“Helicopter money” – reality bites BIS, by Mr Claudio Borio, Head of the Monetary and Economic Department and Mr Piti Disyatat, Executive Director of the Puey Ungphakorn Institute for Economic Research, Bank of Thailand

September 27, 2016

Since the Great Financial Crisis, central banks in the major economies have adopted a whole range of new measures to influence monetary and financial conditions. The measures have gone far beyond the typical pre-crisis mode of operation – controlling a short-term policy rate and moving it within a positive range – and have therefore come to be known as “unconventional monetary policies.” To be sure, some of these measures had already been pioneered by the Bank of Japan roughly a decade earlier in the wake of that country’s banking crisis and uncomfortably low inflation. But no one had anticipated that they would spread to the rest of the world so quickly and become so daring, testing the boundaries of the unthinkable.

As growth has remained disappointing and inflation stubbornly below targets, the range and size of these measures have increased. Hence the growing use of long-term liquidity support, large-scale asset purchases, sizable increases in bank reserves (so-called QE) and, of late, even the introduction of negative policy rates. In the wake of these measures, the central banks’ monetary base (cash and bank reserves) has ballooned in step with the overall size of their balance sheets (see graph).



With central banks delving further down into their box of unconventional tools, calls for them to take a deep breath and pull out “helicopter money” have intensified. What was just a thought experiment designed to shed light on how money affects the economy is now threatening to become a reality. Proponents of this tool – more soberly described as “overt money financing” of government deficits – see it as a sure-fire way to boost nominal spending by harnessing central banks’ most primitive power: their unique ability to create money at will. But can helicopter money work in the way its proponents claim? And is the balance of benefits and costs worth it? Our answer to both of these questions is no.

Proponents argue that helicopter money is special because it amounts to a permanent increase in non-interest bearing central bank liabilities (“money”) as the counterpart of the deficit. This form of financing is most effective because money is free and debt is not. Permanent monetary financing means less government debt and thus lower interest payments forever. All else equal, this saving should boost nominal demand, as there would be no need to raise additional taxes. Moreover, the argument continues, the central bank is then free to increase interest rates again whenever it wishes while the lower amount of debt outstanding will still yield savings. This is the best of all possible worlds: Demand is boosted without the collateral damage of prolonged exceptionally low interest rates.

Devil in the details

Or so it seems. But the devil is in the details.

As we have argued elsewhere, the reasoning may be correct in the stripped-down models people have in mind, but not in reality. In fact, the central bank faces a stark choice: Either helicopter money results in interest rates permanently at zero, so that control over monetary policy is lost forever, or else it is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the additional boost. Since losing monetary policy control forever is not a feasible option, helicopter money is just fiscal policy dressed up.

The reason is hidden in an obscure but critical corner of the financial market. Contrary to what the stylized models suggest, it is not the amount of cash that determines interest rates but what the central bank does with bank reserves (commercial banks’ deposits at the central bank), over which it has a monopoly. Monetary deficit financing will, in effect, amount to an equivalent increase in bank reserves. If the central bank issued more cash than people demanded, the amount in excess of desired balances would inevitably be converted into bank deposits and then switched by banks into reserves (see in the graph how steadily and slowly cash grows, reflecting the demand for it). If the government issued checks, the same would happen. If the reserves are non-interest bearing – as they must be for helicopter money – the increase will inevitably also drive the short-term (overnight) rate to zero. This is because when the system as a whole has an excess of reserves, no one wants to be left holding it but someone must.

The problem arises once the central bank decides to raise interest rates again, as this, alas, would not be consistent with helicopter money. To do so, the central bank has only two options. Either it pays interest on those reserves at the policy rate, in which case this is equivalent to debt financing from the perspective of the consolidated public sector balance sheet – there are no interest savings. Or else it imposes a non-interest bearing compulsory reserve requirement to absorb the reserves, but this is equivalent to tax financing – someone in the private sector must bear the cost. While the tax would in the first instance fall directly on banks, they could decide to pass it on to their customers — for example, in the form of higher intermediation spreads.

Thus, either helicopter money comes at a prohibitive price – giving up control over monetary policy forever – or else, choreography and size aside, in its watered-down version it is not very different from what some central banks have already been doing: engineering temporary increases in reserves which may happen to coincide with increases in government deficits (a form of QE). Views about QE’s effectiveness differ, but we would be talking about “more of the same.” Such a policy already exploits the synergies between ultra-low interest rates and fiscal policy so as to enhance any expansionary impact that fiscal policy may have.

That said, choreography and size do matter. And they don’t speak in favor of the tool. Imagine policymakers went down this route, announcing that they were embarking on a “new” policy and explicitly linking the increase in reserves with higher public sector deficits. They could hide the inconvenient truth and renege on their promise not to raise rates. But this would hardly be an example of good policy, and in any case its effectiveness would at best be doubtful – the private sector would surely anticipate this possibility to some extent, thereby tempering the impact of the signal. Alternatively, policymakers could hope that the fanfare surrounding the tool would induce people to spend more. This is a possible but by no means obvious outcome. And in any case, unless the exercise is repeated over and over again on a large scale, its impact is likely to be only temporary.

And therein lies the danger. It is hard to imagine helicopter money not ending up in fiscal dominance, the outcome that would obviously be inevitable in its purest form, where interest rates are kept at zero forever. Sooner or later this could indeed erode the value of money, but at the cost of losing the public’s confidence in our monetary institutions – a trust so painfully gained over the years – and with unpredictable consequences. It would be a Pyrrhic victory.

Thomas Paine, Champion of Sound Money The Foundation for Economic Education

September 27, 2016

Between writing his well-known revolutionary liberal tracts Common Sense (1776) and The Rights of Man(1791), Thomas Paine contributed knowledgeably to a 1785-6 debate over money and banking in Pennsylvania. Paine defended the Bank of North America’s charter and its operations in a number of lengthy letters to Philadelphia newspapers during 1786, followed by a December monograph that summarized his case, Dissertations on Government; The Affairs of the Bank; and Paper Money.[1]

“The natural effect of increasing and continuing to increase paper currencies is that of banishing the real money.” Paine argued that to repeal the bank’s charter violated both the rule of law and the maxims of sound economic policy. His writings show that he well understood the benefits of banking. Although proponents of the repeal accused Paine, publicly known to be in dire financial shape, of being paid by the BNA’s proprietors for defending it (one called him “an unprincipled author, who lets his pen out for hire”), Paine vociferously denied the charge, and historians (such as Philip S. Foner, who edited an anthology of Paine’s works), have found no evidence to support the accusation.

Image source: Wikimedia Commons. Thomas Paine

Prima facie evidence for Paine’s sincerity is found in his marshalling of serious arguments that were consistent with the classical liberal principles of his earlier writings.

Here’s the backstory: The Continental Congress chartered the Bank of North America, headquartered in Philadelphia and headed by Robert Morris and Thomas Willing in 1781. Considering a Commonwealth of Pennsylvania charter to be a sounder authorization, in 1782 the bank sought and received a charter from the Pennsylvania legislature. After the Revolutionary War’s end in 1783, as historian Janet Wilson noted, farmers in western Pennsylvania with large debts and tax arrears “set up a cry for paper money” to be issued by the Commonwealth.[2] These state-issued notes would not be presently redeemable, but would be receivable for future tax payments.

The clamor for irredeemable paper money, he wrote, derived from “delusion and bubble.” The inflationists understandably saw the BNA as a barrier to their plan. If the bank valued the state paper below its par value, while BNA banknotes and checks traded at par in terms of the silver dollars for which they could be immediately redeemed, real demand for the state paper currency would be low. Better for the sake of state paper to eliminate the superior alternative. Hence, with the legislature voting to authorize an issue of state notes in mid-1785, the inflationists demanded repeal of the bank’s charter.

They were further motivated by the bank proprietors’ public opposition to state paper. The legislature debated and then repealed the charter in September 1785. The BNA continued to do business, on a smaller scale, under its 1781 charter from the Continental Congress. (The 1st US Congress would not meet until March 1789.) Eighteen months after repeal, in March 1787, following a pitched public discussion and the election of pro-bank legislators in fall 1786, the charter was restored.

The clamor for irredeemable paper money, wrote Paine in 1786, derived from “delusion and bubble.”[3]Yes, the irredeemable paper currency issued during the war as a matter of necessity had provided revenue “while it lasted,” but not as a free lunch, but rather by taxing individual money-holders through price inflation and currency depreciation. Since its demise, “gold and silver are become the currency of the country.”[4] Those thinking that state paper will relieve a “shortage” of specie have it backwards: it is precisely the issue of irredeemable paper that drives out gold and silver. On this point Paine argued with impeccable Humean logic:

The pretense for paper money has been, that there was not a sufficiency of gold and silver. This, so far from being a reason for paper emissions, is a reason against them. As gold and silver are not the productions of North America, they are, therefore, articles of importation; and if we set up a paper manufactory of money it amounts, as far as it is able, to prevent the importation of hard money, or to send it out again as fast it comes in; and by following this practice we shall continually banish the specie, till we have none left, and be continually complaining of the grievance instead of remedying the cause. Considering gold and silver as articles of importation, there will in time, unless we prevent it by paper emissions, be as much in the country as the occasions of it require, for the same reasons there are as much of other imported articles.[5]

Critic of Monetary Stimulus

Paine understood that any stimulus from injecting money was only temporary, because issuing more paper money does not create any more wealth. He even offered the binge drinking / hangover analogy that has, in modern times, become commonplace:

Paper money is like dramdrinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased. But the truth is, that it is a bubble and the attempt vanity.[6]

State paper money became not just imprudent but unjust when it was combined with a legal tender law compelling the acceptance of depreciated paper dollars where a contract called for payment in silver or gold dollars:

As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. … [A]ll tender laws are tyrannical and unjust, and calculated to support fraud and oppression.[7]

For a legislator even to propose such a tyranny should be a capital crime [!]:

The laws of a country ought to be the standard of equity, and calculated to impress on the minds of the people the moral as well as the legal obligations of reciprocal justice. But tender laws, of any kind, operate to destroy morality, and to dissolve, by the pretense of law, what ought to be the principle of law to support, reciprocal justice between man and man: and the punishment of a member who should move for such a law ought to be death.[8]

Responding to an anti-BNA petition, which claimed that “the said bank has a direct tendency to banish a great part of the specie from the country, so as to produce a scarcity of money, and to collect into the hands of the stockholders of the said bank, almost the whole of the money which remains amongst us,” [387-8 n] Paine argued that the issue of immediately gold-redeemable banknotes gives a commercial bank like the BNA a strong reason to retain sufficient gold reserves:

Specie may be called the stock in trade of the bank, it is therefore its interest to prevent it from wandering out of the country, and to keep a constant standing supply to be ready for all domestic occasions and demands. … While the bank is the general depository of cash, no great sums can be obtained without getting it from thence, and as it is evidently prejudicial to its interest to advance money to be sent abroad, because in this case the money cannot by circulation return again, the bank, therefore, is interested in preventing what the committee would have it suspected of promoting. It is to prevent the exportation of cash, and to retain it in the country, that the bank has, on several occasions, stopped the discounting notes till the danger had been passed.[9]

Here Paine failed to add that the public’s voluntary substitution of banknotes for specie, although it does not banish any specie that is still wanted, does allow the payment system to conduct a given volume of payments more economically, with less specie. The ability to export the share of specie thus rendered redundant, in exchange for productive machines and material inputs, was a growth-enhancing benefit of banking that Adam Smith had emphasized in The Wealth of Nations published ten years earlier.

In response to the claim that the bank “will collect into the hands of the stockholders” the specie remaining in the country, Paine explained that a bank’s specie reserves are not the net worth owned by its shareholders. Rather the reserves are held to redeem its liabilities, and thus are “the property of every man who holds a bank note, or deposits cash there,” or otherwise has a claim on the bank.

The Bank of North America at the time held the first and as yet only bank charter granted by the legislature of Pennsylvania. Critics damned the BNA as a privileged monopoly. Legislator John Smiley asserted that the charter repeal “secured the natural rights of the people from invasion by monopolies.” This view – later echoed by the Jeffersonians and Jacksonians in their opposition to the First and Second Bank of the United States – is of course paradoxical.

The Cure for Monopoly Power

The cure for monopoly power created by exclusive charter (incorporation) is to grant charters freely, to go from one to a multiplicity of charters. It is not to go from one to zero charters. If more banks were free to enter but simply hadn’t yet, then the BNA was a monopolist only in the benign sense that the entrepreneur who creates a new market (thus expanding and not restricting trade) is the single seller until others arrive. Eventually additional chartered banks did enter the Pennsylvania market: the (First) Bank of the United States (chartered by the US Congress) in 1791, and the Bank of Pennsylvania (state-chartered) in 1793.

In a later work criticizing the Bank of England (which did have an exclusive charter to issue banknotes as a corporation), Paine unfortunately seemed to blur the distinction between banknotes and irredeemable paper money. He made the valid point that banknotes held, unlike gold held, are not net national wealth (because they are liabilities of the issuer). Then he declared:

the rage that overran America, for paper money or paper currency, has reached to England under another name. There it was called continental money, and here it is called bank notes. But it signifies not what name it bears, if the capital is not equal to the redemption. … The natural effect of increasing and continuing to increase paper currencies is that of banishing the real money. The shadow takes place of the substance till the country is left with only shadows in its hands.[10]

To reconcile this passage with his previous writings, we must suppose that Paine is not criticizing banknotes in general, but the Bank of England in particular for holding inadequate reserves relative to its growing note-issue.

But this raises the question: Why would the BOE want to hold inadequate reserves when the BNA (as he had argued) did not? Paine might have explained this (but unfortunately did not) by Parliament’s implicit guarantee that it would not penalize the BOE for a suspension of payments, giving the Bank a moral-hazard incentive to skimp on reserves. When the Bank of England did suspend payments in 1797, forced by a run on the bank prompted by the threat of an invasion by Napoleon’s troops, Parliament did in fact immunize the Bank against note-holder lawsuits. Paine ten years ahead warned that the BOE might suspend in 1796, which was only one year off if we consider it a prediction:

A stoppage of payment at the bank is not a new thing. Smith in his “Wealth of Nations,” book ii. chap. 2, says, that in the year 1696, exchequer bills fell forty, fifty and sixty per cent; bank notes twenty per cent; and the bank stopped payment. That which happened in 1696 may happen again in 1796.[11]

To be clear, Paine anticipated trouble from the growing British public debt, not from threat of invasion. But the two were not unrelated.

Entrevista con el profesor Niall Ferguson, Nueva York (25/02/2016)

September 20, 2016

Entrevista con el historiador de Oxford Niall Ferguson, profesor de historia en Stanford. Adjunto la conversación original y la edición para la Revista de Foment del Treball que edita Valentí Puig.



Entrevista completa.

Edición para la Revista del Foment del Treball.

“Una contribución al debate de las ideas”, epílogo libro M. King, ‘El fin de la Alquimia’ (Deusto)

September 20, 2016

La gran virtud del libro del que tengo el honor de escribir unas breves líneas a modo de epílogo, es que se trata de un libro sobre ideas. El texto no es una crónica de como el autor contribuyó a salvar el mundo –como suele suceder en las obras de este perfil–, sino que es una reflexión profunda, enriquecida con la dilatada y rica experiencia de quién escribe, sobre las causas últimas de la grave crisis financiera que tan importantes cambios y consecuencias han supuesto en el escenario económico global. De hecho, no se trata de un libro sobre la crisis propiamente dicha, sino de una obra sobre la banca y el dinero que se sirve de la crisis como hilo conductor. A diferencia de otras obras del mismo género, Mervyn King realiza un esfuerzo por profundizar en las causas últimas de la patología bancaria superado la tentación de meramente realizar un análisis epidérmico de los síntomas, como ha sido la tónica en otros libros (con las excepciones de rigor que se quieran poner). En este sentido, el autor no rehúye el planteamiento de ninguna de las cuestiones que resultan clave para dar con los porqués del comportamiento disfuncional generalizado por parte del sistema financiero que desembocó en la grave crisis de 2008.

El tono ligeramente disonante del que fuese antiguo gobernador del Banco de Inglaterra sirve para evidenciar algunas de las diferencias con respecto al diagnóstico que ha dominado la corriente mayoritaria, siendo este más completo y amplio a la hora de abordar las diferentes cuestiones. Seguimos a día de hoy sin contar con un consenso claro y mayoritario sobre cuáles fueron las causas de la última crisis. King se desmarca de las tesis defendidas por otros protagonistas preeminentes de la crisis que se han lanzado a escribir su visión con respecto a la crisis como Ben Bernanke, también Hank Paulson o Tim Gaithner, al remarcar en su análisis la importancia de los propios bancos centrales, y demás elementos de la arquitectura del sistema financiero, como causas fundamentales de la crisis al alimentar la “búsqueda desaforada de retorno” a toda costa por parte de las entidades financieras para compensar así las caídas en la rentabilidad derivadas de las políticas de crédito artificialmente barato por parte de los propios Bancos Centrales. Fueron estas políticas de dinero barato, señala el autor, las que en última instancia favorecieron un escenario de sobre confianza generalizada en los mercados y dieron lugar, entre otras cosas, a un crecimiento desaforado de los balances y una acumulación excesiva de riesgos en el sistema. El autor de El fin de la Alquimia señala acertadamente como este comportamiento hunde sus raíces en la asimetría entre ganancias y pérdidas con la que operan los bancos en donde con respecto a estas últimas, en última instancia, están cubiertas de forma tácita por el contribuyente. Todo esto deriva en un perverso sistema de incentivos que favorece un comportamiento disfuncional en las entidades. Incentivos y asimetrías, advierte el autor, que no han sido corregidas y que no hacen descartable que el conjunto del sistema financiero no vuelva a ser foco de problemas e inestabilidad en un futuro.

La gran conclusión del libro, que quién les escribe comparte plenamente, es que en última instancia la crisis económica ha sido consecuencia de una falla de ideas, de una equivocada comprensión de cómo funciona la economía realmente. Por eso no es de extrañar que la crisis financiera haya reavivado, más que menos, el debate intelectual con respecto a la propia ciencia económica. Se trata de un debate demasiadas veces encorsetado al terreno de juego que establece el Sanedrín académico neoclásico, sobre todo por lo que respecta a las grandes tribunas de pensamiento y grueso de responsables políticos. Suelen ser únicamente unas pocas voces sueltas, ajenas a las círculos de poder académico y a los altos cargos, versos sueltos, las que cuestionan los dogmas siendo categorizadas como heterodoxas de inmediato. Es bueno entender esto para poner el valor este tono disonante de King, un peso pesado dentro del establisment financiero y académico mundial, que pone una interesante nota de color, al demasiadas veces monocroma debate académico mainstream donde las diferencias son siempre de matiz, nunca de grado. Resulta meritorio, por ejemplo, que King aborde con claridad el tema, por otro lado crítico y fundamental, de la protección de los depósitos o el mismo sistema de reserva fraccionada, elementos ausentes en la ecuación de análisis del grueso de economistas y que, sin embargo, resultan piezas imprescindibles si queremos realmente alumbrar un sistema bancario y monetario que favorezca un comportamiento racional por parte de los bancos y permita a las economías crecer de forma sostenible y no de forma burbujeante como hasta ahora.

Se trata de un mensaje con toques contrarian del cual tuvimos algunas muestras en los compases iniciales de la crisis pero que, poco a poco, estas voces fueron quedando ahogadas por lo que fue configurando la sabiduría convencional con respecto a la crisis económica. Ahí esta la hemeroteca para quién la quiera consultar de voces que alertaron de algunos elementos equivocados en el diagnóstico que hizo Washington en los inicios de la crisis como Jean-Claude Tritchet, muy escéptico con respecto al diagnóstico de la situación de 2009 elaborado por la Reserva Federal y que dio pie a los programas de compra de bonos y que ahora tantas dudas despiertan entre amplias capas de analistas e inversores, Wolfang Schäuble, el actual ministro de finanzas alemán, o Axel Webber, antiguo gobernador del Bundesbank. Pese a todo, las tesis de Bernanke y compañía, que podemos resumir como: crisis de liquidez, cíclica debido a fallos de mercado por falta de regulación; se acabaron imponiendo a la visión más Europea de la misma: crisis de solvencia, estructural, cuyo origen se sitúa en las políticas de dinero fácil por parte de los bancos centrales que alimentaron la burbuja especulativa y el crecimiento de la deuda. Al final, con matices, Europa ha ido siguiendo el plan anti-crisis diseñado por Washington. El libro de King, aunque por momentos ecléctico y en donde el autor navega con mucha habilidad por ambas orillas, pone en valor muchos de los aspectos que configuraron en un inicio el grueso del diagnóstico europeo cuando realiza una visión crítica de la salida en falso que ha supuesto, en muchos aspectos, el grueso de medidas monetarias ultra expansivas adoptadas hasta ahora.

En la base de esta divergencia de visiones subyacen distintas maneras de entender como funciona la economía: una más matemática, optimizadora y equilibrista; la otra más humanista, dinámica y articulada alrededor de la acción humana. Ideas falsas, dan lugar a diagnósticos equivocados, y estos a políticas económicas que lejos de arreglar los problemas de raíz meramente alivian síntomas generando nuevas distorsiones, nuevos problemas sin solucionar los viejos, y que, en el mejor de los casos, únicamente generan una prosperidad ilusoria consolidando este escenario de economía burbujeante y de expectativas limitadas al que parece que poco a poco nos hemos ido resignando. El debate sobre el método, es decir de que manera verificamos teorías y extraemos conclusiones, no es nuevo: David Hume ya planteo de forma célebre el problema de inducción a mediados del siglo XVIII, que luego fue reformulado por Popper en el XX, y sofisticado de nuevo por Nassim Taleb en el XXI. La crisis ha subrayado la importancia del mismo ya que, en buena medida, de ello depende que sepamos dar con un diagnóstico acertado y remedios acorde a los males que lastran la confianza y limitan el crecimiento.

Con independencia de las discrepancias que inevitablemente suscitarán al lector muchos de los postulados de King, como le ha sucedido al lector que ahora les escribe –bienvenidos sean los discrepantes si vienen con argumentos–, el libro constituye una contribución de primer orden y de gran valor a la espinosa y difícil cuestión de cómo ordenar la banca y el sistema monetario en el siglo XXI.

Luis Torras

Barcelona, 10 de mayo de 2016

Mervyn King y el futuro del capitalismo“, La Razón, 19 de septiembre de 2016.

Weimar revisited by Edward Chancellor

September 16, 2016

The spectre of Weimar Republic-like inflation has haunted some fevered minds since central banks revved up their printing presses after the Lehman Brothers bust. No hyperinflation has yet emerged. Still, a milder manifestation of the social malaise which gripped Germany in the early 1920s is becoming evident in the West. Monetary policymakers are urging more extreme actions in their frantic pursuit of higher inflation. They should be careful what they wish for.

Historians agree that the origins of Germany’s post-war inflation lay in the failure of the country’s political classes to make hard choices. The Germans had funded their war effort largely with debt, accompanied by the printing of central-bank money. After the Weimar Republic was established in 1918, inflationary finance continued. Government deficits funded with newly printed marks had the advantage of maintaining employment at high levels and keeping the economy buzzing. As inflation soared, enterprises were able to borrow from the Reichsbank at rates so low that capital was, in effect, free.

This policy had the support of many seemingly reasonable people. Walther Rathenau, the cultured head of the electronics firm AEG and a future foreign minister, suggested in January 1921 that should the economy turn down “we ought to print money a bit faster and start construction works, using the employment these create as a dam against the depression. It is incorrect when people said that printing money was bringing us ruin.”

Rathenau, who was assassinated some 18 months later, lived long enough to change his mind. He later complained of the “delirium of milliards” (a thousand million) after the mark collapsed on the foreign exchanges and prices began escalating out of control. “We are living in a bubble,” observed the chastened politician. “Our companies pay dividends – but in fairy gold. We are eating our own accumulated resources, the result of generations of work of our ancestors.”

John Maynard Keynes agreed with these sentiments. “In the modern world,” wrote Keynes in the Manchester Guardian in the autumn of 1922, “organization is worth more in the long run than material resources.” The printing of paper marks, he continued, had brought temporary economic benefits “at the cost of a ruinous disorganization, both present and future and still to come. (Germany) has confiscated most of the means of livelihood of her educated middle class, the source of her intellectual strength; and the industrial chaos and unemployment, which the end of the inflationary boom seems likely to bring, may disorder the minds of her working class, the source of her political stability.”

The celebrated economist, whose later work gleefully extolled the “euthanasia of the rentier”, turned out to be correct on all points.

One of the curious features of the Weimar inflation was the refusal of the Reichsbank to accept that rising prices resulted from its own money-printing. Rather its president, Rudolf Havenstein, maintained resolutely that the decline of the currency was responsible. Inflation, he claimed, produced a shortage of currency which it was the Reichsbank’s duty to rectify. When it was suggested that the central bank set interest rates too low, Havenstein replied that it wasn’t his duty to make market rates but to follow them. In response to calls that Havenstein change course, he insisted on the central bank’s constitutional independence.

Inflation was difficult to bring under control not merely because the central bank was obtuse and politicians feared the inevitable cost in terms of unemployment and bankruptcies. Rather, once under way, inflation develops its own lobby which is not responsive to reason. The industrialists, who benefited from inflation, only changed their position after the economy and society started falling to pieces during the course of 1923. Another group of beneficiaries, the over-worked printers at the Reichsbank’s presses, even went on strike when a currency stabilization plan was eventually announced.

By the time its currency was stabilized, the real value of Germany’s enormous post-war national debt had shrunk to a fraction of a 1913 gold mark – 35 pfennigs to be exact. According to economist Costantino Bresciani-Turroni, this amounted to the greatest peacetime expropriation in the history of the world. The country’s wealth, writes Frederick Taylor in his gripping account of the Weimar inflation, The Downfall of Money, was “no longer spread evenly among millions but largely coagulated in blobs among the new plutocracy”.

Capital had passed from the slow-witted to opportunists. Speculators, who spent their rapidly amassed fortunes with great ostentation, were bitterly resented. So were foreigners, who bought up properties and shares with hard currency. In January 1923, a government minister called for tighter immigration controls.

Germany’s inflation undermined morals and manners, and fostered corruption. Respect for government and the rule of law declined as prices escalated and social order broke down. Adolf Hitler eagerly exploited the growing rancor in society, inveighing against the money-printing which he claimed had crushed the “decent solid businessman who doesn’t speculate” and turned the country into a “robbers’ state”. The horrors of inflation fed the Germans’ desire for a political strong man.

Modern central bankers like to point out that despite the recent explosion of their balance sheets the much-feared inflation has yet to materialize. Nevertheless, the recent period of ultra-low interest rates has produced conditions which, though less extreme, are eerily reminiscent of the Weimar years.

Once again, an era of negative real interest rates has produced low unemployment and “bubble” prosperity. Powerful interests support the easy-money policy, while central bankers ignore the damage their policies produce. Wealth has been redistributed on a grand scale. The newly rich flaunt it, while those less well-positioned feel squeezed. Rancor runs high in society. Popular sentiment has turned against foreigners.

In several countries the political middle ground is giving way. Firebrand politicians like Donald Trump campaign on promises of national resurrection. Hard choices and substantive economic reforms are invariably avoided. And once again, monetary policymakers, unwittingly invoking the tragic Rathenau, intone that “it is incorrect when people said that printing money was bringing us ruin.”

Some Thoughts on Supply-side Economics, Richard M. Ebeling (03/02/2010)

July 25, 2016

When Keynes‘s General Theory was published in 1936 there was no reason to believe that it would soon serve as the framework for 40 years of economic theory and policy. Almost to a man, every important economist of that era condemned the book and its message as confused, inconsistent and dangerous.

Joseph Schumpeter compared Keynes‘s proposals with the types of economic policies pursued by France’s Louis XV, which led to the bloodshed of the French Revolution.1 Friedrich Hayek angrily insisted that Keynes was asking us to abandon 200 years of economic theory and return to the crude and naive idea that somehow the more money you create the wealthier you become.2

And Kenneth Boulding declared that

Mr. Keynes’ economics of surprise, like Hitler’s, may be admirable in producing spectacular immediate success. But we need Puritan economists like Dr. Hayek to point out the future penalties of spendthrift pleasures and to dangle us over the hellfire of the long run.3

Yet, by 1946, only ten years after the appearance of The General Theory, all that had changed. Keynesian economics had swept the field and those who refused to accept the new vision were considered as out of date and antiquated as those who still believed that the sun revolved around the earth.

Paul Samuelson could prayerfully give thanks that Keynesian system had given economists, “a Gospel, a Scripture, a Prophet.”4 And Gottfried Haberler, who had once been one of Ludwig von Mises‘s most promising students in the 1920s and early 1930s, could insist that, “Only a dullard or a narrow minded fanatic could fail to be moved to admiration by Keynes‘ genius.”5

Promising price stability, Keynesian monetary policy produced 30 years of ever worsening inflation; pledging an era of full employment, Keynesian contra cyclical manipulations created severe fluctuations and distortions in employment and output, particularly in the last ten years; and assuring the public that the secret to ever greater investment and productivity lies in the government’s fiscal ability to stimulate aggregate demand, the last 20 years has seen productivity increases falling rapidly and capital investment become ever more erratic.

With such a widening margin between promise and performance, a revolt against the Keynesian system was inevitable. The first step in this revolution was the rediscovery of the quantity theory of money. Both Austrian and Chicago economists hammered away at the public and their fellow economists that a prolonged and accelerating rise in prices could never happen without an ever increasing expansion of the supply of money and credit.

How successfully has this truth been learned? James Meade, a leading British Keynesian and Nobel Laureate, gave a lecture in Vienna last year in which he said that a “system of uncontrolled [trade union] monopoly power” combined with a “Keynesian governmental undertaking that, whatever happens to the level of money wages, demand will be stimulated sufficiently to avoid any General Unemployment,” has created a “set of institutions which might well have been expressly designed to set in motion and maintain [a] process of explosive inflation.”6

When one of the leading intellectual advocates of the British Welfare State and the Keynesian system begins to show such grave doubts, we can hope that the era of naive but highly dangerous rationalizations for monetary expansion may be coming to an end.

Another major blow against the Keynesian paradigm is now being leveled by those who call themselves the “supply-side” economists.

Pointing to the low rate of savings in the United States (approximately 3 percent), and the low rate of (real) investment and productivity increases, the “supply-siders” have lifted from a bookshelf long neglected by the Keynesians, the old 19th century classical works that had so cogently argued that only that which has been produced can be consumed and only that which has been saved is available to be invested. With great articulation they have helped bring back to Say’s Law the respect it always deserved and should never have been denied.

All exchange has as its purpose the fulfillment of human wants and desires. We offer to trade something we possess for something held by another because we believe that that which the other person presently has title to would give us greater satisfaction than that which we presently own. Yet, unless we have been the beneficiary of a magnanimous gift giver, the only way to acquire what we want is first to produce or participate in the production of something that other individuals might possibly desire.

That too much of one thing and too little of another might be produced is almost inevitable in a world where the future is uncertain and present productivity must be guided by anticipations of future wants. But through the process of profit and loss, incentives are always being created for producers to supply greater quantities of some goods and less of others. Thus, while a perfect balancing of supply and demand may never exist at any moment in time, that is the tendency that is always at work in the system.

The “supply-side” economists have not only repeated these arguments, but have also attempted to analyze under what conditions it is worthwhile to trade or not to trade, work or not to work, and save or not to save. Individuals, they point out, must compare the relative advantages of doing one thing rather than another, and the alternative that offers the highest anticipated gain will be the one chosen.

In the market place, relative advantages come to be expressed in terms of prices. We enter the supermarket and, given our income, we allocate our expenditures so as to maximize utility or achieve the highest level of satisfaction possible.

If the relative prices of some goods change, we reevaluate our estimations of them and most people will tend to buy a relatively smaller amount of the products that have risen in price and a relatively larger amount of those that have gone down in price. Relative prices, and any changes in them therefore, influence and guide the allocation of income on the part of consumers and the allocation of production on the part of producers.

The same tools of analysis, the “supply-siders” argue, can also be applied to a study of fiscal policy. Tax rates, for example, represent some of the relative prices that an individual has to take into consideration when making a decision.

If an individual is considering working additional hours or is contemplating a new investment or a new device for improving productivity, he must compare the additional revenue or gain that he would receive from carrying out this plan with the additional costs — including taxes — involved.

Thus, “supply-siders” conclude, progressively rising marginal tax rates that take a greater and greater proportion of one’s income will tend to dissuade work, create incentives to move into barter or cash transactions that can avoid the leering eye of the tax collector, and diminish the incentive for saving and investment.

How could work, productivity, saving, investment and greater division of labor be stimulated? By lowering the marginal tax rates, so that at every level of income the proportion remaining in the hands of workers and producers would be larger. Then the relative cost of making a work or saving or investing decision would have fallen and these activities over time would probably be expanded.7

Now, if the “supply-side” argument was left at that, the main thrust of their argument could be considered unobjectionable in its general outline, with few grounds for major disagreement. They would have only more or less supplied the basic tools of price theory to some aspects of fiscal policy.8

An additional ingredient in the tool kit of some “supply-side” theoreticians, however, is the concept of the “Laffer Curve,” named after Arthur Laffer, a USC economist.

Laffer argues that there are two possible tax rates that will generate the same level of government revenue. If taxes are zero, government revenue is zero and the people retain 100 percent of their income. If taxes are l00 percent, government revenue would again be zero because, Laffer says, nobody would bother to work if they were not allowed to keep any of what they had earned and produced.

If the rate of taxation is lowered from l00 percent, individuals would have an incentive to work, since they could now keep some of what they had produced and government revenue would rise from zero to some positive number. Every lowering of the tax rate would continue to induce more and productivity, with greater government revenue besides.

Greater government revenue, that is, until some point at which any further lowering of the tax rate would, in fact, generate less of a government take rather than more. Hence, the “Laffer Curve.”

What, then, is the goal to which economists and politicians should direct their efforts? In The Way The World Works, Jude Wanniski, one of the leading gurus of the “supply-side” school of economics, gives as an answer, the discovery of the actual shape of the “Laffer Curve.”

That part of “The Curve” at which government revenue is maximized should be pinpointed and fiscal policy implemented to assure that the economy is moved to that point without further delay.9

The obvious question is, how do we ever find out the actual shape of “The Curve” and where we are on it?

If, for sake of the argument, we accept that such a “Curve” exists somewhere out there, it is important to realize that it would be nothing more than the cumulative subjective estimations of a multitude of individuals about the relative advantages of work vs. leisure, consumption vs. savings, etc.

“The Curve” would be no more fixed or stable than the expectations and preferences of the individuals in a particular community. Changes in people’s valuations, revisions in expectations about the political, social or economic climate and new discoveries of cost-saving production techniques would all work to make any hypothecated “Laffer Curve,” a shifting, shadowy entity whose position and shape would be as fluid and erratic as the imaginative minds of the individuals who comprise the elements living under “The Curve.”

But even more important than the theoretical difficulties of determining the position and shape of “The Curve” is the assumption that the goal of fiscal policy should be the maximizing of governmental revenues.

The primary trade-off is not seen as that between income kept and income seized via taxation from the public. That analysis is incidental to the main purpose of discovering the tax structure that generates the most revenues for the state coffers, i.e., the incentive structure that entices and induces the slaves to produce the output that assures the maximum booty for the slave-masters and their lackey underlings.

Indeed, the in-fighting and emotional hysteria in Congress over the Kemp-Roth Bill is nothing more than the politicians and the special interests arguing over whether the proposed tax cut will or will not supply the government with ever greater sums to dole out to the friends and favorites of the political court.10

“Supply-side Economics,” as it has developed over the last few years and as it is usually presented when its case is being made, is not a vehicle for diminishing the size of government or expanding the economic liberty of the general public.

Having reached a dead-end in attempts to stimulate the economy on the side of “aggregate demand,” the macroeconomic manipulators have now discovered there is a new set of economic equations that can be massaged on the “aggregate supply” side as well.

Already the economic model builders are busy at work revising their equations and adding more variables. Michael Evans, the designer of two of the leading Keynesian econometric models, has changed over to the “supply-side” school. Having opened a new economic forecasting business, he is designing a new “supply-side” model and is already estimating how much of a percentage cut in tax rates will produce what percentage increase in savings and work effort.11

And after having slowly been shown the light, the economic forecasters working for Congress are licking their chops calculating what tax levers should be pulled, and by how much, to generate revenue and production where the government considers it worthwhile.

Rather than a means for freeing the economy from the fiscal tax burdens of the state, “supply-side” economics may very well serve as the vehicle for what in France has long been called “indicative planning.” Instead of directly ordering the movement of labor and resources from one area of the economy to another, indicative planning operates through a system of tax incentives and subsidy programs to entice business enterprises into certain parts of France and into certain lines of production that the government considers “socially desirable.”12

Supply-side economics could open the door for systematic government manipulation of tax rates as a means to assure the “socially desirable” level of saving and investment and the “socially desirable” combination of work and leisure.

Just as the old Keynesian macroeconomics has been a mechanism for distorting the economy through “aggregate demand” tools, the new “supply-side” macroeconomics will almost certainly result in economic distortions through the use of “aggregate supply” tools.

Tax cuts and lowering of tax rates are desirable. But they are desirable because they would allow those who have earned the income the right to keep and spend it as they see fit. Would savings and investment be greater if personal and corporate tax levels were lower? Probably they would, since existing fiscal actions have set up disincentives for both activities.

But individuals, themselves, should be left free to decide how much to work or not and how much to consume and save. And equally important, entrepreneurial and business activities should be free from regulations and fiscal gimmickry so production can be organized and resources can be allocated to reflect the preferences and desires of income earners in their role as consumers.

There is no “socially desirable” level of work or of saving and investment other than what individuals freely choose as desirable. And unless the case for “supply-side” economic reform is modified to reflect an argument for individual freedom, it may very well serve as a means for even greater state control over the economy and not less.

  • 1.Joseph A. Schumpeter, “Review of The General Theory of Employment, Interest and Money by John Maynard Keynes,” Journal of the American Statistical Association (Dec., 1936), p. 794.
  • 2.Friedrich A. Hayek, The Pure Theory of Capital (London: MacMillan & CO., Ltd., 1941), pp. 409-410.
  • 3.Kenneth E. Boulding, “Review of The Pure Theory of Capital by Friedrich A. Hayek,” Journal of Politcal Economy (Feb., 1942), p. 131.
  • 4.Paul Samuelson, “The General Theory”, in The New Economics, ed. by Seymour E. Harris (New York: Alfred A. Knopf, 1946), p. 147.
  • 5.Gottfried Haberler, “The General Theory,” in The New Economics, ibid., p. 161.
  • 6.James E. Meade, “Stagflation in The United Kingdom,” Atlantic Economic Journal (Dec., 1979). p. 6.
  • 7.Jack Kemp, An American Renaissance: A Strategy for the 1980’s (New York: Harper & Row, 1979), pp.32-76.
  • 8.See Murray N. Rothbard, Power and Market: Government and the Economy (Menlo Park: Institute for Humane Studies, 1970) pp. 63-123, who draws similar conclusions, though with important qualifications.
  • 9.Jude Wanniski, The Way the World Works (New York: Simon and Schuster, 1978), pp. 97-1 15.
  • 10.Arthur B. Laffer & Jan P. Seymour, eds., The Economics of the Tax Revolt (New York: Harcourt Brace Jovanovich: 1979), pp. 45-68.
  • 11.Michael E. Evans, “The Bankruptcy of Keynesian Econometric Models,” Challenge Magazine (Jan.-Fep.., 1980) pp. 13-19.
  • 12.Vera Lutz, Central Planning for the Market Economy, An Analysis of the French Theory and Experience (London: Longmans, Green and Co. Ltd., 1969).

“The Lessons of the 1920–21 Depression” by J. T. Salerno Pace University

July 12, 2016

The Forgotten Depression is a narrative history of the depression of 1920–21. Although it is informed by a very definite theory—the Austrian business cycle theory—it is not a standard work in applied economics. It does not first present the theory in a rigorous formulation and then move on to apply the theory by adducing pertinent qualitative facts and statistical data to explain a complex historical event such as a depression. It instead proceeds by way of anecdotes and contemporary media accounts, liberally seasoned with telling quotations from politicians, policy makers, economists, business leaders, and other contemporary observers of the unfolding depression. Data on money, prices, and production are inserted at crucial points to keep the reader abreast of the economy’s precipitous decline, but they do not dominate and weigh down the story. James Grant, a masterful stylist, effectively weaves these disparate elements into a seamless and compelling narrative that never flags in pace or wanders off track. The book should appeal to a wide variety of readers, from college students and business professionals to academic economists and policy makers.

By proceeding anecdotally, Grant gives the reader an intimate “feel” for the intellectual milieu prevailing at the time, offering a bracing immersion into an economic paradigm unimaginably alien to contemporary thinking about business cycles. It is for this reason that the book is especially valuable for academic economists whatever their theoretical bent or policy predilections. Grant conveys to the reader a clear understanding of a policy for curing depressions that was nearly universally prescribed in the era before macroeconomic concepts and formulas fastened themselves upon the minds of economists and media opinion molders. This policy is today derisively referred to as “liquidationist.”

To understand the liquidationist position, one must first grasp its foundational concepts and assumptions. In the world of the early 1920s so richly portrayed by Grant, there was no national macroeconomic entity with which economic theory and policy were concerned: “As far as the political-economic mind of 1920 was concerned, there was no ‘U.S. economy.’ And as the economic totality was yet unimagined, so too was the government’s role in directing, managing and stimulating it” (p. 128; see also p. 67). Economists—with a few notable exceptions—did not think of the “price level” as a unitary statistical construct or worry overmuch about its fluctuations. Nor did they try to calculate “aggregate demand” or total spending or even consider either relevant to economic performance. Indeed, for most economists, the core of the market economy was the interdependent system of money prices, including wage and interest rates. Money prices were seen as the foundation for the calculations of revenues, costs, profits, and asset values upon which entrepreneurs based their resource-allocation decisions. Furthermore, it was widely recognized that money prices were in constant flux as they coordinated economic activities in the face of ceaseless change in consumer tastes, business organization, technology, population, labor skills, and so on. As Grant aptly and incisively expresses his theme in the preface, “The hero of my narrative is the price mechanism” (p. 2).

The favorable view of liquidation as a cure for depression thus arose naturally out of the belief that the price mechanism, when left undisturbed, benignly adapts resource allocation and production to the underlying economic realities. As Grant points out, to liquidate, as the term was used at the time, simply meant “to throw on the market” (p. 172). In this sense, “liquidating” labor, inventories, farms, and businesses was a call to allow the price system to operate to discover the configuration of wages, prices, and asset values appropriate to the reemployment of idle resources in the production of goods most urgently demanded by consumers. If this price adjustment incidentally resulted in deflation, then so be it. In lieu of the fictitious concept of a unitary price level, inert and resistant to movement, money prices were conceived as naturally and fluidly (but not instantly) moving up and down like a swarm of bees in flight. The fact that the “price swarm” might be ascending or descending would not inhibit and, indeed, might be required to facilitate necessary changes in the relative positions of money prices. (The metaphor of a “price swarm” wasn’t coined until 1942 by Arthur W. Marget in The Theory of Prices: A Re-examination of the Central Problems of Monetary Theory, 2 vols. [New York: Kelley, 1966, pp. 2:330–36], but it aptly describes the earlier classical-liquidationist view of the value of money.) Deflation presented no special problem because the classical view of the value of money still prevailed. In this view, money’s value was simply the unaveraged array of money prices inverted to reveal the alternative quantities of each good or service that exchanged for the money unit—for example, the dollar. Money prices fluctuated freely, so then must the value of money, which was determined in the same integral market process.

Grant’s judicious choice of quotations shows how pervasive and deeply ingrained was the view that the only sure cure for the depression was deflation and liquidation of overblown resource and asset prices. Here are some examples.

Benjamin Strong, the governor of the Federal Reserve Bank of New York, foresaw the need for deflation and liquidation at the height of the postwar boom in 1919, writing that an anticipated change in Federal Reserve Board and Treasury policy “will insure during the next year or two a very considerable liquidation of our banking position . . . and a considerable decline in the price level” (qtd. on p. 92). The Berkeley economist Adolph C. Miller, a member of the Federal Reserve Board, opined in 1919, “Where there has been inflation, there must follow a deflation, as a necessary condition of economic health,” although Miller doubted that this deflation could and would be done (qtd. on pp. 94–95). Another member of the board and concurrently the comptroller of the currency, John Skelton Williams, in early 1921 viewed the global collapse of commodity prices as “inevitable” and welcomed the day when “the private citizen is able to acquire, at the expenditure of a dollar of his hard-earned money, something approximating the quantity and quality which that dollar commanded in prewar times” (qtd. on p. 118). As Grant concludes, the entire Federal Reserve Board was in remarkable agreement: “A continuing, drastic and perhaps violent rollback in prices, and therefore in wages, was the way forward” (p. 118).

The Federal Reserve Bank of Boston identified “two important conditions precedent to the laying of enduring foundations for the future stability of business, namely, liquidation and deflation … and an increasingly satisfactory banking situation with reserves augmented and loans decreasing [i.e., bank credit contraction]” (p. 120). A. Barton Hepburn, a former comptroller of the currency, also declared for bank-credit contraction and price deflation in 1920, lamenting, “The people of the country have by no means realized as yet the necessity for economy, liquidation of loans and curtailment in the use of credits. We will never be able to bring about the desired deflation until the general extravagance is curtailed” (qtd. on p. 98).

Even some prominent academic economists took up the case for deflation. Professor Edward W. Kemmerer of Princeton University, a leading monetary theorist, vigorously exhorted an audience of bankers in mid-1920, “We must have contraction. . . . We can’t go ahead with our business and make much progress . . . until we get substantial contraction” (qtd. on p. 125 n.).

Politicians also joined the chorus calling for deflation. In his inaugural address in March 1921, President Warren G. Harding perceptively declaimed in its favor, “The economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations, and price upheavals. . . . Prices must reflect the receding fever of war activities. . . . We must face a condition of grim reality, charge off our losses and start afresh [i.e., liquidate]. It is the oldest lesson of civilization” (qtd. on pp. 135–36).

There was no fear among contemporary observers that, as current macroeconomic jargon would put it, “aggregate supply curves” would shift slowly and painfully to the right because entrepreneurs’ and workers’ expectations would adjust very slowly to the new reality. For liquidationists, in contrast, deflation would proceed very rapidly because bankers, investors, entrepreneurs, and consumers expected it to do so. And they expected it to do so because the intellectual paradigm and the monetary policy regime fostered such expectations. Even though the Fed was up and running, it did not yet see its task as preventing money prices from adjusting to changed conditions of money supply and demand.

Contemporary economic observers also did not fret about the modern specter of a runaway deflationary spiral that might result from plunging prices stoking expectations of further declines in prices and inducing consumers and entrepreneurs to delay purchases into the indefinite future. The reasons they ignored such an eventuality were obvious. First, such an event had never been experienced previously under the gold standard. Second, according to the liquidationist view, credit contraction and deflation was the most expeditious method for realigning money prices and costs, in particular wage rates. It was well understood that capitalists and entrepreneurs did not react to some abstract price level but to actual or expected price margins. Deflation under a freely operating price mechanism did not just lower the height of the price swarm but also deftly reconfigured it so that price margins expanded to the point where entrepreneurial pessimism and malaise gave way to optimism and energetic risk taking.

The liquidationist policy was criticized at the time by a small but notable group of economists, foremost among them Irving Fisher, John Maynard Keynes, and the Swede Gustav Cassel. These economists formulated what came to be known as the “stabilizationist position,” according to which maintaining a constant price level was the necessary and sufficient condition for ridding the economy of business cycles, especially depression and unemployment. For these economists, deflation was “a cruel and colossal blunder” (p. 123). Cassel denied that gradual deflation was possible and foretold that the Fed would not be able to control the rate of descent of prices or the level to which they would tumble. Writing two years after the 1920–21 depression had already ended, Keynes claimed that deflation would induce “everyone in business to go out of business for the time being” and “everyone who is contemplating expenditure to postpone orders so long as he can” (qtd. on p. 124).

In any event, as Grant demonstrates, the liquidationists proved to be correct. Cassel’s dire warning that deflation, once unleashed, would become unhinged from economic fundamentals was not substantiated. And Keynes’s dire assessment of the effect of deflation was proved false two years before he wrote it down. During the depression, total spending or nominal gross national product (GNP) tumbled by 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921, and real GNP shrank by 9 percent. As Grant puts it, there was a “perpendicular plunge in commodity prices,” which never before had “fallen so far and so fast” (p. 182). Both farm prices and wholesale prices plummeted by more than one-third in 1921. Unemployment reached 15.3 percent in 1921. But despite “the breakneck rate of decline” of prices—or rather because of it—the liquidation process came naturally to an end, and prices reached a finite bottom beginning in March 1921. Contrary to Cassel and Keynes, deflation did not continue indefinitely or bring about a cessation of all economic activities and business expenditures. In fact, the U.S. economy entered a remarkably strong and rapid recovery in 1921 (pp. 186–90).

Paradoxically, in the immediate aftermath of its greatest triumph, the liquidationist position was completely discredited and placed beyond the pale of rational discourse. By the mid-1920s, the early Fisher–Keynes macroeconomics of price-level stabilization swept the field in the English-speaking world. Under the sway of this sophisticated brand of monetary crankism, policy makers and politicians deliberately disabled the price mechanism and ensured that less than a decade later a garden-variety recession would be transformed into the tragedy of the Great Depression.