Thursday, March 17, 2011

The Wrath of Keynes, or, The Fall of the House of Hayek, Part X

There are more than a few parallels between the current world situation and that which prevailed in the 1890s. The world was in the grip of the first "Great Depression." The financial services industry, especially in the United States and Great Britain, both saddled with inelastic, debt-backed currencies based on existing accumulations of savings, was completely inadequate to respond to the crisis. Jobs disappeared at an alarming rate.

As the decade wore on, crop failures spread rapidly throughout the world, driving food prices up and causing widespread unrest. Popular fiction presented one scenario after another of a cataclysmic war to end all wars, with many of the novels ironically putting the start of "the final war" in 1914.

Consumer debt mounted to previously unheard-of levels. The home mortgage crisis caused many people to walk away from the new homes they had purchased during the economic boom of the 1880s that followed the currency reform in response to the Panic of 1873. Many homeowners stole away in the middle of the night to avoid the sheriff. This gave rise to local haunted house legends as neighborhood children made up stories to account for the mysterious disappearances and to put a scare into their friends.

Socialism in various forms was touted as the panacea as the gilt wore off the Gilded Age. Frederick Jackson Turner's paper on the importance of the frontier in forming American civilization and character presented at the Columbian Exhibition announced that the end of free land meant the end of democracy. William Jennings Bryan, the "Boy Orator of the Platte," was very nearly elected president on a platform of "free silver," i.e., inflationary redistribution of purchasing power to relieve debtors, especially farmers saddled with mortgages and other debt dating from the Civil War, the loans being obtained when prices were high and money was inflated and cheap, but now coming due when prices were falling and money was deflated and expensive.

What saved the American economy in the late 1890s were bumper crops at a time when European and Asian crop failures ensured high prices. This allowed farmers in many cases to pay off their debts, and virtually ensured the election of William McKinley, who ran against Jennings on a platform of a stable currency backed by (or at least valued in terms of) gold, and promotion of trade through a protective tariff that benefited both industry and agriculture.

According to Dr. Harold G. Moulton, however, the economic recovery and the diversion of the 1896 election into "the silver question" left the main problems unsolved. The country was still saddled with an inelastic currency, courtesy of the National Bank System that backed its notes with government debt. Industry, commerce, and agriculture were thus still at the mercy of existing accumulations of savings to finance new capital formation.

Further, while the majority of people in the 1890s were still engaged in agriculture, the number was shrinking rapidly, and the wage system job was becoming the norm. As Judge Peter S. Grosscup noted in a series of articles in the early 20th century, small ownership was disappearing as people left the farm for high paying factory jobs, and small businesses were bought out by the trusts and conglomerates, or forced out of business.



nail-in-the-wall said...

Did you say deja vu' -1891


"Every Citizen an Owner is a Global Imperative"

That the spirit of revolutionary change is in the air, and which has long been disturbing the nations of the world, should have passed beyond the spheres of politics and made its influence felt in the cognate sphere of practical economics - that is the moral fabric of the family- is not surprising. For had it's first reflections been acknowledged and been provided proper care and attention, the first breaches of chaos and disorder found in the anxiety of the common family, perhaps then the decay of the whole body would not now ensue. There should have been no doubt. The elements of the conflict now raging are unmistakable, in the vast expansion of industrial pursuits and the marvelous discoveries of science and technology; in the changed relations between management, masters and works, laborers; the controlled and growing power of bureaucrat and the state; in the enormous fortunes of some few individuals, and the utter poverty of the masses held by the bondsmen and marketers of past savings as it were debt; in the increased self-reliance and closer mutual combination of the working classes; as also, finally, in the prevailing moral degeneracy and the out-casting, aborting of the most innocent. The momentous gravity of the state of things now obtaining fills every mind with painful apprehension; wise men are discussing it; practical men are proposing schemes; popular meetings, legislatures, and rulers of nations are all busied with it -- actually there is no question which has taken a deeper hold on the public mind. Then the sovereignty and elements of character and its composition of human dignity for the person, what is commonly referred to as the management of the household - economics; but in its stead we find the utter abandonment of the what constitutes the signature of the creator God on the human heart.

≈ ≈ ≈

I now wish to propose a "re-reading" of Pope Leo's Encyclical by issuing an invitation to "look back" at the text itself in order to discover anew the richness of the fundamental principles which it formulated for dealing with the question of the condition of workers. But this is also an invitation to "look around" at the "new things" which surround us and in which we find ourselves caught up, very different from the "new things" which characterized the final decade of the last century. Finally, it is an invitation to "look to the future" at a time when we can already glimpse the third Millennium of the Christian era, so filled with uncertainties but also with promises — uncertainties and promises which appeal to our imagination and creativity, and which reawaken our responsibility, as disciples of the "one teacher" (cf. Mt 23:8), to show the way, to proclaim the truth and to communicate the life which is Christ (cf. Jn 14:6). - John Paul II (3)

Read more here

Michael D. Greaney said...

What did you do, Guy? This comment popped up in the spam folder, and I almost deleted it. You must really have ticked off the god in the machine.