Jon Hilsenrath, the Wall Street
Journal's ferret at the Fed, reports what the Federal Reserve wants the
public to know while retaining anonymity. He found the professors in a stew. In
the June 19, 2012, edition, Hilsenrath disclosed: "Fed officials have been
frustrated in the past year that low interest rate policies haven't reached
enough Americans to spur stronger growth, the way economics textbooks say low
rates should. By reducing interest rates-the cost of credit-the Fed encourages
household spending, business investment and hiring, in addition to reducing the
burden of past debts. But the economy hasn't been working according to
script."
Since the professors wrote the textbooks,
Fed headquarters is not a source of economic inspiration. Textbooks in the U.S.
are the monopoly of Bernanke, Romer, Mishkin and a few other cross-pollinated
primates.
Notable in Federal Reserve Chairman Ben
Bernanke's Essays on the Great Depression is its inbreeding. The
professor is unsparing in his praise of such contemporaries as Romer, Mishkin,
and of course, devoted to Friedman and Schwartz. He neglects earlier economists
who might have modified the certainty of his negative real interest rate policy.
There were many prominent economists -
two, three, and four generations ago - who warned that low- and lower- and
zero-percent interest rates may fail to waken an economy. Bank reserves may sit
in the bank. That's that.
This happened in the Great One. It was
obvious by the mid-1930s there was little appetite for lending or borrowing,
even with interest rates below one percent. If ever the phrase "it takes
two to tango" fits, here we are. A loan includes two parties: a lender and
a borrower. Reading Hilsenrath's article, the stalagmites in the Eccles
Building only think about the lack of lending. The possibility that
credit-worthy customers do not want to borrow is apparently negligible.
By 1934-1935 the domestic banking system
had become saturated with idle cash. So notes David Stockman, former director of the Office of Management and Budget
under President Reagan, in the draft of his future
book: The Great Deformation: How Crony Capitalism Corrupted Free
Markets and Democracy. Stockman writes that excess bank reserves
at the Fed rose from $2.7 billion in 1933 to $11.7 billion by 1939. These
fallow dollars remained sterile, like Grandpa Joad's farm. They accounted for
75% of the Fed's balance-sheet growth during the period.
Bernanke has entirely ignored earlier scholarship, but it may be of interest to
readers:
In 1910, William Beveridge (of the 1942 Beveridge Report) wrote:
"Clearly a mere offer of cheap money
does not suffice; banks at times of depression may go on offering cheap money
for months or even years together before any recovery happens."
-- William Beveridge, Unemployment: A Problem of Industry,
Longman, Green and Co. (1910)
In 1926, Dennis Robertson:
"...while there is always some rate of interest which will check an
eager borrower, there may be no rate of money interest in excess of zero
which will stimulate an unwilling one."
Robertson also wrote:
"...those theorists are right who
have found cause of 'crises' in a 'deficiency of capital.' But what is
deficient is not money, otherwise the situation could be cured, as all
experience shows it cannot, by continued inflation."
-- Dennis Robertson, Banking Policy and the Price Level, King, 1926
In 1936, Wilhelm Ropke:
"The American experiences have amply
verified the surmise that even an interest rate which approaches zero may be
insufficient...to induce entrepreneurs to enter upon new investment."
--Wilhelm Ropke, Crises and Cycles, William Hodge & Company,
Limited, 1936
In 1937, C.A. Phillips, T.F. McManus and R.W. Nelson:
"[W]e have witnessed for four years
and more a policy of deficit borrowing which has forced Government bonds on the
banks and has created new credits to such an extent that the demand deposits of
the Federal Reserve System are now higher than they were in 1929 ($16,324
million on June 29, 1929, $19,161 million on March 1936); and for almost five
years we have experienced excessively low rates of interest for short-term
capital coincidentally with unprecedented excess reserves in the banking
system; both conditions indicate that the basic immediate need is not for more
credit, but rather that conditions in the investment market are still such that
extensive long-term investment is not being made."
Also from the trio:
"What is to be desired is a greater
use of bank credit now in existence rather than a greater absolute volume of
credit....The total volume of bank deposits now in existence is in excess of
the 1920 total ($51,335 millions of deposits [exclusive of interbank deposits]
on June 30, 1936, as against $37,721 million in June, 1920), yet the price
level and the cost of living are both below the levels prevailing in 1920-1921.
Between December 30, 1933, and December 31, 1935, total deposits [exclusive of
interbank deposits] increased by $10,459 million, or at a rate of $100 million
a week."
--Banking and the Business Cycle,
1937
The reader may note a common theme in the titles to these books,
"banking" and "cycles" recurring. This suggests why
Bernanke & Co. may remain detached from such tomes. They do not believe in
cycles. If bad things happen, the intruders are thwarted by good policy. That
the policy is "good" is assumed. (I am not making this up.)
In 1937 (probably: this is from the 1946 edition), Gottfried
Haberler:
"During a depression, loans are
liquidated and gradually money flows back from circulation into the reserves of
banks....Interest is by this time fallen to an abnormally low level; but, with
prices sagging and with a prevalence of pessimism, it may be that even an
exceedingly low level of interest rates will not stimulate people to
borrow."
-- Gottfried Haberler, Prosperity and Depression: A Theoretical Analysis of
Cyclical Movements, United Nations, 1946.
Haberler discussed Ralph Hawtrey, who changed his mind. Hawtrey's shift is
mentioned since there is an inverse relationship between one's status
(regardless of whether we are discussing economists, biologists, or motor
mechanics) and the willingness to admit one's error. Hats off to Hawtrey:
"Mr. R.W. Hawtrey is confident that
eventually, if only the purchases of securities are carried far enough [and, by
implication, interest rates are low enough - FJS] the new money will find an
outlet into circulation, consumers' income and outlay will begin to rise, and a
self-reinforcing process of expansion will be started."
Haberler wrote of Hawtrey's maturation:
"In more recent publications, under the impression of the slump of the
nineteen-thirties, Mr. Hawtrey has modified his views to some extent. He still
believes that 'a failure of cheap money to stimulate revival' is 'a rare
occurrence' but he admits that since 1930, it has come to plague the world and
has confronted us with problems which have threatened the fabric of
civilization with destruction."
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