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As the Australian and US
booms rolls on some 'forecaster', particularly on the net, are once again
drawing historical analogies, warning that we risk a financial collapse that
could bring on a depression every bit as bad as the 1930s. These forecasters
know as much about the Great Depression as I do about brain surgery. Unfortunately,
journalists' ignorance of economic history is massive.
As we all know, ignorance
never stopped journalists from expressing their opinions, especially when it
comes to economics. This brings me to Alan Wood, The Australian’s
economics commentator who wrote about the dismal fate of the “US economic
forecasting industry” that flourished in the 1920s (Dangerous
complacency increases investors' appetite for risk, 22 January 2005). It
was their “failure to see the depression coming [that] put them out of
business,” wrote Mr Wood.
Relying on J. K.
Galbraith’s The Great Crash 1929 Wood relates how Harvard
Economic Service’s forecasts failed to warn business of the impending
depression. Even in November 1929 it declared “a severe depression like
that of 1920-21 is outside the range of probability. We are not facing
protracted liquidation.” (Galbraith). The preceding, according to Wood,
is “a prudent reminder of the fallibility of forecasts at a time of the
year when the voices of economic and market prognosticators are loud in the
land.” But is it? Any journalist who relies on Galbraith’s
account of the “Great Crash” deserves the sack. His book is a
shallow and misleading work that lacks any permanent value.
(The classic work is Murray
N. Rothbard’s America’s Great
Depression, Richardson
& Snyder,
New York City. There is also
Benjamin M. Anderson’s Economics and the Public Welfare, LibertyPress, Indianapolis 1979. Then there is
Amity Shlaes' The Forgotten Man: A New History
of the Great Depression, Harper Collin 2007).
What our economic pundits
do not know is that during the ‘20s some economists did warn that a
severe depression was unavoidable. In the summer of 1929, for instance, Ludwig
von Mises refused an important job at the Kreditanstalt Bank because,
as he told his fiancé, "A great crash is coming, and I don't want
my name in any way connected with it." (Margit von Mises
My Years with Ludwig von Mises , Arlington
House, 1976, p. 31).
Mises had been
warning for years that the central banks’ loose monetary policies would
bring on a depression. Likewise, Friedrich von Hayek warned that the US economy
was heading for a crash. Writing for the Austrian Institute of Economic
Research Report, February 1929, he successfully predicted that “the
boom will collapse within the next few months.” Hayek were no alone in their dire warnings. Roger Babson, a
well-known Boston
financial adviser, was warning investors in September 1929 of an imminent crash.
E. C. Harwood, founder of the American Institute for Economic Research, and
Benjamin M. Anderson, chief economist at Chase National Bank, were also
warning that a crash was unavoidable.
The brilliant Mr Keynes was
not so prophetic. Felix Somary, a Swiss banker,
related how Keynes had approached him in the mid-20s for stock
recommendations. Somary, who subscribed to the Austrian School of economics, refused to give
him any, warning that a speculative bubble was emerging. Keynes confidently
replied: “There will be no more crashes in our lifetime.” The
financial collapse apparently did nothing to dent his self-confidence. (Cited
in Dissent on Keynes, edited by Mark Skousen,
Praeger, 1992, p. 163).
Once the depression was
underway Keynes still hailed the price stabilization scheme that caused it as a “triumph.” When it
suited him, Keynes’ conceit apparently left him unfazed by mere facts. On
the other hand, D. H. Robertson who had been a supporter of the Fed’s
monetary policy began to have serious doubts about it after the depression
stuck.
It is therefore not a
question of unsound forecasting but of unsound economics. Under the influence
of Irving Fisher virtually the whole of the American economics profession had
fallen prey, and still has, to the fallacy that a stable price level means
there is no inflation. (Sir Ralph Hawtrey was one
of the guiding lights of this fallacy in England). Unfortunately the same
situation prevails in Australia.
The Austrians, however, explained in detail how trying to stabilise the price
level will actually destabilise the economy and bring on the very depression
the policy was designed to avoid.
According to the Austrians
the Fed’s credit expansion would trigger a speculative boom, which it
did; eventually the Fed would be forced to apply the monetary brakes, which
it did in December 1928 when it froze the money supply; this would cause malinvestments
created by the credit expansion to start emerging by about the middle of the
1929, which is exactly what happened; the bubble would then quickly burst and
the economy would go into a fully fledged depression — the rest, as
they say, is history.
Yet some 80 years later we
are still being told that economics failed to predict the Great Depression,
despite the historical fact that a group of economists succeeded where the
mainstream forecasters failed. Widespread ignorance of this fact among those
who should know better is an intellectual scandal.
Unfortunately Brookesnews is the only Australian publication in which
you can find this knowledge. You will certainly never find it in the
mainstream media.
Gerard
Jackson
Brookesnews.com
Gerard
Jackson is Brookesnews Economics
Editor
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