Some Inconvenient Facts About Fiscal Austerity
Andrew Mellon's infamous advice to Hoover is as good now as it was in 1932: "Liquidate labor, liquidate stocks, liquidate the farmer, and liquidate real estate."
Finally, Main Street Americans were introduced to the twin wonders of consumer installment credit and stock market margin accounts during the 1920s. When the public's new-found enthusiasm for autos, appliances, and home goods couldn't be funded by these new lines of credit, winnings from the stock market were available to make up the difference. While buying durables and stocks on credit is not an original sin, a central bank policy that caused consumers to plunge off the deep end into unaffordable debt possibly is. In any event, after the music stopped in late 1929, durable goods purchases virtually ceased through the mid-1930s.
In short, the Great Depression had nothing to do with fiscal policy mistakes because the "fisc" in question was self-evidently too small to make a difference. Instead, it was the product of a classic boom and bust cycle that originated in the inflationary finance policies of central banks -- first to fund the carnage of WWI with printing-press money and then to layer on the speculative merriment of the Roaring Twenties.
When viewed in this framework, it's also evident that nostrums about the Great Depression offered by the non-Keynesian catechisms are equally off the mark. The monetarists, following the teachings of Uncle Milton (Friedman), say that the Fed caused the depression. And it did -- but by means of its inflationary monetary policies of 1917-1927, not on account of its stinginess in the provision of money after October 1929. In fact, the Fed was reasonably "easy" in its management of the monetary base after the stock market crash, permitting it to grow by 3% per year during the descent into the Great Depression from late 1929 to January 1933. Thus, the fact that the stock of money fell by nearly 25% during the same period wasn't due to a policy mistake by the Fed in its provision of reserves; rather, the Fed found itself "pushing on a string" in the face of massive loan liquidation owing to defaults and working capital contraction -- the same headwinds thwarting the Fed's hyperactive money string pushing today.
As for the supply-siders, it should be noted that neither Herbert Hoover nor the supply side patron saint, Treasury Secretary Andrew Mellon, committed the heresy of raising the tax burden, either. In 1929 Federal revenues were 3.7% of GNP and declined to 3.2% in 1932. Moreover, with his tax-cutting days of the 1920s long behind him and the reality of a classic boom and bust cycle everywhere evident, the patron saint remained as cogent as ever. In his infamous advice to Hoover in 1932, Mellon admonished: "…liquidate labor, liquidate stocks, liquidate the farmer, and liquidate real estate… ." His advice is as good now as it was then.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.