On Walton Mountain
By Adrian Ash
March 20, 2008
Forgetting the lesson of the 1970s' inflation in
the shadow of the '30s depression...
"...Every morning, when you look in the mirror, I want you to think 'What
am I going to do today to increase the money supply?'..."
- John Ehrlichman, assistant to Richard Nixon, apparently speaking to
Charles Pardee, a Federal Reserve governor, sometime in the early 1970s
SO THAT'S IT then. We're all agreed.
"This is clearly the worst financial problem we've had since
the Great Depression," as Joseph Stiglitz told a radio show in New Zealand
on Wednesday morning, where he's attending a conference.
The Nobel laureate lined up behind Countrywide Financial (July
'07), Wells Fargo (Nov. '07), former Treasury advisor Nouriel Roubini (Dec.
'07), the National Association of Homebuilders (March '08) and pretty much
everyone else in saying this is as bad as it gets.
As in, well, the worst ever like finding nothing besides Of
Mice & Men to order from Amazon, and nothing but Seabiscuit to
rent at Blockbusters.
The men now pulling the Fed's monetary levers sure agree. And while
Ben Bernanke might see the shadow of depression where the rest of us glimpse a
shade of recession, liquidating the mal-investments of 2002-2007 is certainly
hurting.
Imagine the US Treasury paid your wages each month; you'd jump to
increase the money supply every chance you got, too. See, it's the only way to
stop the Nazis taking over. Or the Commies.
Or maybe even oh, horror! the Clintons...
"Involuntary unemployment," as John F.Kennedy put it, way
back in 1960, "is the most dramatic sign and disheartening consequence of
under-utilization...We cannot afford to settle for any prescribed level of
unemployment."
Barely a generation after the worst recession in US history,
backing labor over capital like this and thereby nabbing labor's far
weightier vote meant JFK got to kick Richard Nixon around at the ballot box.
When his turn at the top finally came round at the end of the '60s,
Tricky Dicky didn't forget the kicking. In fact, "I [already] knew from
bitter experience how, in both 1954 and 1958, slumps which hit bottom early in
October contributed to substantial Republican losses in the House and
Senate," as Nixon himself wrote in 1962.
So come December of 1968, when Herbert Stein first met with Nixon
as head of his Council of Economic Advisors and he asked Stein to name the
biggest problem they faced "I started with inflation," said the
economist.
"[Nixon] agreed, but immediately warned me that we must not
raise unemployment," Stein was to recall nearly 15 years later. "I
didn't at the time realize how deep this feeling was or how serious its
implications would be..."
Fast forward to the brink of Easter '08, and the "serious
implication" of the Great Depression once again today is the cost of not
acting to prevent it. Or so everyone says.
And I mean everyone...
"The Liquidationists turned the 1930 recession into a
slump," says Ambrose Evans-Pritchard for The Daily Telegraph here
in London. "They insisted with Puritan zeal or malice that
speculators should be driven to the wall amid a cathartic purge of the Roaring
Twenties.
"Among them were top bureaucrats at the US Federal Reserve and
some of Europe's central banks. The consequence was the Brόning deflation in
Germany, ushering in the Nazis. Democracies snapped across half of Europe. If it
had not been for the towering figure of Franklin Roosevelt, America might have
splintered into a bedlam of Prairie populists, Coughlan Fascists and Huey Long
extremism."
Better anything even a bail-out of Wall Street's hated bankers
today than jack-boots and Benzedrine addicts with Chaplin moustaches, right?
And where better to start in getting the voters on-side than with Ben Bernanke's
complete collection of The Waltons, series 1 to 9, on DVD...?
"During the major contraction phase of the Depression, between
1929 and 1933," as Bernanke said in a speech of 2004, "real output in
the United States fell nearly 30%.
"During the same period, according to retrospective studies,
the unemployment rate rose from about 3% to nearly 25%, and many of those lucky
enough to have a job were able to work only part-time."
By comparison, the 1973-75 recession "perhaps the most
severe US recession of the World War II era," according to Ben "John
Boy" Bernanke real output fell 3.4% and the unemployment rate merely
doubled from 4% to 9%.
So never mind about the double-digit inflation. Never mind that by
the end of the '70s, "every business decision [had become] a speculation on
monetary policy," as J.Bradford De Long put it in a 1995 essay (from which
we're quoting liberally, by the way). Never mind that business can't function if
money becomes a flickering variable, making the trade-off between inflation and
jobs...bail-outs and growth...a loser both ways.
"Other features of the 1929-33 decline included a sharp
deflation," Bernanke went on in his speech, soup-ladle in hand and a Baker
Newsboy flat cap on his head. "Prices fell at a rate of nearly 10% per year
during the early 1930s as well as a plummeting stock market, widespread bank
failures, and a rash of defaults and bankruptcies by businesses and
households."
So no matter the cost, deflation must be defeated long before it
arrives. Indeed, the higher the cost, the better!
"In 1938, the Congress enacted the Fair Labor Standards
Act," writes David Hackett Fischer in The Great Wave his
sweeping review of history's longest inflations "which set the first
national minimum wage. It also briefly considered a maximum wage, but that idea
was quickly forgotten."
Over the next 30 years, this upwards bias in wages all floor
and no ceiling was "built into the American economy," Hackett
Fisher goes on. "Floors under wages, pensions, and compensation for the
unemployed; floors beneath farm prices, steel prices, liquor prices, and milk
prices; floors for airline fares, trucking charges, doctors' bills, and lawyers'
fees..."
Come Nixon's first term, the high cost of living was mandated by
government, corporations, unions and householders alike. Falling prices could
not be allowed ("You remember the '30s, don't you?") and
as yet rising prices were no more than a puzzler at the grocery store every
Saturday morning.
Convinced by economists of a trade-off between rising prices and
jobs, governments everywhere watered and tended inflation, thinking they could
always prune it if the foliage got out of control. And feeding its roots, deep
below ground, was the rich, manure mulch of the Great '30s Depression.
"At the surface level," De Long explains, the destruction
of money during the '70s happened because no one in power "placed a high
enough priority on stopping inflation." Worse than that, Nixon and his
successors Ford and then Carter inherited "painful dilemmas with no
attractive choices". The '60s battle to grow jobs at the expense of sound
money had already locked in that problem.
Look deeper again, and "no one had a mandate to do what was
necessary," our Berkeley professor goes on. "It took the entire decade
for the Federal Reserve as an institution to gain the power and freedom of
action necessary to control inflation."
But at the very deepest level, "the truest cause of the 1970s
inflation was the shadow cast by the Great Depression," De Long concludes.
"It took the 1970s to persuade economists, and policy makers, that
'frictional' and 'structural' unemployment were far more than one to two per
cent of the labor force. It took the 1970s to convince [them] that the political
costs of even high single-digit inflation were very high."
In short, the developed world balked at the chance to
"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real
estate" as US Treasury secretary Andrew Mellon had urged in the '30s
when the liquidation wouldn't have washed so deep or so hard at the start of
the '70s.
Scared by the ghost of a Greater Depression instead, the West
pushed ahead with big budget deficits, negative real interest rates, and a
destruction of money that almost bankrupted Treasury-bond holders. The runaway
inflation that failed to back off when Richard Nixon nudged the Fed about
defending jobs before the Dollar (for what else is "inflation" if not
a loss of purchasing power?) proved a hard-won lesson all told.
Reaching double-digits across the developed world, and causing a
flight into commodities that in turn led to a huge bubble of mal-investments in
the early 1980s, the "sustained spurt" of '70s inflation equaled the
worst war-time price increases by the time double-digit interest rates could be
used with broad voter approval to kill it off.
It all ended guess what! with a forced liquidation at the
start of the '80s.
And today?
"Ben Bernanke is smarter than I am and thinks about this 24/7
which I do not," says Bradford De Long on his blog this week. "He
leads a superb committee. He is backed by the best monetary policy technical
economic staff on the world. If I disagree with Ben's FOMC on an issue of
monetary policy, I am probably wrong."
Either that, or Bernanke's still stuck on Walton Mountain
nostalgia...just like TV audiences were back in the '70s.