George Selgin on the New Deal, Regime Uncertainty, and What Really Ended the Great Depression

“Until 1933, the US government mainly undermined the stability of its banking system by limiting the freedom of what banks could do, by imposing very harmful restrictions on their activities. The situation has totally changed, but not the fact that the government is still to blame. Now we allow branch banking, we allow banks to do a lot of things that they couldn't do before. But since 1933, we have created a vast system of deposit guarantees and so have introduced a huge moral hazard problem.”— George Selgin

Economics & Markets · Strategy & Decision Making · Psychology & Behavior

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Guarantees corrupt the incentives around freedom

“The war did help end the US Depression, but not just in the way that people normally think. The common view is, well, we started finally doing fiscal stimulus and that got the spending going and that got us out of the Depression. The problem with that simple explanation is that the big boost in spending ended. Wartime spending fell back down almost to where it was in 1939 after the war ended, and that happened very quickly.”— George Selgin

Economics & Markets · Psychology & Behavior · History & Geopolitics

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WWII changed attitudes not just spending

“Keynes's advice on how the US should deal with the Depression was very sound. He was very concerned about uncertainty, regime uncertainty, and specifically with Roosevelt's tendency to attack businessmen and even pursue policies that were directly aimed at punishing them. He told him, more or less, that he ought to back off. This was not the time. Similarly, he said that the New Deal was confusing or getting priorities wrong about reform versus recovery.”— George Selgin

Strategy & Decision Making · Psychology & Behavior · Leadership & Management

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Prioritize recovery over reform in crisis

“Regime uncertainty is a huge thing because the problem is not that you anticipate a policy and anticipate its consequences, but that you just don't know what's coming. From investors' point of view, that's a huge thing because the first thing investors want to know is whether they're going to reap the benefits of their investments.”— George Selgin

Economics & Markets · Psychology & Behavior · Strategy & Decision Making

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Uncertainty blocks investment more than consumption

“There were a bunch of factors that contributed to the 1937-38 depression, and the best answer is that there were so many operative causes all coming together at once, a perfect storm of bad policies. On the monetary policy side, the Fed started doubling reserve requirements in three steps. At the same time, at the Treasury, they started sterilizing the gold inflows, preventing the inflow of gold from influencing the amount of reserves in the banking system.”— George Selgin

Economics & Markets · History & Geopolitics

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Perfect storm: simultaneous monetary and fiscal tightening

“The problem with the Austrians is that their policy recommendations were not necessarily consistent with their theories. Hayek, in theory, came around to the view that you had to maintain the level of spending, or what Keynes would call aggregate demand, in an economy, or get it back up when it has collapsed. Stabilize the product of the money stock and its velocity.”— George Selgin

Philosophy & Reasoning · Economics & Markets

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Theory-practice inconsistency driven by politics

“Roosevelt was a fiscal conservative throughout his years. At first he said, regarding big spending plans, 'What are you going to spend it all on?' He had a point. I would have favored more fiscal stimulus to the extent that they could come up with stuff to spend it on, but I would have put more emphasis on monetary policy.”— George Selgin

Economics & Markets · Strategy & Decision Making

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Fiscal stimulus limited by imagination for spending

“FDR was always looking over his shoulder at the people who might more accurately have been described as fascists and socialists, people like Huey Long and Townsend. There were all these people who were threatening to mount campaigns that might keep FDR from being reelected. It was largely in an attempt to fend off these attacks that he stole a lot of their fascist thunder. He was thinking about what was needed to get reelected.”— George Selgin

Strategy & Decision Making · History & Geopolitics · Psychology & Behavior

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Preemptive moderation to block extremist threats

“My immediate reaction to any argument from any industry that says don't allow X because it'll hurt our industry is so what? It has to be the case that the damage banks suffer somehow is going to make us worse off, even though people are benefiting from the stablecoins instead. If we could envision a stablecoin industry that gives us all everything we want that we used to get from banks, so we dispense with banks altogether, well, so what? It's like replacing horses and buggies with automobiles.”— George Selgin

Economics & Markets · Philosophy & Reasoning

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Industry complaints need externality justification

“The best way I can answer the question about central bank independence is by saying it's precisely because our central bank, the Fed, is not very independent that we need to take seriously the preservation of what little independence it does have. It's overrated because there isn't that much of it. But it's underrated to the extent that people say, 'Well, let's not worry about losing it all.”— George Selgin

Economics & Markets · History & Geopolitics · Strategy & Decision Making

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Defend limited independence because it's limited

“Countries that are very poor decided that they'd better dollarize so they don't get any poorer. I really object to large numbers of economists who when addressing questions like this, they go to their blackboard economics. What they do is they say, well, a perfectly managed central bank with a floating exchange rate can do this, that, and the other thing, and now let's compare it to dollarization. Oh my, dollarization's inferior.”— George Selgin

Philosophy & Reasoning · Economics & Markets

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Compare reality to reality not ideal to reality

“The quantity theory's basic assumption that velocity is independent of the monetary growth or is stable for whatever reason is often violated. I've never been a strict proponent of the quantity theory myself. I taught this stuff in the '80s and '90s, I presented to students some rough correlation data for M2 growth rates and rates of inflation. A chart for a bunch of countries with the usual diagonal, and they all lined up pretty well.”— George Selgin

Economics & Markets · Philosophy & Reasoning

DUR_CONTEXTUAL

Regime change broke quantity theory correlations