Reading List for the End of an Age

One hates to disagree with accomplished professionals. And yet it’s obvious that the professionals of this great Age of the Accredited Professional (AAP) have really blown it. They assured us that they could manage the economy — indeed, micro-manage the economy — and that things were all right. And yet, the bust happened, and they’ve been scurrying to prevent an utter debacle.

It looks to me that, for all their trillions in bailouts, they haven’t succeeded. Government policies of deficit spending and ever-​increasing debt are self-​destructing, right on top of a bubble’s bursting, a bubble created by experts (mostly government, but not all) in a market created by government (the mortgage after-​market) amongst institutions regulated by government (during the Bush years vast reams of new regulations clogged up the realm) and fed by the Federal Reserve (a government-​created central bank).

So when historian Niall Ferguson writes that “The Fed’s Critics Are Wrong: We Need to Avert Depression,” I’m more than a bit skeptical. I suspect that he’s advocating the use of bedpans to bail out a sinking Titanic.

Ferguson gives the AAP line about boom and bust:

In normal times it would be legitimate to worry about the consequences of money printing and outsize debts. But history tells us these are anything but normal times.

We teetered on the edge of this same precipice 80 years ago, in 1931. A succession of major European banks went bust. Bailing them out was beyond the resources of fiscally overstretched governments. Failure to agree on orderly debt reductions led to disorderly defaults, tariff wars, and a further worldwide collapse of production and employment.

My problems with the historian’s history begins here. Tariff wars resulted from defaults? That’s not what I’ve read. Tariff wars started with the Smoot-​Hawley Tariff, the contemplation, enactment, and enforcement of which helped cause the cascade of market crashes and bank defaults in America, and the sheer enormity of which led to retaliatory protectionism elsewhere, which helped instigate further bank defaults.

And spread the contagion of monetary contraction, a great deflation which required reductions in prices and wages all around, but which governments in America (first under Hoover) and Europe fought to prevent. This intervention at the level of wage policy and price supports was new in fighting depression. And it didn’t work. It lengthened the time of recovery.

Ferguson offers a reading list, and he berates his readers for not reading these two books: Milton Friedman and Anna Schwartz’s Monetary History of the United States and Barry Eichengreen’s Golden Fetters: The Gold Standard and the Great Depression. I don’t want to denigrate the Friedman and Schwartz tome, but it seems to me that our historian’s reading list is too short. Indeed, it’s not even the full story on money and credit regarding the Depression: Murray Rothbard’s America’s Great Depression shows the inflationist-​fed policies of the Federal Reserve to have built up the boom that led to the Crash of 1929 — and how Hoover’s policies immediately thereafter scuttled the process of recovery. Further, the length of the Great Depression was not primarily a gold-​standard problem (takeaway: Ron Paul is no fool), as explained in Richard Timberlake’s classic essay on why not to blame gold for the Depression. You can easily read this as a strong case against Ferguson’s use of Eichengreen:

If the reader begins with the valid premise … that “the gold standard of the late 1920s was hardly more than a façade,” Eichengreen’s work suggests something very different from what he claims. The negotiations and machinations of the world’s central bankers in trying to provide a human design to the world’s monetary system did not work. Their blueprint retained only the outward and visible sign of the previous era’s working gold standard; it had been deprived of the inward and spiritual grace of that system. It neglected the fact that an authentic gold standard functioned on the principles of spontaneous order: set up simple rules and let freely acting people make their own arrangements within that framework. The authentic gold standard provided long-​term stability not matched by any other monetary system before or since. In the interwar period, however, managing gold, as the central bankers tried to do, proved to be a disaster. The gold standard did not succeed; neither did it fail. The issue is not even moot, because the gold standard was not functional. What failed was the theory — the real bills doctrine — that U.S. central bankers used in its place to guide monetary policy into the monetary disequilibrium that never ended.

Today’s machinations to design and plan our monetary system are also not working. Further, it strikes me that they will not and cannot work, not like the experts pretend and Ferguson regurgitates. His sniping at “Republican presidential wannabe” Ron Paul and Paul’s advocacy of a gold standard fall apart when you look carefully.

But it gets worse than that. Ferguson’s reading list ignores the crucial issue of expectations in the real world of investment and business. Shoring up current fortunes with bailouts and monetary infusions, all to prevent “another Great Depression,” misses the sword hanging over our heads: uncertainty. Fixating on monetary crisis management remains a macro-​level answer to a micro-​level problem not fixable by money alone. The real source of future jobs and growth depends on stability, yes, but not just “monetary stability” (especially as understood as price stability and monetary equilibrium). Government must not behave erratically or flirt with disaster. The rule of law must be maintained, and regulation must not be seen as punitive, protective (of big guys at the expense of little guys) or radically variable, uncertain. And increasing deficits and debt adds not only uncertainty, but the specter of sovereign debt default, the ultimate destabilizer.

Mr. Ferguson, I commend to you the work of historian Robert Higgs, whose notion of regime uncertainty explains so much of what went wrong in the 1930s (and, by extrapolation, what’s wrong today):

It is time for economists and historians to take seriously the hypothesis that the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in the minds of investors.

… From 1935 through 1940, with Roosevelt and the ardent New Dealers who surrounded him in full cry, private investors dared not risk their funds in the amounts typical of the late 1920s. In 1945 and 1946, with Roosevelt dead, the New Deal in retreat, and most of the wartime controls being removed, investors came out in force. To be sure, the federal government had become, and would remain, a much more powerful force to be reckoned with. But the government no longer seemed to possess the terrifying potential that businesspeople had perceived before the war. For investors, the nightmare was over. For the economy, once more, prosperity was possible.

Government must do a few jobs well, and then get out of the way. Straining to bail out the big guys with created money cannot pave the way for a decent future. Acknowledging the limitations of government policy-​makers, on the other hand, and setting up a reasonable system, consistent with a rule of law, will work better.

Micromanaging the future with vast influxes of money? I doubt that they will stop the next wave of insolvency. The big hit will come (I shudder to think of how big it could be … the phrase on my lips is “we ain’t seen nothing yet”). And Niall Ferguson will not be able to blame unlearned politicians or voters for what’s coming. The responsibility lies precisely with the experts such as Ben Bernanke, and with a system that long ago forsook the rule of law and the policy of responsible, non-​fraudulent financing and money.

December 11, 2011

This column first appeared on Townhall​.com.