In 1929, in the boom before the Great Crash, Irving Fisher reckoned that market forces would force a correction, though not collapse. Countless other ‘experts’ in the sharemarket denied the possibility of financial meltdown.
However the Scottish army engineer C. H. Douglas had predicted such a financial crisis years before it happened. He also predicted war would be the way nations would revive their economies. He was right on both counts. Douglas, founder of the Social Credit philosophy, is widely regarded as a crank.
Fisher went on to write a book ‘100% Money’, with a remarkably similar prescription to that of Douglas. Many of his theories retain their respectability in modern economics. One economics encyclopedia considers Fisher America’s greatest economist of all time.
While J. M. Keynes was searching for an explanation and a solution for the Great Depression, he concluded that there was too much money locked up in savings. Douglas found out the amount of savings in Britain and showed that it was inadequate to return the economy to health, even if all of it was spent. Keynes came up with a brilliant mathematical analysis of the Depression which prescribed debt as the solution. The Keynesian solution probably can take much of the credit for the resilience of the world economy in the first two decades after World War II (unlike WWI), but in the 1970s stagflation arrived. Douglas’s prediction that Keynesianism would fail was vindicated, but neither man lived to see the misery of simultaneous high inflation and unemployment. Keynes is widely regarded as the greatest 20th century economist. Each man made mistakes, but why were they treated so differently?
1980s monetarism applied Fisher’s quantity theory of money to control inflation.. Difficulties with use of the reserve asset ratio to control the banks’ creation of money led to today’s use of interest rate. With portability of money and floating exchange rates this has provided speculators with unprecedented opportunities to make or lose fortunes, and made economies vulnerable to large current account deficits.
How safe are banks? Some economists say governments have lost control of private banks. The derivative antics of Northern Rock, Citigroup and Societe Generale support this view. Clinton and Greenspan have been blamed for the relaxation of controls of U.S. banks. Bernanke’s reduction of interest rates may trigger more borrowing, and ultimately severe recession. This is our second largest export market. Agriculture is only weakly protected by WTO. Even if our dollar depreciates, our farm exporters are vulnerable to trade barriers.
History tells us a monetary system based on debt is unstable and unsustainable. Stagflation could well come again.
This article also appears in the 25 February issue of Canterbury Farming.