Hayek for download - Grant's Interest Rate Observer

Vol. 33, No. 12e Two Wall Street, New York, New York 10005 • www.grantspub.com ®

JUNE 12, 2015

Hayek for download

The editor of Grant’s, whose “The istration and the opening months of ulatory arrangements, the 1920s seem
Forgotten Depression: 1921, the Crash Warren G. Harding’s, and, second, to especially alien. Ninety-five years ago,
that Cured Itself,” won the 2015 Hayek relate those long-ago occurrences to the dollar was defined as a weight of
Prize, delivered the associated Hayek the present day. Conscientious his- gold and the shareholders of a nation-
Prize Lecture on June 2 in New York. torians are at pains to separate pres- ally-chartered bank were responsible
The text of his remarks follow. ent and past—to block out the atti- for the solvency of the institution in
tudes and prejudices of the moment which they owned a fractional inter-
2015 Hayek Lecture from their perception of yesteryear’s est—which is to say, if the bank failed
The Forgotten Depression events. I confess that I undertook this they got a capital call. This sword of
project in response to contemporary Damocles was called double liability.
This is the thing that generally hap- events. In 2008, the Great Depression Patterns of thought and speech were
pens in heaven. I thank the Manhattan of the 1930s monopolized the mar- likewise different from today’s. The
Institute and the Hayek Prize jurors. ket in historical analogy. Policymak- abstraction that we moderns call “the
I thank George Selgin, who graciously ers constantly invoked the 1930s with economy” had not yet been conceived.
wrote a letter to place the book in nom- reference to the crisis of the mangled People spoke of good times and bad, of
ination. And I thank Tom Smith, the mortgages and combusting banks. No boom and bust, but not yet of a macro-
Hayek Prize financier. My book and I intervention was too great to forestall economic whole to be observed, much
couldn’t be happier. a repeat of that calamity, they said. less to be managed.
Thus, the drive to “stimulate”—to
Once upon a time in the early 20th print money and to spend it. We are In the 1960s, John Cowperthwaite,
century, there was a deflationary de- still being stimulated seven years after British governor of Hong Kong, refused
pression. Unemployment reached the trouble started. to allow the collection of economic sta-
the double digits, farm incomes col- tistics lest the bureaucrats misappro-
lapsed, industrial production plunged As far as I know, not one senior priate that information in the service
and the Dow Jones Industrial Average policymaker invoked the 1920-21 af- of governmental macroeconomic ma-
was nearly sawed in half. From peak to fair on the other side of the stimulus nipulation (the very word “statistics”
trough, America’s last governmentally argument. You may say—many have derives from “the state”). Wilson and
unmedicated business-cycle downturn said—that 1921 was a long time ago. Harding had precious few statistics
spanned 18 months. So was 1931. And you may observe that at their disposal, even if they were in-
the world has changed since 1921—as clined to implement the cyclcial poli-
The question before the house is it has since 1931. I submit that, in re- cies that were yet uninvented. So ill
why it ever ended. The fiscal response spect of the study of economic history, lit was the economic landscape that
to the crisis was a balanced budget. the 1920s are just as deserving as the the Republican Party seemed unaware
The monetary response was high in- decade that followed them. As Amity that a depression was in progress when
terest rates—punishingly high even in Shlaes reminds us, the 1930s did no it convened in June 1920 to nominate
nominal terms. Yet, as I say, the depres- honor to American public policy. Mon- Warren G. Harding as its presidential
sion ended. It was Hayek’s price mech- etary manipulation, heavy taxation, pu- candidate. At least, the platform writers
anism—Adam Smith’s invisible hand— nitive regulation, public works spend- neglected to mention “the economy” in
that performed the economic healing. ing and persistently low interest rates their list of charges against the incum-
failed to restore the Harding-Coolidge bent Wilson administration. “Economy
My mission this evening is, first, to prosperity. So I turned my attention to in government” was the only context in
describe what happened during the the decade that roared. which the GOP chose to employ the “e”
final year of Woodrow Wilson’s admin- word. Business activity had peaked five
They say that the past is a foreign months earlier, in January 1920.
country. In monetary, banking and reg-

article-GRANT’S/JUNE 12, 2015  2

By the time the depression ran its prices and delivery dates were being conditions. One must have a theory of
official course in July 1921, industrial pushed way out into the future. A sen- these things to work on, and at least
production had plunged by 31% and sible pair of shoes had cost $3 before the courage to practice and state it.”
commodity prices by 40%. Maximum the war. Now they sold for $10 or $12.
joblessness ranged between two mil- Wages couldn’t seem to keep up with Implicit in Strong’s theory was faith
lion and six million out of a nonfarm prices nor prices with costs. in the self-correcting nature of markets
labor force of 31.5 million—that was and in the strength and resilience of
the range of estimates presented at the Responding to flyaway prices, pro- American finance. He believed that the
national conference on unemployment ducers and consumers took actions they depression he foresaw was a necessary
at which Herbert Hoover presided in would presently come to regret. General evil. Wages, like prices, were too high
September 1921, just as recovery was Motors built itself the world’s biggest and had to come down. They would fall
beginning. Notable bankrupts includ- office building. National City Bank— to sustainable levels sooner or later. If
ed the CEO of General Motors, Billy today’s Citibank, even then accident- the Federal Reserve could give them a
Durant, and a Kansas City haberdasher prone—lent not wisely but too well helpful push, so much the better for the
named Harry S. Truman. against the inflated collateral of Cuban timely return to sustainable prosperity.
sugar. Farmers borrowed to purchase
Some today, including the historian marginal acres of cropland, which they There was no mistaking this Ameri-
Christina Romer, argue that the 1920- planted from fencepost to fencepost. can zeitgeist for the Era of Good Feel-
21 downturn was little more than a ings. 1919 brought race riots, a wave of
recessionary bump in the road. A con- The inflationary music didn’t stop all strikes in the heavily unionized labor
temporary congressional inquest con- at once but decrescendoed in the fall of force, a Red scare and an influenza pan-
cluded, with respect to commodity 1919. On Nov. 3, the Federal Reserve demic. In 1920 came Prohibition and
prices that “the debacle of 1920-21 was Bank of New York lifted its discount rate the unmasking of a swindler named
without parallel.” The bitterly sardonic to 4 ¾% from 4%; over the next three Ponzi. On Sept. 16, 1920, a terrorist
lyrics of the 1921 hit tune, “Ain’t We weeks, the Dow gave up 12.8% of its val- explosion on Wall Street killed 38 and
Got Fun?” would also seem to attest to ue. In January 1920, the Fed tightened wounded 300. Later that month, a grand
the seriousness of the situation. You’ve once more, this time all the way to 6%. jury heard evidence into the Chicago
probably heard this line: “There’s Commodity prices started to soften in White Sox’s alleged fixing of the 1919
nothing surer, the rich get rich and the March, the Japanese silk market being World Series. By 1921, according to the
poor get children.” an early deflationary bellwether. contemporary reckoning of the English
economist T.E. Gregory, the world was
Booms not only precede busts, the The price declines were immediate “nearer collapse than at any time since
Austrian school of economics teaches; and, in many cases, steep, though they the downfall of the Roman Empire.”
they also cause them. So it was in 1920. failed to seize the national attention.
The combatants of the Great War had Certainly, they made no deep impres- Still, the successive administrations
fought on the cuff. They spent more sion on the still wet-behind-the-ears of Woodrow Wilson and Warren G.
than they raised in taxes, and they bor- Federal Reserve. “There are already Harding hewed to policies of economic
rowed or printed the difference. They indications that the transition period is nonintervention. With Wilson, it was a
abandoned the gold standard almost as nearing a halt and than an improvement case of laissez-faire by accident. In the
soon as the shooting started. The re- in the general situation is in sight,” the war, his administration had rationed,
sult was an inflation that distorted both governors ventured at the end of Au- commandeered and regimented with-
prices and judgment. gust 1920. They were a year early. out ideological compunction. After the
war, it had attacked inflation by the
Inflation ravaged America, too, Benjamin Strong, head of the Federal ancient quack remedy of villifying the
though this country entered the war 2 ½ Reserve Bank of New York, was a year producers who charged the objection-
years after the first shots were fired and prescient. In a letter to the monetary able prices. “I am perfectly sure that
the Wilson administration never aban- economist Edwin W. Kemmerer, early the state has got to control everything
doned the letter of the gold standard. in 1919, he predicted exactly how de- that everybody needs and uses” the
Consumer prices rose by 11% in 1916, flationary events would unfold. Interest president was quoted as saying in the
by 17% in 1917 and by 18.6% in 1918. rates would be going up, as the Fed extri- summer of 1919. Nobody knows what
cated itself from the untenable position Wilson might have done if he had kept
History taught that peace would of suppressing the cost of the Treasury’s his health. The stroke he suffered in
bring deflation. Such had been the ex- wartime borrowing. Prices would be fall- September 1919 incapacitated both
perience of Britain after the Napoleon- ing and business activity contracting. him and his administration. It present-
ic wars and the United States after the ly seemed to the journalist Ray Stan-
Civil War. When governments stopped “I believe,” Strong prophesied, “that nard Baker as if “our Government has
printing money for the very purpose this period will be accompanied by a gone out of business.”
of destroying life and property, prices considerable degree of unemployment,
would certainly tumble. but not for very long, and that after a Not so the Federal Reserve, which con-
year or two of discomfort, some losses, tinued to turn the screws. In June 1920,
They did not tumble. The long- some disorders caused by unemploy- it imposed a 7% discount rate. Adjusted
thwarted American consumer cel- ment, we will emerge with an almost for the deflation of prices and wages, that
ebrated the end of wartime stingency invincible banking position, with prices 7% felt more like 15%. The chairman of
by making the cash registers ring. By more nearly at competitive levels with the Federal Reserve Board, W.P.G. Hard-
the fall of 1919, plants were operating other nations, and be able to exercise ing, gave speech after speech proclaim-
at full tilt, raw materials were unob- a wide and important influence in re- ing that better times were at hand. This
tainable except at markups to quoted storing the world to normal and livable

article-GRANT’S/JUNE 12, 2015  3

was not despite falling prices but because recall that the gold value of the dollar of the wartime excess profits tax and a
of them. The Boston Fed, in a cheerful was fixed. It was not within the Fed- halving in the top income-tax rate on
March 1921 comment, echoed Harding: eral Reserve’s power to raise up prices personal incomes, to 32%.
“[W]e have been witnessing two impor- and/or wages by conjuring new dollar
tant conditions precedent to the laying bills, even if it had wanted to. Prices Uncounted millions of unemployed
of enduring foundations for the future and wages were expected to do the ad- people were pleading for work; tax
stability of business, namely, liquidation justing, if adjustment was called for. As cuts and spending reductions were the
and deflation. . . . ” prices were deflating, so should wages means to providing it: Such was the bed-
fall, reasoned the business and finan- rock of the Harding-Mellon economic
To many people, those particular cial community. plan. “Stabilized finance and well estab-
foundations seemed neither necessary lished confidence are both essential to
nor stable. Critics included, broadly, Wages would not and should not restored industry and commerce,” the
the political left; Sen. Robert L. Owen, fall, Samuel Gompers, president of the president told the senators who yearned
Democrat of Oklahoma, who had American Federation of Labor, coun- to pass the legislation that would cause
shepherded the Federal Reserve Bill tered. Working people had not yet re- the Treasury to mail government checks
through the upper house of Congress; gained the purchasing power they had to millions of their demobilized constit-
the economists Irving Fisher, Gustav lost in the war. The fact is that wage uents. Harding prevailed.
Cassel and John Maynard Keynes; and rates did drop in the early 1920s, though
the comptroller of the currency, John by exactly how much is unknown. The Though the phrase “new normal” was
Skelton Williams, who, as an ex-officio decline was steep enough to prevent unspoken in 1921, people did wonder
governor of the Federal Reserve, bit- the evisceration of business profits that if the world had lost its bearings. “The
terly criticized the high interest rates would otherwise have occurred and stockholders of this company are anx-
for which he himself had voted. that, in the 1930s, did occur, along with ious to know whether this represents a
its complement, mass unemployment. new era of reduced business or whether
Tucked away in Williams’s archives is The restoration of profits at lower lev- the depression will quickly pass,” was
a newspaper cartoon which the comp- els of prices and wages made a signal how the president of E.I. duPont de
troller did not draw but might well contribution to the blooming recovery Nemours & Co., posed the question
have inspired. The scene is an operat- of the early 1920s. in his 1921 annual letter. Earnings per
ing room out of the blood-bucket era share had plunged to $2.35 in 1921
of orthopedic medicine. An unanes- Harding won the 1920 presidential from $17 in 1920. Inventories and the
thetized patient, labeled “Business,” election on a promise of “less govern- payroll had both been chopped in half.
stares bug-eyed as the doctor, ticketed ment in business and more business
“Federal Reserve,” begins to amputate in government.” Like his secretary of DuPont’s chief executive blamed
his right leg. It is more than concerning the Treasury, Andrew Mellon, Harding not some new era but an old-fashioned
to Business that the doctor is oblivi- favored sound money, low taxes and inventory cycle. As duPont had liqui-
ous to the ingrown toenail, designated the free play of wages and prices. “We dated its inventories, so had its cus-
“Speculation and High Prices,” for must face a condition of grim reality, tomers and suppliers reduced theirs. It
which the patient had evidently sought charge off our losses and start afresh,” stood to reason that restocking would
treatment. “Gosh Doc,” implores Busi- said the cheerful ex-newspaperman in prove a potent stimulant—which, in-
ness, “couldn’t you cut it off down a his inaugural address. “It is the oldest deed, it did.
little nearer to the toe?” lesson of civilization.”
Mellon did not immediately get the
In a speech to the United States The depression was 15 months old tax cut he wanted, but the Federal Re-
Chamber of Commerce in May 1930, when Harding moved into the White serve, beginning in the spring of 1921,
President Herbert Hoover made bold House. Mellon—banker, industrial- did begin to implement the interest-
to claim that, “for the first time in the ist and a director of no fewer than rate reductions for which he had quietly
history of great slumps, we have had no 60 corporations—knew full well how lobbied. To objections that a ½ of 1%
substantial reduction in wages.” In a hard were the times. He subsequently reduction in the 7% discount rate would
later totting up of data compiled by the described the crisis of 1921 as among incite speculation, Mellon replied that
Bureau of Labor Statistics, the A.F.of L. the most severe in American history. the country could use a little speculation.
found truth in that assertion:Whereas To President Harding and him, it was
92% of reporting firms had reduced the very gravity of the situation that By the time the stock market scraped
wages in 1921, only 7% did so in 1930. demanded reduced federal spending bottom late in the summer of 1921,
The result, according to new research and lower tax rates—and in Mellon’s “scores” of companies were valued at
by the UCLA economist Lee Ohanian, personal view, lower interest rates, less than their working capital, accord-
was a rise in real manufacturing wag- too. In none of the 12 years leading up ing to The Wall Street Journal. The
es—and a disastrous drop in manufac- to 1912 had the federal government shares of “large numbers” of industrial
turing hours worked. spent as much as $700 million. Now it companies were selling at “one-third of
laid out that much and more in annual their intrinsic values.”
Just how paradoxically enlightened debt service.
were the supposedly primitive ideas Coca-Cola, in which punters had earli-
of 1920 and 1921 did not become evi- To staunch the gushing red ink, er speculated as a play on the new Prohi-
dent till after the 1930s had run their Harding personally went to the Senate bition law, was one such comely bargain.
course. Downwardly mobile wage rates to make his case against a pending bill At $19 a share—500,000 shares were out-
were one such constructive feature of to pay a multi-billion-dollar soldiers’ standing, providing a stock-market capi-
the forgotten depression. It helps to bonus. Mellon pushed for elimination talization of just $9.5 million—the com-
pany was valued at what would prove to
be 1.7 times 1922 earnings and 2.5 times

article-GRANT’S/JUNE 12, 2015  4

1923 earnings; the shares provided a divi- quickly made, with intelligent compre- and Fisher, too—won the battle of pub-
dend yield of 5 ¼%. Gillette Safety Ra- hension and a cooperative spirit.” lic policy. Today, in place of the gold
zor Co., which was selling as many razors standard, the world has adopted the
and blades in 1921 as it had in 1920, was Stability became the public-policy Ph.D. standard—discretionary mon-
quoted at little more than five times for- watchword of the mid and late 1920s. etary management by formerly tenured
ward earnings and yielded 9 ¼%. Radio Irving Fisher talked up the virtues of academic economists. Prices and wages
Corporation of America, not yet revealed active monetary management. By buy- must always rise, never fall, contempo-
as one of the great growth stocks of the ing and selling the correct volumes of rary doctrine has it, which policy takes
1920s, could be purchased in the market government securities, a central bank the curious name “price stability.” At
for about as much as the company would might keep prices on an even keel, or the desired 2% per annum rate of rise,
earn in 1923: $1.50 a share. so he proposed. “The need of our time the consumer prices would quintuple
is stabilization,” declared the famous over the course of a healthy lifespan.
The springtime thaw in Federal Re- Yale economist.
serve interest-rate policy was by no Not much remains the same in
means the only, or most important, In the final quarter of the 19th centu- America nearly a century after the
source of monetary stimulus. Sky-high ry, average prices had fallen in response events of 1920-21. The former gold
real American interest rates and rock- to the rise of labor-saving technology. dollar is today weightless, undefined.
bottom American asset values pulled in The world had advanced in economic Double liability no longer attaches to
gold from abroad. Between January and understanding since then, the stabili- the common equity of a commercial
July 1920, foreign bullion augmented zationists insisted. The price level (if bank—with Dodd-Frank, it’s not too
the American gold stock by some $400 one could could acurately calculate much to say that the biggest such insti-
million, to a grand total of $3 billion. such a thing) must be made to stand tutions have been functionally nation-
Optimists hoped for $500 million more still, whatever the underlying decline alized. “The economy,” the abstraction
before the great importation ran its in the cost of production. of which the contemporaries of Wilson
course. By the close of 1923, another $1 and Harding knew nothing, came to
billion had landed. President Harding And when the 1920s stopped roaring, life in the 1930s and has subsequent-
had aimed to restore business confi- the Fed and the Hoover administra- ly come to seem almost tangible. We
dence. Foreigners expressed their con- tion applied what they took to be the speak of it as if we could see it, touch
fidence by sending money. lessons of 1920-21. The Fed lowered it, smell it and, of course, manage it.
interest rates—it didn’t raise them—
Over and done with in 18 months, and President Hoover rallied employ- The people have changed and so
the depression of 1920-21 was the beau ers against wage reductions. “It seems has their government. Empathy has
ideal of a deflationary slump, I judge. manifest,” judged Fisher in May 1930, infused American public policy. In a
The banking system survived without a “that thus far the difference between 1921 speech on unemployment, Hard-
single major failure, even if certain em- the present comparatively mild busi- ing related that, in the best of times,
inent New York institutions wobbled ness recession and the severe depres- a million and a half members of the
and hundreds of country banks closed. sion of 1920-21 is like that between a American working population were
Though painful, the depression was thunder-shower and a tornado.” unemployed. And he added, “The fig-
hardly pointless. It rebalanced costs ures are astounding only because we
and prices and corrected the invest- Seven years after this colossal mis- are a hundred millions, and this para-
ment errors of the inflationary boom. A judgment came one of the wisest of site percentage will always be with us.”
powerful, job-filled recovery followed: the contemporary postmortems of the Not only would a 21st century Ameri-
In 1922, industrial production leapt by Hoover policies. The authors of “Bank- can president not utter the word “para-
26%, domestic auto and truck produc- ing and the Business Cycle,” published site,” he or she would not even think
tion by 63%. “From practically all an- in 1937, identified the essential flaw it. (Mitt Romney came close but then
gles,” judged the Wall Street Journal in of Fisher’s argument. By propping up he isn’t the president.) It would not
a New Year’s Day 1923 retrospective, a price level that, owing to cheapening be a matter of not daring to think it.
“1922 can be recorded as the renais- production costs, would otherwise have It would simply not occur to the chief
sance of prosperity.” fallen, the Fed had implemented a kind executive to form the thought. In 2013,
of invisible inflation. So doing, it had a Cato Institute report found that wel-
Contemporaries mainly withheld disturbed the economic architecture fare paid more than a minimum wage
their applause. The virtue of downward in ways that led to a bust. “[T]he end job in 35 states and that in 13 states it
flexibility in wage rates was so obvious result of what was probably the great- paid more than $15 an hour. Wage flex-
to the many whose wages had declined est price-stabilization experiment in ibility, which contributed more than a
(there was, of course, no federal safety history proved to be, simply, the great- little to the brisk work of the 1920-21
net). Then, too, a year-and-a-half ’s est and worst depression,” the critics slump, is not the outstanding feature
worth of business contraction seemed judged—correctly, I think. of 21st century American economic life.
unnecessarily protracted—there was,
as yet, no Great Depression against In 1923, Keynes told a British audi- The price mechanism, the hero
which to draw a favorable comparison. ence that “an individualist society left of 1920-21, is thriving in the digital
“It is a pity,” regretted the September to itself does not work well, or even world—witness eBay and Uber—but
1921 economic review of the National tolerably. . . . The more troublous the hardly in the financial world. The 21st
City Bank, i.e., Citibank, “the agony times, the worse does a laissez-faire sys- century Fed, freed from all gold stan-
must be so long drawn out, a pity the tem work.” The story of the forgotten dard constraints, has taken to sponsor-
inevitable adjustments cannot be depression disproves that contention. ing bull markets. By raising up asset

Mistaken though he was in his read-
ing of the American record, Keynes—

article-GRANT’S/JUNE 12, 2015  5

prices—stocks, bonds, real estate— alone does not render them obsolete. Frank would have been incomprehensi-
the central bankers hope to infuse Something like “austerity” well served ble to Andrew Mellon. In the capitalism
Main Street with the riches of Wall the Baltic states of Estonia, Latvia and he knew, the stockholders who earned
Street. It seems not to occur to them Lithuania in the wake of the Great Re- the dividends also bore the losses.
that, by lifting (or attempting to lift) cession. In telling contrast to Greece,
aggregate demand, they are likewise observes John Dizard in a recent Finan- Principle No. 3 is that too much
lifting aggregate supply. The rise and cial Times column, the Baltics chose knowledge can be a dangerous thing. I
fall of the American energy business sound money and fiscal balance as the wonder if one of our aspiring Republican
could serve as Exhibit “A” in this re- cure for what ailed them. Having suf- presidential candidates wouldn’t con-
gard. Easy money financed a gush of fered under Soviet rule, Dizard pointed sider taking up the call for a trial black-
American production; the resulting out, “their people had no intention of out of government-issued macroeco-
crack in the price of oil sent up cries of moving any distance back to the past nomic data? Harding in American and
“deflation,” to which the central bank- or away from orthodox market econom- Cowperthwaite in Hong Kong worked
ers responded with pledges of contin- ics. They lacked faith in state-directed wonders in the statistical darkness.
ued low interest rates. investment or in policies to maintain
demand through accommodative mon- Guido Majno wrote a history of medi-
Hayek criticized the pretensions of etary policy and fiscal stimulus.” Today, cine entitled “The Healing Hand: Man
economic science in his brilliant 1974 on account of these Harding-esque ini- and Wound in the Ancient World.” It’s
Nobel Prize lecture. He would likely tiatives, the three enlightened coun- a chronicle of the cycles of insight and
have no high opinion of the econo- tries confront the problem of upward ignorance concerning medical practices
metric models that, in 2005, 2006 and wage pressure stemming from tight la- in ancient Mesopotamia, China, India,
2007, failed to detect the biggest cycli- bor markets—a high-grade problem, as Egypt, Greece and Rome. Peter Fisher,
cal event in the professional lives of the Dizard observes. whose high level career has included
model builders. On this score, you may stops at the Federal Reserve and the
recall the New York City blizzard that If I were asked—and I have been Treasury, once heard Majno summarize
wasn’t. Late in January this year, the asked—what America can learn from his findings. “You know,” Peter quotes
meteorologists had forecast the biggest the experience of the early 1920s, I the historian as musing, “it was not real-
snowstorm since the Dutch landed would reply: principles. Principle No. 1 ly until the last year of the Second World
on Manhattan island—which forecast is the primacy of the price mechanism. War, with the widespread dissemination
missed. How, then, can the macroecon- In Harding’s time, the definition of of penicillin, that if you suffered an
omists hope to succeed? Snowflakes money was inflexible—it was defined open flesh wound you would have been
are inanimate. They don’t change their as a weight of gold—while prices and advised to let someone touch you rather
minds on account of something they wages were, to a greater or lesser de- than let nature take its course.”
read while surfing the Web or because gree, flexible. Today, money is famous-
a neighboring snowflake is getting rich ly undefined, while the average of pric- In the decades since the forgotten
by mortgaging its house. I think of the es, and the average of wages, are—to depression and subsequent roaring
weathermen’s foibles when I hear the a greater or lesser degree—inflexible. recovery, doctors of economics have
Fed trying to rationalize a course of pol- When imbalances arise, we fiddle with prescribed more and heavier interven-
icy action because an inflation forecast interest rates and exchange rates as op- tions. Wholesale money printing, doing
for the five years beginning in the year posed to addressing the relevant mi- business under the clinical term “quan-
2020 has begun to sag—which the Fed croeconomic dislocations—too much titative easing,” has come to seem al-
actually does. Tell us, Chair Yellen, will mortgage debt against too many houses most orthodox.
the sun shine next Tuesday? being a recent example.
The triumph of sound money and of
So, no, the policies of Wilson and Principle No. 2 is that individuals market-determined prices in the not so
Harding seem not especially to the should bear the responsibility for finan- distant American past invites the sug-
liking of 21st century America. That cial outcomes. Too-big-to-fail and Dodd- gestion that we, today, allow economic
nature take its course.

•

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