Central Bankers & Stupid Credit Tricks - Part IX
Banking & Credit – Reflation and Inflation (1933-1947)
Again, please recall, this is Carol Quigley’s breakdown of monetary periods in the period 1897-1947 (in his classic work Tragedy and Hope).
1. Reflation, 1897-1914
2. Inflation, 1914-1925
3. Stabilization, 1922-1930
4. Deflation, 1927-1936
5. Reflation, 1933-1939
6. Inflation, 1939-1947
This document will quote Professor Quigley’s on periods #5 and #6 above.
Reflation and Inflation, 1933-1947
The period of reflation began in some countries (like Great Britain and the United States) long before the period of deflation had ended elsewhere (as in France). In most countries the recovery was associated with rising wholesale prices, with abandonment of the gold standard or at least devaluation, and with easy credit. It resulted almost everywhere in increased demand, rising production, and decreasing unemployment. By the middle of 1932, recovery was discernible among the members of the sterling bloc; by the middle of 1933 it was general except for the members of the gold bloc. This recovery was halting and uncertain. Insofar as it was caused by government actions, these actions were aimed at treatment of the symptoms rather than the causes of the depression, and these actions, by running contrary to orthodox economic ideas, served to slow up recovery by reducing confidence. … Finally, the recovery was slowed up by the drastic increase in political security as a result of the aggressions of Japan, of Italy, and of Germany.
Except for Germany and Russia (both of which had isolated their economies from world fluctuations) the recovery continued for no more than three or four years. In most countries the latter half of 1937 and the early part of 1938 experienced a sharp “recession”. In no important country had prices reached the 1929 level at the beginning of the recession (although within 10 percent of it), nor had the percentages of persons unemployed fallen to the 1929 level. In many countries (but not the United States or the gold bloc), industrial production had reached 1929 levels.
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The failure of the liberal states in the 1920’s becomes more obvious when we examine the great increase in restrictive economic and financial policies in the 1930’s. It is usually said that the excesses in these were caused by the great increase in nationalism resulting from the depression. This is not true … The increase in economic nationalism was based on a much more practical cause than that – on the fact that the nation was the only social unit capable of action in the emergency resulting from the depression. And men were demanding action. For this the only available agency was the nation state. If a broader agency had been available, it would have been used. Since it was not, the state had to be used – used, not with the purpose of injuring one’s neighbors, but solely for the purpose of benefiting oneself. … This is the real tragedy of the 1920’s Because of the conservatism, timidity, and hypocrisy of those who were trying to build an international organization in the period 1919-1929, this organization was so inadequate that by 1929 when the emergency began that the organization which had been set up was destroyed rather than strengthened. If the instruments of international cooperation had been further advanced in 1929, the demand for action would have made use if these instruments, and a new era of political progress would have commenced. Instead, the inadequacy of these instruments forced men to fall back on the broadest instrument which was available – the nation-state; and there began a retrogressive movement capable of destroying all Western Civilization.
The economic nationalism which arose from the need to act in a crisis – and to act unilaterally because of the lack of any organ able to act multilaterally (that is, internationally) was intensified after the breakdown in finance and economics of 1931-1933 by several developments. In the first place, it was increased by the discovery, by Germany in 1932, by Italy in 1934, by Japan in 1936, and by the United States in 1938, that deflation could be prevented by rearming. In the second place, it was increased by the realization that political activity was more powerful and more fundamental that economic activity … In the third place, economic nationalism was increased and internationalism reduced, by the great increase in political insecurity, since the preservation of an international economic organization involved entrusting one’s economic fate, to some degree, to the hands of another. Rather than this, economic nationalism was increased in the name of autarky, security, economic mobilization, and so on. Self-sufficiency, even if it involved a lower standard of living, was held preferable to international division of labor, on the grounds that political security was more important that a high – and insecure – standard of living.
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The Period of Inflation, 1938-1945
The period of reflation, which began in most countries in the first half of 1933, merged into the following period of inflation without any sharp line of demarcation between the two. The increase in prices, prosperity, employment, and business activity after 1933 was generally caused by increases in public spending. As the political crisis became worse with the attacks on Ethiopia, on Spain, on China, and Austria, and on Czechoslovakia, this public spending increasingly gook the form of spending on armaments.
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Outside the Unites States, many of the wartime control mechanisms were continued into the postwar period, and contributed substantially to the creation of a new kind of economic system which we might call the “pluralist economy” because it operates from the shifting alignments of a number of organized interest blocs, such as labor, farmers, heavy industry, consumers, financial groups, and, above all, governments. This will be analyzed later. At this point we need only say that the postwar economy was entirely different in character from that of the 1920’s following World War I. This was most notable in the absence of a postwar depression, which was widely expected, but which did not arrive because there was no effort to stabilize on a gold standard. The major difference was the eclipse of bankers, who have been largely reduced in status from the masters to the servants of the economic system [Note: I personally don’t entirely agree with Professor Quigley on this point, but it may well be the case to a degree.] This has been brought about by the new concern with real economic factors instead of with financial counters, as previously. As part of this process, there has been a great reduction in the economic role of gold [Will this continue? How then to stem abuses of fiat currency? Global bond markets can serve this role to a degree, but not sure that this necessarily leaves no room for an asset with the unique properties of gold (and silver)].
… That’s all folks! |
