Mellonism is alive and well and just as wrong as in the '30s
Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn't repeat the mistakes of the 1930s, would we?
How naive we were. It turns out the urge to purge - the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering - is as strong as ever. Mellonism is everywhere these days. Turn on CNBC or read an op-ed page, and you're likely to encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil.
The fact is these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. Remember how federal deficits were supposed to cause soaring interest rates? Never mind: after four years of such warnings, rates remain near historic lows - just as Keynesians predicted. Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 per cent.
But the Mellonites just keep coming. The latest example is David Stockman, Ronald Reagan's first budget director, who has just published a mammoth screed titled The Great Deformation.
His book doesn't have much new to say. Although Stockman's willingness to criticise some Republicans and praise some Democrats has garnered him a reputation as an iconoclast, his analysis is pretty much standard "liquidationism", with a strong goldbug streak.
We've been doomed to disaster, he asserts, ever since FDR took us off the gold standard and introduced deposit insurance. Everything since has been a series of "sprees": spending sprees, consumption sprees, debt sprees, and above, all money-printing sprees. So what should we be doing? By all means, let's restore the kind of effective financial regulation that, in the years before the Reagan revolution, helped deter excessive leverage. But that's about preventing the next crisis. To deal with the crisis that's here, we need monetary and fiscal stimulus, to induce those who aren't too deeply indebted to spend more while the debtors are cutting back.
But that prescription is anathema to Mellonites, who wrongly see it as more of the same policies that got us into this trap. Unemployment, not excessive money printing, is what ails us now - and policy should be doing more, not less.
Frequently Asked Questions about this Article…
Mellonism, or liquidationism, is the idea—associated with Andrew Mellon and others—that economic downturns should be allowed to "purge" weak firms, workers and assets rather than being countered by government action. The article argues this mindset remains common today: commentators still denounce deficits and stimulus and call for austerity, repeating the same "urge to purge" that critics advocated during the Great Depression.
No. The article notes that repeated warnings that federal deficits would push interest rates sharply higher have not come to pass — after several years of such alarms, interest rates have remained near historic lows, which is precisely what Keynesian economists predicted.
According to the article, it does not necessarily. It points out that since the recession began the Fed has more than tripled the size of its balance sheet, yet inflation has averaged less than 2 percent over that period, undercutting claims that ‘money printing’ automatically produces high inflation.
David Stockman, Ronald Reagan's first budget director, wrote The Great Deformation. The article describes his book as a large critique that largely recycles liquidationist ideas with a strong goldbug streak: he argues the economy was damaged when FDR left the gold standard and introduced deposit insurance and calls subsequent decades a series of spending and money‑printing 'sprees.'
Keynesians recommend monetary and fiscal stimulus to support spending while heavily indebted households cut back. The article contends Keynesians have been mostly right during the crisis — for example, they anticipated that deficits and central‑bank balance‑sheet expansion would not necessarily trigger runaway rates or inflation.
The article argues that the immediate problem is high unemployment, not excessive money creation. Therefore, policy should focus on measures that reduce joblessness — including stimulus — rather than prioritising austerity or purging the economy, which is the Mellonite approach.
The article agrees that restoring effective financial regulation to deter excessive leverage is a sensible step to prevent future crises. However, it also stresses that better regulation alone won't resolve the current downturn — monetary and fiscal stimulus are needed to address the present slump and unemployment.
The article suggests everyday investors should be sceptical of alarmist doomsaying: many commentators predicting soaring rates or runaway inflation have been wrong at every stage of the crisis. Instead, look at the evidence in rates, inflation and policy actions — the author argues the case for stimulus to tackle unemployment has been stronger than claims that deficits or central‑bank action would wreck the economy.
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