THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

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.