailout bill, by which we peasants were plundered to transfer hundreds of billions of dollars to the owners, managers, and creditors of banks and other financial institutions — all under the pretext, of course, that the impending financial catastrophe meant that “something had to be done” at once.
Well, something was damn sure done then, and something even worse is being done now. The list of beneficiaries from these piratical actions differs, to be sure, but the common denominator remains: ROBBERY — robbery most foul, and on an almost unthinkably grand scale.
From huge hydrants of money
I’m stimulated
Credit freeze thaws now
Fed heats pipes until they steam
Winter is lovely
Consumers feel fine
Ready to mortgage their souls
John Maynard Keynes smiles
Saving’s so passé
Capital may be assumed
Let K be the stock
Giant debt you bet
Chinese will serve fine dinner
Children cannot vote
Like rose in springtime
Welfare state blossoms anew
Laughter heard in hell
I went out to tend the birds as I normally do. Released from the main henhouse, the birds burst forth creating their usual happy cacophony of liberation, only this time as the roosters crowed, the hens clucked, the ducks quacked, and the geese honked, they crowed, clucked, quacked, and honked with an ecstatic exhuberance I have never heard before. Something has changed.
In the distance, I spied a lone hawk. Of all the predators that menace the birds, especially the small ones as they range freely during the daytime, the hawks are the most fearsome. Over they years, they have taken a terrible toll. But today, notwithstanding the hundreds of yards that separated me from the raptor, I discerned for the first time a benign glint in his steely eyes. Something has changed.
As I went about my chores, I realized that despite my many criticisms of Keynesian economics over the years, Paul Krugman’s “depression economics” might actually bear fruit at last. If the hens and the roosters, the ducks and the drakes, the geese and the gander all pitch in and do their part, there can be a positive multiplier effect. Something has changed.
Not until I had completed my chores and returned to the kitchen did I realize that I, too, was no longer the same. The chronic aches and pains that plague me had disappeared. Moreover, the spiritual outlook that more than one phychiatrist had diagnosed as anxiety and depression (before Tom Szasz convinced me that I simply lack the gumption to cope with life’s workaday problems) had evaporated, and my heart was filled with gladness and newfound longing for the glorious future I am now convinced awaits me — as indeed it awaits all mankind, regardless of race, creed, sexual preference, or previous condition of servitude. Something has changed.
I do not follow the news closely. Years ago, I discovered that no matter what the news media reported, I could recall their having reported the same thing ten or twenty or thirty or forty years earlier, so it seemed pointless to waste time absorbing information about events that differ only in the specific names and dates that fill in the blanks today. Nevertheless, I am aware, as todo el mundo are, that today in the imperial capital, a new emperor is being crowned. The media report that he will be acknowledged as a new Sun King, only more splendid by far than the original Roi Soleil. Louis XIV, they say, looks like small potatoes in comparison with the new emperor. Obviously, something has changed.
And it’s not simply that the new emperor rules the entire world, whereas his pidling predecessor ruled only France and Navarre. It’s a more spiritual difference. Almost fifty years ago, we Americans crowned a king who assured us that a rising tide lifts all boats, but his youthful wit was no match for the assassins’ bullets. Old Louis knew how to deal with court intrigues, gathering the aristocrats in Versailles where he could keep a close watch on them. Unlike our new emperor, however, old Louis would never have made the cut as a male model. So, clearly, something has changed.
Le Roi Soleil had some enemies, too, whereas the new emperor basks in the glow of universal adoration. And why not? Has he not explained to us in words too simple and plain to be misunderstood that we are all in this together, whatever “this” may happen to be? And we might be wise to get ourselves ready for some mighty exciting times—stimulating times, you might say. Face it: we’re all in this stimulus together. Under the old emperor, Bush II, only the aristocrats and the hangers-on at the court got rich. Now, though, if the economy should faint from the stress of excessive stimulus, we may console ourselves that we are all in this together. Something has changed.
It’s a good speech, as such speeches go. Roosevelt’s voice was strong, he articulated his words clearly, and he spoke with suitable emphasis and emotion at the right places. He was obviously not yet the frail, dying man he would be when he gave his next inaugural speech in 1945.
The speech, which I had never heard before today, struck me in several regards. The president took a couple of swipes at the rich, and he posed as a friend of the little guy — standard rhetorical tactics throughout his presidencies. His principal thrust, however, was to represent the country as standing in grave danger from foreign foes, and to suggest without saying so explicitly that going to war against those foes was imperative if the nation were to survive with its traditional “spirit” of liberty and democracy intact. Although for the most part he framed his attacks on the “isolationists” by innuendo, rather than by frontal assault, he left little doubt that he was battling for the “soul” of the nation by contending that unless the United States threw its full weight against the unnamed foreign enemies, “democracy” was all but doomed in the entire world.
Most of all, however, I was struck by the great amount of sheer mystical collectivism that pervades the speech. Of course, politicians tend to speak in such terms in their public addresses – elevated balderdash is their stock in trade, as a means of concealing the hard realities of their proposals and actions. This speech, however, contains an exceptional amount of “spiritual” talk, and I found myself concluding repeatedly that the president’s declarations, notwithstanding their noble ring, lacked all content: he was referring to things that have no observable referents. Many of his statements were entirely symbolical, wholly without substance. I was reminded of the “mystic cords of memory, stretching from every battlefield and patriot grave to every living heart and hearthstone all over this broad land,” of which Abraham Lincoln spoke in his first presidential inaugural address. Though Roosevelt’s language did not pack the poetic punch that Lincoln’s did, he sought to touch the same primitive emotions and collective loyalties, drawing the obstreperous and miscreant sheep together into the same “national” fold.He referred more than once to Lincoln.
One of my favorite books is F. G. Bailey’s unjustly neglected masterpiece Humbuggery and Manipulation: The Art of Leadership (1988). Bailey succeeds better than any writer I know in establishing how political leaders, who are essentially gangsters writ large, gain the people’s submission. The followers, he writes
are cajoled into devotion by the leader’s pretended concern or admiration for them or for some cause in which they believe, by a pretense of virtue; it is mostly humbuggery. . . . [T]he role of leader requires performances in defiance of truth, ranging from the mild and on the whole inoffensive metaphorical exaggerations . . . to actions that are carefully written out of autobiographies because they are shamefully dishonest or even criminal.
Listening to Roosevelt’s 1941 inaugural speech, I could not help but think of Bailey’s analysis, in which he also wrote:
Leaders are not the virtuous people they claim to be; they put politics before statesmanship; they distort facts and oversimplify issues; they promise what no one could deliver; and they are liars. . . . [However, and this point is central,] leaders, if they are to be effective, have no choice in the matter. They could not be virtuous (in the sense of morally excellent) and be leaders at the same time.
Think of these words, if you happen to listen to another presidential inaugural speech in the next few days.
Bananas, of course, must be imported into this country from Latin America and other places where their commercial cultivation has proved profitable.
As for the republican form of government, the American people have progressively repudiated it almost from the time they won their independence from the British Empire, and during the past century, they have increasingly favored a form of electoral dictatorship cum empire in which, every four years, the people cast ballots for one of the candidates put forward by the two wings of the one-party political apparatus. This system, vigorously promoted by the imperial running dogs known as the mainstream news media, brings great delight to the masses, who love a good horse race, even if it has been fixed. They are also kept contentedly semi-comatose by the bread and circuses their masters provide in the form of the welfare-nanny-therapeutic state and its Hollywood adjuncts. The few who object strenuously are tased or shot dead by the police, who are ever ready to serve and protect the state that employs them.
The CBO’s projection does not take into account any addition to the federal budget deficit that may arise from enactment of a “stimulus” bill after the Obama gang takes charge of administering the empire. If the magnitudes now being discussed for this so-called stimulus should prove to be in the right range, the deficit for fiscal year 2009 may turn out to be not $1.2 trillion, but something in the neighborhood of $2 trillion, perhaps 15 percent of GDP. If so, the deficit will be as large in amount as the entire federal budget was as recently as 2002. This prospect may be what cranky commentators such as yours truly have in mind when they speak of “out-of-control federal spending.”
The 2009 deficit arises in part from the CBO’s taking into account outlays of $238 billion as the net subsidy costs for Fannie Mae and Freddie Mac, plus $18 billion of cash infusions from the Treasury to Freddie and Fannie. It is entirely possible that the estimated net present value of Fannie and Freddie’s future earnings will prove to be too large, and therefore that the subsidy will be greater than projected and the overall federal budget also greater by that extra amount.
With little fanfare, the CBO report ventures to mention that “foreign lenders, who have recently been willing to lend to the U.S. government on very advantageous terms, may become less willing to do so in the future, which would tend to raise interest rates in this country.” To be sure. Indeed, if the Japanese, Chinese, and Arabs, who have been carrying a major part of the load in covering the federal deficits in recent years, should substantially reevaluate the risk of dollar depreciation (or even U.S. repudiation of its debt) and greatly reduce their purchases of U.S. Treasury securities, then drastically higher interest rates and, in response, hyperinflation (with or without price and wage controls) might well be the next chapter of this unpleasant story.
Meanwhile, my advice is: eat bananas while they are still available from producers who will accept U.S. dollars in exchange for them. If the U.S. dollar is totally destroyed, as recent and impending government actions suggest it might be, then we may be reduced to barter, at least for a while. I wonder if we can trade Hollywood films for bananas. And, most important, I wonder whether I can get a job in the movie business, perhaps as an extra for the crowd scenes. I think I have the talent needed for that role.
No doubt, most of them became disillusioned after a while, if not immediately. Worse, thousands of them were enmeshed in Stalin’s purges of the latter 1930s and ended up in the Gulag, where prisoners endured an extraordinarily harsh life, usually cut short by a painful death after a few months or years. Some of these victims managed to appeal to U.S. diplomats inside the USSR for help, only to be turned away by over-cautious junior-level careerists or, in effect, by supercilious higher-ups who were even more despicable.
Tim Tzouliadis has written a book about these things, The Forsaken: From the Great Depression to the Gulags Hope and Betrayal in Stalin’s Russia. For an interesting and informative review, see Adam Hochschild’s article in The Times Literary Supplement, December 23, 2008.
HT: Elizabeth Higgs
I know I should be kind to him, on grounds of collegiality toward a fellow economist, so I’m not going to go on and on about his stunningly sophomoric ideas on economics, income distribution, the Great Depression, how best to deal with business recessions, and so forth. Besides, I’d never earn a marksman’s medal for shooting a fish in a barrel.
But good golly, Miss Molly, here’s what he says in the column, in discussing the proposed “stimulus” plan the next administration hopes to get enacted into law soon after it takes office. “The biggest problem facing the Obama plan . . . is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.”
Think about that statement; roll it around in your mind. Krugman worries that certain politicians may obstruct enactment of the stimulus plan by insisting on a demonstration that its benefits exceed its costs. Could anything be more unreasonable than such hidebound insistence that the government’s expenditures be shown to be worthwhile? That’s not the funny part, though.
The hilarious part is the appended phrase “a burden of proof never imposed on proposals for tax cuts.” Think about that one, if you can stop yourself from rolling around on the floor in laughter. Look, here’s the deal, Krugman is saying: these conservative fuddy-duddies insist that the government not spend the taxpayers’ money unless the spending passes a benefit/cost test. Pretty dumb, huh? But even dumber is that these hypocritical prigs never insist on such a test when they decide to suck a little less than they’ve been sucking out of the taxpayers’ bank accounts. Damned cheeky of these old fossils, eh?
Krugman obviously subscribes to the belief, immensely popular inside the beltway, that all the money rightfully belongs to the government, whether it is being considered for involuntary transfer from its private holders to the government or being considered for retention by the people who earned it in the first place. He wants anyone who proposes to allow such retention to bear a burden of benefit/cost proof. What a guy. I tell ya he slays me!
If only to regain my composure, I will mention a somewhat related idea I take seriously about who should bear the burden of proof. Consider the following proposition: a gang of armed people calling itself a government has a right to take money from and impose rules on people who are innocent of violating anyone’s just rights, employing violence and threats of violence against these unoffending people to get its way. My idea is that anyone who supports this proposition bears a heavy burden of proof – so heavy, indeed, that no one can bear it on the basis of logic, evidence, and a moral standard higher than a wolf’s.
I don’t expect Krugman, a plumed knight of the economics profession and a designated hatchet man for the goofy left, to bother trying to meet this challenge. Yet I wish he would do so. Watching his antics would be a barrel of laughs.
Lucas finds the Fed’s actions in adding more than $600 billion to bank reserves in the past few months to be “the boldest exercise of the Fed’s lender-of-last-resort function” in its history. He believes, as I do, that in recent months financial decision-makers have engaged in a “flight to quality”—I call it a flight from risk—and that by injecting reserves into the banks, the Fed has effectively exchanged risky assets (the banks’ collateral securities) for a riskless asset (deposits at the Fed), thereby satisfying their demand to hold additional high-quality assets when the market itself was not supplying more such assets.
Viewing the Fed’s action as an effective way to stimulate spending, Lucas also applauds it as superior to the alternative policies to achieve this objective. “It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities.”
I agree that these alternative policies are probably worse than direct Fed lending to the banks, but, unlike Lucas, I do not view the Fed’s abrupt, massive lending with equanimity. Indeed, as I indicated three days ago, I view the banks’ current, gigantic holdings of excess reserves as a veritable Sword of Damocles with the potential to cause a near-collapse of the dollar’s purchasing power.
I also differ with Lucas—and with Bernanke and nearly all of the mainstream commentators on the financial scene during the past several months—in that whereas he views the present situation as a liquidity crisis, I view it as fundamentally an insolvency problem for many banks and other financial institutions, inter alia. By treating this situation as if it were a liquidity crisis, like the banking situation from 1929 to 1933, one may moderate the recession for a short while or even reverse it, but only at the expense of preserving a plethora of malinvestments that ought to be liquidated by balance-sheet adjustments and, in many cases, bankruptcies, so that the valuable assets can be reallocated to their most valuable uses, rather than being kept impounded in zombie enterprises, including zombie banks. Because Lucas, in good mainstream-economics style, views the current situation in terms of aggregates, he is not looking inside the capital stock and therefore he is failing to see that the easy credit and reckless lending from 2002 to 2007 gave rise to a great many rotten investments that are not viable except by some species of Fed or Treasury bailout.
If the economy is to experience healthy sustainable growth, this garbage needs to be thrown out—and the incompetent managers and investors who created it need to be removed from positions of control over assets they have demonstrated they cannot manage responsibly and successfully. Free enterprise is a system of profit AND loss. If the government rides to the rescue of every large-scale, politically connected loser, the system will grow ever more rotten from the top down.
Yes, this way of proceeding entails short-run pain, but the alternative only pushes the pain into the future while ensuring that when it strikes, it will be even more severe.
So far, this explosive increase of reserves has had only a small effect on the growth of the money stock as measured by the conventional monetary aggregates, such as M2, although the rate of growth of the monetary aggregates is beginning to increase substantially, as shown in this graph.
Because the public’s demand for cash balances has also risen, the recent increases in the money stock have not given rise to increased prices in general. In fact, the major price indexes have fallen slightly in recent months, although the bulk of this decline has occurred because of the decline in the price of oil and related products since July. Price indexes for goods other than energy have declined very little - certainly not enough to justify the many expressions of fear of impending deflation (setting aside whether an actual deflation ought to be feared or not).
At matters now stand, by far the greater threat is rapid inflation, notwithstanding the ongoing recession. When the banks begin to feel more comfortable with expanding the volume of their conventional loans and investments, they will have more than $550 billion on hand to employ for that purpose. The multiplied effect of such a vast amount of lending, as newly created deposits make their way through the fractional-reserve banking system, portends a gargantuan increase in the money stock and hence a correspondingly enormous jump in the general price level. As the public responds to the acceleration of inflation by reducing its demand for cash balances, the increased velocity of monetary circulation will contribute to even more rapid price inflation.
So much potential new money is now impounded in the commercial banks’ holdings of excess reserves that it is difficult to see how the Fed will be able to stem the flood once the banks begin to transform those excess reserves into normal loans and investments. If the Fed attempts to sell enough government securities to soak up the growing money stock, it will drive down the prices of Treasury bonds and hence drive up their yield, increasing the government’s cost of borrowing to finance the huge budget deficits the government will be running because of its various bailout commitments and so-called stimulus programs. This scenario holds the potential for a complete monetary crackup.
I have never been inclined toward touting doomsday financial scenarios. I raise the possibility now only because, as I consider the situation portrayed in the graph of excess reserves linked above, I am unable to foresee how the Fed and the Treasury can navigate through these treacherous waters - waters that their own previous actions have whipped to a foam - without creating terrible financial and economic harm. If the dollar survives the ministrations of Bernanke, Paulson, Bush, and the Obama gang, its survival will be something of a miracle.
Many, it appears, have simply panicked. Starting late last summer, the financial markets began to exhibit tremendous volatility, officials at the Fed and the Treasury began to act as if imminent disaster loomed, and media commentators and reporters completely lost their composure. Even people who should have known better began to talk and to act as if the economy stood on the brink of complete collapse unless the government took unprecedented actions immediately. When one extraordinary action failed to calm the waters at once, another extraordinary action was taken, then another, and another.
We now look back on four months littered with ad hoc bailouts, new regulations, institutional takeovers, a gigantic bail-out statute, massive lending, asset exchanges, and loan guarantees never before made by the Fed and the Treasury – all on a scale that no one foresaw six months ago. We might understand that the big bankers and other financial masters of the universe who had got themselves and their mega-institutions into such deep trouble would have worked hard to create a sense of crisis and to exploit it as a pretext for cushioning their slide from the financial pinnacles — peaks so high that the air is thin and the brain does not function effectively, so that even such workaday necessities as due diligence are overlooked. Blessed with friends in high places, these financial titans snatched loot by the hundreds of billions while the snatching was good.
But why have free-market economists and other commentators expressed approval of this blatant piracy? It now appears, I am saddened to report, that these free-market experts were not so expert after all. Indeed, many of them seem to have failed to understand how markets work and how government actions can hobble or kill those workings. Many have talked as if they actually believe in vulgar Keynesianism or other crackpot ideas — about “systemic risk” where none exists or about “missing markets” for poor-quality assets that only a fool would try to sell privately when the alternative of a munificent government buyout shimmers on the horizon.
Despite the evidence of how counterproductive all of these frantic government actions have been, of how they have served above all to produce “regime uncertainty”about what the rules will be tomorrow or the next day, and thereby to paralyze private arrangements, the market’s fair weather friends are now clamoring for various species of government “stimulus” as soon as the Obama regime takes power. Of course, the Obamistas’ motives are purely political, as befits a pack of office holders and their lackeys, so it is pointless to indict them — a rattlesnake is not to be blamed if it strikes, because its nature impels it to do so. But why are well-known free-market economists going along with this nonsense?
Back in my days as a professor, I always endeavored early in the course to teach my students the fundamental importance not only of the first laws of demand and supply, but also of the second laws of demand and supply. Thus, the first law of supply states that the greater the price, the greater is the quantity supplied per unit of time, other things being equal. And the second law of supply states that the own-price elasticity of supply is greater, the greater is the time allowed for response to a change in price. The first and second laws of demand are expressed similarly, mutatis mutandis. Thus, although we can expect markets to respond to price changes, we must recognize that the responses take time; and the greater the time, the greater are the responses. Anyone who expects markets to restore a disturbed equilibrium instantaneously will be disappointed. People cannot discover the relevant changes, confirm and assess them, consider alternative arrangements of their affairs, and carry out those changes in an instant. The competent economist appreciates the necessity of patience in evaluating the market’s operation. Simply because the market does not appear to have reconfigured itself fully soon after a shock, we have no warrant to conclude that “the market doesn’t work anymore” or that “the market doesn’t work the way it used to.” Such statements manifest an economic crackpot, and economists who talk this way discredit their professional competence.
A clever riposte, of course, is the one that Keynes himself famously made in response to criticism of inconstancy in his views: “When the facts change, I change my mind. What do you do, sir?” Glibness, however, is a poor substitute for good sense, and Keynes’s critics were right to call him to account for his frequent shifts with the winds of events and intellectual fads. Nothing that has happened recently invalidates in the slightest the solid corpus of sound economic understanding. Indeed, such understanding allows us to comprehend how a variety of government policies created the incentives that, by various paths, led to the current difficulties; and such understanding informs us that piling new, equally foolish polices on top of the ones that got us into these straits is a recipe for short-term salvation at best, and for long-term troubles galore, even if the short-term “stimulus” should appear to have the desired effects.
Decent analysts know these things; I am not breaking new ground here. So, we can only shake our heads in wonder when we see well-known free-market economists and other formerly sound analysts and commentators embracing unsound and ill-considered positions. Among other things, we must appreciate that the sky is not falling, even if the news media and the politicians talk and act as if it is.
Yes, house prices have fallen substantially, but what did people expect – that the bubbled-up values achieved between 2001 and 2007 would be sustained forever or rise even more preposterously? We are witnessing a correction. If real estate prices have been driven up absurdly by easy credit, reckless lending, and silly expectations, then real estate prices must come down substantially. To act as if prevention of this correction represents the sine qua non of recovery is to begin one’s journey on the wrong foot. And to suppose that throwing taxpayer money mindlessly at real-estate-based securities or at people who cannot afford to make regular mortgage payments only portends a new and greater collapse of house prices later on.
Of course, the new New Deal idea of the Obama regime’s “creating jobs” by bankrolling infrastructure “investments” might as well come with a written guarantee attached that it will generate nothing but resource waste and the pork-barrel distribution of vast amounts of taxpayer money to satisfy the appetites of congressmen, local politicians, construction unions, and real-estate interests. Even if a road, a bridge, or a sewer system ultimately comes forth as a visible result, the unseen alternatives forgone are almost certain to have greater value for those from whom the grasping hand of the federal state has stripped the wherewithal to pay for the projects. Free-market analysts ought to understand such matters, which are scarcely arcane, and anyone who has watched the government’s responses to previous recessions, from 1929 to the present, ought to understand the present situation without remedial instruction from me.
Yes, unemployment has risen, as it always does during a recession. But the rate of unemployment last month was only 6.7 percent. During the Great Depression, the unemployment rate often exceeded 20 percent, and many workers who had jobs in those days had only part-time employment even when they wanted to work full-time. So, despite the numerous Chicken Littles running about excitedly, the present situation does not bear comparison with the mass unemployment of the 1930s; nor does the ample safety net that now stretches beneath the unemployed — a refuge that did not exist in anything like its present setup during that difficult decade. I do not belittle the problems that involuntary unemployment may pose for people even now, but it makes no sense for policy makers to burn the house down because they have discovered that a few rats have taken up residence in it.
Above all, policy makers, economists, other analysts, and news media commentators need to cultivate an understanding of and appreciation for the wisdom of the aphorism, “don’t just stand there, undo something.” The greatest mistake made in previous occasions of this sort has been to add new government burdens to the ones that helped to bring on the troubles in the first place; hence the ratchet effect in the growth of government. If only we had the wisdom to recognize a crisis as the most compelling occasion for getting rid of accumulated government burdens and idiocies, then we could throw the ratchet effect into reverse, with highly beneficial long-run consequences, including greater economic liberty and faster economic growth.
Unfortunately, many people are now urging exactly the opposite policy, joining their voices with those of the usual suspects who, like Obama's lieutenant Rahm Emmanuel, seek to exploit the prevailing sense of emergency to lock new government controls and burdens onto the economy in order to gain their political ends and solidify their state powers, at the expense of our purses and our liberties. I beseech these former friends of the market: please pause and reflect; do not allow yourself to be stampeded into support for measures that probably will not work as advertised even in the short run and will certainly prove counterproductive and oppressive in the long run. The sky is not falling; do not act as if it is or lend your support to those who recognize hard times as the perfect opportunity to realize their grandiose dreams of social engineering, wealth redistribution, and central economic planning.
The economists sometimes dismissed my idea on the grounds that national emergencies are simply transient or abnormal events — outliers, as the econometricians call them — that should either be purged from a long time series or be treated as stochastic deviations from a long-run trend caused by more “fundamental” factors, such as demographic shifts or changes in the franchise. At times, the economists dismissed my hypothesis because, they maintained, it fails to fit every case in every country in every period of history; as puerile positivists, they concluded that the hypothesis is wrong because a correct hypothesis must be, in effect, a flawless law of history. Most often, perhaps, the economists pooh-poohed my hypothesis because they misconstrued it: they took it to be, like the typical economist’s model of the growth of government, a hypothesis about government spending and nothing more. So, if a certain crisis did not appear to have had a persistent, long-run effect by increasing the estimated trend level of government spending (often after standardization for increases in population, the gross domestic product, and the price level), then it did not explain, in their eyes, “the growth of government.”
I have always insisted that modern government has many facets and that, at minimum, a study of its growth must consider not only government spending (or taxing or employing), but also the government’s scope and power. Changes in these latter aspects of government do not leave the same kind of easily retrieved record, or numerical data set, that economists typically work with — and without which they are more or less at sea, or in denial. Over the many years that I have pursued my research into the growth of government, I have repeatedly met with evidence of essential elements of the ratchet effect that lie completely beyond the purview of conventional economic research on this subject.
The most recent such evidence I’ve encountered appears near the end of Godfrey Hodgson’s book The Colonel: The Life and Wars of Henry Stimson, 1867-1950 (New York: Knopf, 1990). Stimson was one of the most important public (or private) figures of the twentieth century. Among other things, he was the human bridge between the original American imperialists of the late nineteenth and early twentieth centuries (e.g., Elihu Root, Theodore Roosevelt, Leonard Wood) and the Cold War directors and managers of the national security state (e.g., Dean Acheson, John J. McCloy, McGeorge Bundy, Robert Lovett). Many of these postwar movers and shakers had worked for or with Stimson at some point, especially at the War Department when he was secretary of war from 1940 to 1945.
In considering how the postwar defense and foreign-policy Establishment, with its characteristic policy proclivities, had been fostered by such men’s engagement in the Big One, Hodgson writes:
Government service in World War II — in the War Department or other civilian departments for the slightly older men, in the Office of Strategic Services or elite military units for the younger ones — gave a whole generation of ambitious and educated Americans a taste for power, as opposed to business success, and an orientation toward government service which they never lost. When they went back to their law offices or their classrooms, they took with them contacts, attitudes and beliefs they had learned in war service. (pp. 384-85, emphasis added)
Ponder this passage, especially the part I have italicized. Here is a legacy of national emergency that no econometrician can tease out of a statistical time series, yet it is the kind of legacy that gives the ratchet effect its greatest substance.
I have emphasized again and again that the legacies of national emergency are not merely fiscal, but also, more critically, institutional and ideological. From Hodgson’s observation, we can see both the institutional and the ideological legacies embodied in a generation of highly placed, closely connected individuals who exerted tremendous influence over the apparatus and conduct of U.S. foreign and defense policies for decades after World War II and whose influence may be seen in the government’s conduct of foreign and defense affairs even today, though in somewhat muted and altered form.
The ratchet effect is a more complex phenomenon than most of my fellow economists seem capable of understanding. To grasp it, one must go beyond economic analysis, and even beyond public choice analysis. One must plunge into the domain of historical analysis, where social scientific theories are necessary but not sufficient for our understanding and where one continually meets path dependencies and contingencies whose resolution is anything but determinate, where real human beings, relying on their attitudes, beliefs, and commitments (shaped by their particular experiences, acquaintances, and loyalties) make genuine―that is, not fully predetermined―choices and thereby set in motion new streams of cause and effect that ripple through time and space.
A century before I formulated my ideas about the ratchet effect, the great William Grahm Sumner understood its essence clearly when he said:
It is not possible to experiment with a society and just drop the experiment whenever we choose. The experiment enters into the life of the society and never can be got out again.
For historians and social scientists, the challenge remains to explicate precisely how this “entering into the life of the society” has occurred as a result of the “experiments” the government has performed during each of the great national emergencies of the past century. Such understanding appears even more imperative at present, as the government engages in yet another great experiment.
The men of my father’s generation made up the great bulk of the sixteen million Americans who served in the armed forces at some time during the Big One. Although my father, who had been in the Army in the late 1920s, did not serve during the war because the authorities considered his efforts more valuable in the Oklahoma oil fields and later in an Oregon shipyard, many of his friends did serve, and I remember listening in as a wide-eyed little boy on their conversations about the war in the late 1940s. For most of them, it was the defining event of a lifetime, overshadowing even the Great Depression.
As I grew up, it never occurred to me that the “infamy” to which President Roosevelt referred in his famous speech of December 8, 1941, pertained to anybody but the Japanese. After all, as the president said when he asked Congress for a declaration of war, the United States had suffered an “unprovoked and dastardly attack by Japan,” so the responsibility for starting the war appeared to belong indisputably to the Japanese - and, of course, it also never occurred to me that I should make any distinction between the Japanese people and the Japanese government in this regard.
Just as old dogs can learn new tricks, however, grown men can learn historical facts they were never taught in school, and over the years I have learned a great deal about the wider context and the important antecedents of the December 7 attack. I have even ventured to write a little bit about how U.S. economic warfare provoked the Japanese to take the desperate gamble of launching a war against the United States, Great Britain, and the Dutch government in exile in the East Indies in order to gain access to essential raw materials, especially oil, that the U.S.-British-Dutch embargo was denying them. Their attack on the U.S. Pacific fleet conveniently concentrated at Pearl Harbor was aimed at protecting their left flank as Japanese forces moved to take control of strategic locations across a wide expanse of the South Pacific and Southeast Asia.
A short comment is no place to settle the controversies that have raged ever since the attack about what Roosevelt and his chief subordinates knew in advance, but one thing has been known for a long time: however “dastardly” the attack might have been, it was anything but “unprovoked.” Indeed, even admirers and defenders of Roosevelt, such as Robert B. Stinnett and George Victor, have documented provocations aplenty. (See the former’s Day of Deceit: The Truth abut FDR and Pearl Harbor and the latter’s The Pear Harbor Myth: Thinking the Unthinkable.) On December 8, the same day that Roosevelt asked Congress for a declaration of war against Japan, former president Herbert Hoover wrote a private letter in which he remarked, “You and I know that this continuous putting pins in rattlesnakes finally got this country bitten.”
On the basis of facts accumulated over the past seven decades and available to anyone who cares to examine them, we are justified in saying that Hoover’s characterization of the war’s provocation was entirely accurate - both with regard to the Japanese imperial government as “rattlesnakes” and with regard to the U.S. government’s “putting pins in.” Indeed, we now have a much firmer basis for that characterization than Hoover could have had on December 8, 1941.
Countless lies have been told, massive cover-ups have been staged, propaganda has flowed like a river, yet in this one regard, at least, the truth has undeniably been brought out.
Most American historians, of course, no longer bother to deny this truth. They simply take it in stride, presuming that the Japanese attack, by giving Roosevelt the public support he needed to bring the United States into the war against Germany through the “back door,” was a good thing for this country and for the world at large. Indeed, some actually shower the president with approbation for his mendacious maneuvering to wrench the American people away from their unsophisticated devotion to “isolationism.” In no small part, Roosevelt’s unrelenting dishonesty with the American people (Stanford University historian David M. Kennedy tactfully refers to the president’s “frequently cagey misrepresentations”) in 1940 and 1941 - plain enough if one reads nothing more than his pre-Pearl Harbor correspondence with Winston Churchill - is counted among his principal qualifications for “greatness” and for his (to my mind, incomprehensible) status as an American demigod.
I have noticed, however, that in polls of historians or lay persons to determine which presidents were “great,” the dead never have a vote. Lucky for Roosevelt.
In my conception, regime uncertainty pertains above all to a pervasive uncertainty about the property-rights regime — about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on voluntarily acceptable terms. Will the government simply take over private property? Will it leave titles in private hands, but strip the owners of real control and profitable use of their properties? These questions fall under the rubric of regime uncertainty.
Between 1935 and 1940, this matter attained prime importance. So many businessmen and investors lost confidence in their ability to forecast the future property-rights regime that few were willing to venture their money in long-term investments. They constantly sought clarification of the government’s designs, but President Roosevelt merely continued to rage against “economic royalists” and to blame a “strike of capital” for the economy’s ongoing troubles, including the depression of 1937-38, which played havoc with the general public’s confidence in the New Deal. Treasury Secretary Henry Morgenthau tried repeatedly to persuade the president to make a public statement that would reassure investors, and as the president continued to reject his entreaty, Morgenthau became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: “What business wants to know is: are we headed toward Socialism or are we going to continue on a capitalist basis?” (qtd. in Higgs, Neither Liberty, Nor Safety, p. 114). Astonishingly, Jim Farley and even Henry Wallace backed up Morgenthau’s insistence that the president spell out what sort of economic system the administration sought to foster.
In his question, Morgenthau encapsulated the wide ranging uncertainty Lammont du Pont expressed in the same year, when he said:
Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? . . . Are new restrictions to be placed on capital, new limits on profits? . . . It is impossible to even guess at the answers. (qtd. in Higgs, Depression, War, and Cold War, p. 16)
I do not know that the regime uncertainty that an increasing number of commentators and others have perceived recently is comparable to that of the latter 1930s — by now there’s not much real capitalism left for the government to destroy, in any event. However, it is clear that the government’s frantic actions of the past several months have created a situation in which investors have little confidence about the character of future property rights in the United States. The takeovers of Fannie, Freddie, and AIG, the massive interventions into financial markets, the huge bailouts of banks and other financial institutions, mixed with letting Lehman Brothers go down and resisting a bailout for the Big Three auto manufacturers (so far, at least) — all these actions, and others, imply that a rational investors would do well to attach a huge risk premium to any money he puts into investments even for the intermediate term, not to mention the long term.
One of the clearest expressions of this outlook that I have seen so far was made recently by Lou Jiwei, the chairman and chief executive of the China Investment Corporation, who expressed a lack of confidence in Western financial institutions and said that his giant fund would make no new investments in them in the foreseeable future. As the New York Times reported:
“Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have,” Mr. Lou said as part of a panel discussion on the second and final day of the Clinton Global Initiative conference [in Hong Kong]. . . . Mr. Lou said that the sheer pace of new initiatives and new rules issued by Western regulatory agencies was disconcerting and made it even harder for him to choose worthwhile investments. “If it is changing every week, how can you expect me to have confidence?” he asked.
How, indeed?
HT to Steve Hanke for calling Lou Jiwei’s statement to my attention.
Over the years, I have ventured to make small contributions to this debate, most notably in a 1997 article titled “Regime Uncertainty: Why the Great Depression Lasted So Long, and Why Prosperity Resumed after the War,” a modestly improved version of which now appears as the first chapter of my 2006 book Depression, War, and Cold War: Essays in Political Economy. (The first five chapters of this book, considered as a coherent whole, show why my hypothesis has the additional charm - lacking in virtually every other hypothesis about the economy’s course between 1933 and 1940 - of also explaining the operation of the wartime economy and the smooth postwar transition to genuine market-oriented prosperity.)
Defenders of the current orthodoxy, however, tend to pooh-pooh explanations such as mine. My story pertains to why the post-1933 recovery was such a drawn-out affair - I call this aspect of the Great Depression the Great Duration. In response to my claims and my evidence in support of them, the mainstreamers might (and at certain Web sites actually seem to, as it were) engage me in a dialogue as follows:
Higgs: blah blah blah, Great Duration, blah blah blah, New Deal, blah blah blah, regime uncertainty, blah blah blah, insufficient net private investment, especially long-term investment, to sustain a prompt, lasting recovery.Mainstreamer: Nonsense. The recovery after the beginning of the New Deal in 1933 was rapid. Look at the data, you old fool. Real GDP rose by about 43 percent between 1933 and 1937. Splendid recovery. No problema. All it took was going off gold.
Higgs: Then why had the economy still not recovered fully as late as 1940, when the unemployment rate was almost 15 percent and the transition to the war-command economy was beginning to make standard interpretation of variables such as gross domestic product, the price level, and the rate of unemployment increasingly problematic?
Mainstreamer: The recovery would have been complete much earlier, thanks to various New Deal measures, especially its abandonment of the gold standard, but the Fed foolishly doubled the required reserve ratios for commercial banks during 1936-37, thereby triggering the sharp depression of 1937-38, which set the recovery back for three years.
Higgs: Even if we grant, which I will only for purposes of debate, that these Fed-mandated increases in required reserves constituted the sole important cause of the depression of 1937-38, you are treating these actions as exogenous to the New Deal. That view of the matter makes little sense because the Fed’s statutory authority to change required reserve ratios as it did came from the Banking Act of 1935, a major New Deal enactment.
Moreover, Marriner Eccles, the chairman of the Board of Governors at the time of these actions, was appointed by President Franklin D. Roosevelt in 1934 and was highly sympathetic to New Deal-type policies. All of the other board members were also Roosevelt appointees, because the board had been reorganized after passage of the 1935 act, at which time Roosevelt named new members, except for Eccles and M. S. Szymczak, earlier Roosevelt appointees to the Federal Reserve Board whom he carried over to the new board.
The Fed did not act independently, but developed its plan of action in close cooperation with the Treasury as part of a broader government program to restrain the buildup of excess reserves in the commercial banks. The Treasury, for its part, announced that after December 22, 1936, it would sterilize all future monetary gold inflows from abroad, and by August 1937, it had sterilized more than $1.3 billion of such inflows, which otherwise would have caused bank reserves to increase.
So, if you want to blame the Fed’s ill-advised actions of August 1936 to May 1937 for the Great Duration, go ahead (although I insist that various other things also helped to bring on the 1937-38 depression, and even more things contributed to the Great Duration in its entirety), but don’t assume that these actions had nothing to do with the New Deal. They were, from the statutory and personnel ground up, simply another aspect of the New Deal. If you claim that these Fed actions caused the Great Duration, you are ipso facto claiming that the New Deal caused it.
Recently the government of Latvia has been illustrating these truths in an especially blatant manner. Latvia’s Security Police has devoted itself to snooping into all sorts of communications about impending economic difficulties, under the authority of a law that prohibits the dissemination of “false information about the financial system orally, in writing or in any other manner.” Violators are subject to imprisonment for as long as six years.
In an incident reported by Andrew Higgins in the Wall Street Journal, economist and university lecturer Dmitrijs Smirnovs was arrested and held for two days of questioning after he expressed doubts about the security of the country’s banks and its national currency, the lat. Although Smirnovs was released and has not been prosecuted, such detentions surely have a chilling effect on criticism of the country’s condition and its ruling institutions.
If the U.S. government were to attempt such suppression of criticism, it would have a big job on its hands. In this country, criticism of the government, the economy’s major institutions, and the present state of affairs is nearly universal, so a mass arrest might create a situation in which each guard had to oversee a million prisoners. But, of course, the government would not need to go to such extremes, because of little bit of well-publicized suppression goes a long way in persuading a multitude of potential critics to hold their tongues and keep their fingers off their keyboards.
In the past, such official suppression has occurred in this society only during wartime, but decades of semi-official enforcement (and in certain institutions, such as universities, the news media, and government agencies, official enforcement) of political correctness has accustomed Americans to holding their tongues and keeping critical views to themselves, expressing their true feelings only to a handful of trusted friends and associates. So, do not think “it can’t happen here.” It might happen, even here.
The essential book on this phenomenon is Timur Kuran’s Private Truth’s, Public Lies, which I recommend highly for many reasons.
HT: Elizabeth Higgs for the report on Latvia.
