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Recently, I've been thinking about the credit contraction of the early
1930s. This generally gets far too little attention today, but people
have thought about it somewhat in the past. One such person was Irving
Fischer, a prominent economist of the time. He called it "debt
deflation." Here is a nice summary of his views:
"The Debt-Deflation Theory of Great Depressions," by Irving Fischer.
May
14, 2016: Credit Expansion And Contraction Of The 1920s and 1930s #2:
Paying Off Debt
April
3, 2016: Credit Expansion and Contraction in the 1920s and 1930s
In general, this theory is not so much of a "cause," as it is a
description of the events of his time. It is, in my view, more in the
nature of symptoms or characteristics. For example, here is what he
wrote about causes:
"8. There may be equilibrium which,
though stable, is so delicately poised that, after departure from it
beyond certain limits, instability ensues, just as, at first, a stick
may bend under strain, ready all the time to bend back, until a certain
point is reached, when it breaks."
This is not an explanation at all, but is rather more in the nature of
the typical Keynesian "autonomous decline in aggregate demand" ("It
just happened") version of things. An economy is "delicately poised,"
such that, for some minor reason -- here unidentified, despite causing
a Great Depression -- "instability ensues." It is sort of like the
twitch of a butterfly's wings leading to a hurricane.
"Then we may deduce the following chain
of consequences in nine links: (1) Debt liquidation leads to distress
setting and to (2) Contraction of deposit currency, as bank loans are
paid off, and to a slowing down of velocity of circula- tion. This
contraction of deposits and of their velocity, precipitated by distress
selling, causes (3) A fall in the level of prices, in other words, a
swelling of the dollar. Assuming, as above stated, that this fall of
prices is not interfered with by reflation or otherwise, there must be
(4) A still greater fall in the net worths of business, precipitating
bank- ruptcies and (5) A like fall in profits, which in a "
capitalistic," that is, a private-profit society, leads the concerns
which are running at a loss to make (6) A reduction in output, in trade
and in employment of labor. These losses, bankruptcies, and
unemployment, lead to (7) Pes- simism and loss of confidence, which in
turn lead to (8) Hoarding and slowing down still more the velocity of
circulation."
Here is a little more on original causes:
15. While any deviation from
equilibrium of any economic variable theoretically may, and doubtless
in practice does, set up some sort of oscillations, the important
question is: Which of them have been sufficiently great disturbers to
afford any substantial explanation of the great booms and depressions
of history?
16. I am not sufficiently familiar with the long detailed history of
these disturbances, nor with the colossal literature concerning their
al- leged explanations, to have reached any definitive conclusions as
to the relative importance of all the influences at work. I am eager to
learn from others.
17. According to my present opinion, which is purely tentative, there
is some grain of truth in most of the alleged explanations commonly
offered, but this grain is often small. Any of them may suffice to
explain small disturbances, but all of them put together have probably
been inadequate to explain big disturbances.
18. In particular, as explanations of the so-called business cycle, or
cycles, when these are really serious, I doubt the adequacy of over-
production, under-consumption, over-capacity, price-dislocation,
maladjustment between agricultural and industrial prices,
over-confidence, over-investment, over-saving, over-spending, and the
discrepancy between saving and investment.
19. I venture the opinion, subject to
correction on submission of future evidence, that, in the great booms
and depressions, each of the above-named factors has played a
subordinate role as compared with two dominant factors, namely
over-indebtedness to start with and deflation following soon after;
also that where any of the other factors do become conspicuous, they
are often merely effects or symptoms of these two. In short, the big
bad actors are debt disturbances and price- level disturbances.
While quite ready to change my opinion, I have, at present, a strong
conviction that these two economic maladies, the debt disease and the
price-level disease (or dollar disease), are, in the great booms and
depressions, more important causes than all others put together,
As we can see, he really has little to say about the originating
factors. There's a floppy hypothesis regarding "overindebtedness,"
which doesn't apply in this case, because, as we saw earlier, debt
levels in the 1920s were actually rather modest, and not rising
particularly.
Note the total blindness here to the very great causes that were
happening all around him: in particular, the global trade war set off
by Smoot-Hawley in the U.S., and the drastic "austerity" domestic tax
hikes that followed.
That is all for Irving Fischer today.
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