Experiments in Economic Crash Postponement: 1927/29 Versus 2016/18

History does not repeat, it echoes. At the time of writing (early 2018), it seems like there have been strong echoes in an “Indian summer phase” of global asset price inflation through late 2016, in the whole of 2017, and into early 2018, from Wall Street in the late 1920s. That earlier episode culminated in a devastating sequence of financial crashes. The danger of a repeat is widely evident, although the Federal Reserve has taken a crucially different policy step from back then. And in broader context, we should note that in the late 1920s, the world was barely ten years on from the World War I (a point emphasized to the author by Alex J. Pollock and also found in Kindleberger’s summing up of the causes of the Great Depression).

The echoes stem from an essential similarity in monetary circumstance. After the Great Recession of 1920–21, the recently created Federal Reserve (doors opened in 1914) embarked on a course of fighting “deflation dangers” whilst countering incipient cyclical downturns. Fed policy-makers were in part responding to contemporary criticism especially as voiced in Congress to the effect that their mismanagement had contributed to the severity of the Great Recession (too slow to halt inflationary policies once war ended and then excess zeal to bring prices down).

The technological revolution unfolding in the 1920s (mass assembly line, electrification, autos, radio, etc.) meant that prices had a natural and benign tendency to fall. The Fed, in resisting this, kept monetary conditions very easy, fostering a powerful asset price inflation which encompassed the market in stocks, real estate, and foreign loans (most of all to Germany). Similarly, in the aftermath of the 2000–02 economic downturn and equity market bust (led by Nasdaq), the Fed turned to “fighting deflation” despite a benign tendency at that time for prices to fall (economic weakness, globalization, a continuing productivity spurt reflecting the IT revolution). The fight against deflation was waged with much greater vigour following the 2007 panic and Great Recession despite a natural rhythm of prices downwards, now due to globalization, digitalization, and economic weakness, rather than any apparent productivity surge.

--Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 165-166.