Mark Levey, senior managing director at Lotsoff Capital Management in Chicago, has a piece on FDR’s New Deal today on the Wall Street Journal’s opinion page that starts out well, but then crashes and burns because (surprise, surprise) Levey misunderstands deflation (and misunderstands money, as well). Once again, we see someone who realizes that the New Deal was a failure, but then says that Roosevelt and his advisers did not recognize the problem of deflation.
Fat chance of that. Much of the New Deal was aimed at keeping up prices, with the government trying to support prices through edict and subsidies, and printing lots and lots of money (after taking the country off what was left of the gold standard). Levey writes:
The problem was that neither Roosevelt nor President Herbert Hoover before him grasped the essential nature of the crisis, which was not the stock-market crash, but global deflation. At the end of the roaring ’20s, an overhang of intergovernmental war debt from World War I, coupled with falling commodity prices and a currency crisis, had started the decline. Weak credit structures and European banks hurt by wartime inflation worsened it. When the Austrian Creditanstalt Bank failed, it ignited a global banking crisis that slashed across the international financial system cutting down everything in its path. Deflation went into full howl.
Indeed, this is a real howler. Not only do bankers and policymakers not understand deflation, few economists do, either. (The late Paul Heyne in his wonderful text, The Economic Way of Thinking, wrote that deflation was as bad as inflation.)
However, as Murray Rothbard has explained, deflation is actually a time when the fundamentals of the economy are put back into order and the distortions are eliminated. Furthermore, money itself becomes more valuable and also facilitates trade instead of distorting it.
Obviously, many people don’t like deflation, as prices fall. Workers don’t like pay cuts, and owners of other factors of production don’t like seeing the prices of their goods fall, yet such a time is necessary if we are to bottom out of the recession and to have a good recovery. However, the inflationist cranks, from the bankers to the politicians, are trying to tell us that inflation will cure everything. Right. And Zimbabwe is the world’s richest country.