Anna Schwartz Dies

Anna Schwartz died yesterday in Manhattan at the age of 96. She is best known for her collaboration with Milton Friedman, A Monetary History of the United States, 1867-1960. The book changed the way people regarded the Great Depression because it showed how far the money supply fell from 1929 to 1933.  Monetary policy went from a neglected tool by Keynesians to the dominant tool in economic policy.  Her obituary is here.

Randall Parker has an interesting book, Reflections on the Great Depression, in which he interviewed a number of famous economists who lived through the depression.  Anna Schwartz was one of the economists in the book.  Friedman's interview is also in the book.

The Great Depression Redux

There is an update of a column that appeared in April in Vox by two economic historians--Barry Eichengreen and Kevin O'Rourke. You can get it here. The date the start of the current recession later than the NBER did, and compare a number of variables with the same time period during the Great Depression. It is sobering.

Books on Panics and Depressions

I finished recently an interesting book--The Panic of 1907: Lessons Learned from the Market's Perfect Storm by Robert F. Bruner and Sean D. Carr. The panic was a catylist for the passage of the Federal Reserve Act in 1913. With no "lender of last resort," it took private individuals such as J.P. Morgan to arrange loans and guarantees to the banks and trusts that were facing bank runs due to the panic. People Morgan relied on included Benjamin Strong and George F. Baker. Strong plays a prominent role in another interesting book--Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed. The latter book concerns the four central bankers of the U.S., Great Britain, France and Germany, and mistakes made that led to the Great Depression. Strong was the President of the New York Federal Reserve Bank, which was the dominant bank at the time. Strong died in 1928--before the onset of the depression. Friedman and Schwartz, in their history of monetary policy, state that they think Strong may have helped prevent some of the worst decisions made during the depression.

Of interest to me also was the inclusion of George F. Baker. Hope College has a Baker Scholar's Program and I am one of the advisors to the group. Originally, it was formed through money from a trust left by George F. Baker for educational purposes. Later, the family pulled out of educational endeavors, but Hope was permitted to maintain the George F. Baker name. Baker was a banker and close associate of J.P. Morgan. He also gave money for the start of the Harvard Business School. In an appendix in The Panic of 1907, the authors state that Baker cofounded the First National Bank of New York in 1863 at the age of 23. He was a director in 22 corporations and also a philanthropist, providing gifts that founded the Harvard Business School and Baker Library at Dartmouth.

At Hope, the Bakers are juniors and seniors who were selected after interviews with local businesspeople. The emphasis is on student leadership. The group meets with businesspeople, both locally and on trips that usually include New York, Chicago and San Francisco. Over the last two years, visits have included Cisco, Google, JPMorgan Chase, ADP, and the Chinese Consulate in San Francisco. The current Bakers are a great group, and it is a pleasure to work with them. Their website can be found here.

Are the "Generals" Remembering History or Fighting the Last War?

The current economic and financial crisis has generated a lot of discussion about previous recessions as well as the Great Depression. Clearly, the approach taken by the federal government and many prominent economists is to take from Keynes the idea of government spending as a stimulus and replacement for reduced consumer spending and reduced business investment. There has been a lot of work over the past decades devoted to understanding the causes of the Great Depression and possible remedies. In this sense, people seem to be paying attention to the adage from George Santayana, "Those who cannot remember the past are condemned to repeat it." Yet, each crisis is different in the sense that the institutional structure of the economy is different, the international setting is different, and technology is different. It is often said that generals have a tendency to, "fight the last war." If we consider the post-World War II recessions as "police actions," then we may be fighting the last war rather than remembering history.

"Worst since the Great Depression"

In a speech before the Brookings Institution on March 9, 2009, Christina Romer said that she has been uttering the words, "worst since the Great Depression" far too often. She is not alone. The words have been uttered by many politicians, economists, financial analysts, and just about everyone. The economy is down and seems to be sinking lower. Whatever measure we might use--unemployment, foreclosures, consumer confidence--we see a gloomy picture.

How are we doing on crisis management? In my view, not well. First, the economists. Keynesianism dominated the profession in the decades following World War II. Many economists believed we could fine tune the economy and select the level of unemployment that was associated with full employment by accepting a certain level of inflation. The stagflation of the 1970s destroyed that rosy view. Work by macroeconomists, both at theoretical and empirical levels, led to a rejection of the view that the answer to a recession was to increase government spending. The short-run multiplier associated with government spending was not that large, and the long-run effects tended to be nil or negative. In the current crisis, many prominent economists are arguing strenuously for massive increases in government spending. Let's return to the macroeconomics of the 1950s and 1960s and ignore everything we have learned since the 1970s. Since this is the "worst since the Great Depression," let's revert to depression-era thinking.

Second, the politicians. There has been a lot of talk about needing bipartisan solutions and approaches to government. Both parties have failed at crisis management. The crisis began as a credit crisis and a solution to the banking and financial sectors is needed. But the "fixes" for the financial sector have been inadequate and inconsistent. For all the talk of bold action, there has not been outlined a bold, consistent procedure to deal with the balance-sheet problems of banks. The stimulus plan includes many items that cannot be considered stimulative but actually represent the pent-up demand for programs favored by Democrats. Let's add autos to the mix, but also tell the auto makers how they should run their firms. Certainly a senator or representative knows more about making and selling cars than people who have worked in the industry for decades. It is easier and more fun to tell people how to run their businesses, or to fulminate over executive compensation, or to pass spending bills than to think seriously and hard about how to recapitalize banks and restore confidence in the financial sector.

Third, the public. You and me. We want quick answers. We want a riskless future and only good times. We want to be able to spend and buy any gadget that interests us without worrying about saving for the future. After all, rising home prices and equity prices should take care of our retirement. Oh, along with social security, medicare and senior discounts. We want it all!

Economics recognizes that we cannot have it all. There are opportunity costs to decisions and choices made. Choices have consequences, often unintended. Just because this is the "worst ______________ (fill in with your preferred term) since the Great Depression" does not mean that the choices we make will not have costs or consequences. Let's come out of the recession with more reasonable spending and saving decisions, and with an awareness that we cannot eliminate risk. We cannot have it all.