Those ignorant of history are doomed to repeat it

May 27, 2009

Here’s a funny essay – published in Randian newsletter The Objectivist in 1966. The author is one Alan Greenspan.

…if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government…

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

Probably best to ignore the wacked-up gold standard promotion. Main point: if only Alan Greenspan, Chairman of the Federal Reserve, had been aware that a politically motivated insistence by the Fed on lowering interest rates no matter what could contribute to a speculative boom and, in turn, a global economic crisis. I wish this Alan Greenspan guy had been around to help out…

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5 Responses to “Those ignorant of history are doomed to repeat it”

  1. mikebeggs Says:

    Haha, that’s great. He seems to have the great misfortune of leaving a lot of hilarious-in-hindsight passages around the place, cf. especially his autobiography. This is going to be irresistible to the historians of the future, probably guaranteeing him Irving Fisher’s place in the second-time-around farce.

  2. duncan Says:

    Yes :-P. I think the one for the ages, though, is his testimony to the House Committee on Oversight and Government Reform. Every time I look at that it gets more perfect. 🙂

    It’d be interesting to trace Greenspan’s intellectual evolution, I think – from this quite pertinent critique of the [pre-]Depression-era Fed, albeit with an insane Mises-style belief that the gold standard can prevent speculation, to the apparent total about-face as actual Fed chair, and his insistence that the dollar as fiat world reserve currency can play the role he originally thought gold must. I suspect the continuities in that development would be quite revealing. But another day.

    Take care…

  3. mikebeggs Says:

    Yep… I’m not sure how cogent a critique of the Fed this is though, given the circumstances. When banks did start failing, the Fed took years to start rescuing… which is, incidentally, what Milton Friedman and Ben Bernanke blame for the Depression. It’s interesting to look at the evolution of conservative thinking on money and central banking in general, since the three dominant positions – gold buggery, Friedman’s strong but rule-following central bank, and von Hayek’s free banking are all radically at odds with one another.

  4. duncan Says:

    Yeah no I agree. Checked out that Friedman Schwartz book from the library yesteday. It’s heavier than me, though, so not sure it’ll get read any time soon.

  5. Tim Says:

    Consumption is what drives the world. If consumption slows, everything quickly grinds to a halt. Jobs dry up, people panic, governments run out of money…

    Either we find a new way of life, or we just keep producing, spending and consuming.


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