A Replay: 1924-29 and 1994-99

March 24, 2000

I am sending you a link to an article on U.S. credit expansion prior to the Great Depression.  It was written by Sean Corrigan.


Corrigan compares what has happened in the U.S. since 1994 with what took place in the U.S., 1924-29.  He makes use of the writings of B. M. Anderson, author of the classic study, ECONOMICS AND THE PUBLIC WELFARE.  Anderson wrote for the CHASE ECONOMIC BULLETIN.  He was chief economist for Chase Manhattan from 1927-37.  Percy Greaves (d. 1985), a disciple of Ludwig von Mises, owned a complete set, and he told me that Anderson’s articles were important commentaries on the finances of the era.  Late in his career, Anderson taught business at UCLA.  My father took a class from him in the late 1930’s, but told me that he remembers nothing about it.  He freely admits that he was not too interested in anything academic other than ROTC.

Anderson held the Austrian theory of the trade cycle, which Mises pioneered in his 1912 book, THE THEORY OF MONEY AND CREDIT.  Mises believed that an expansion of central bank credit would create an economic boom, which would be followed by a bust.  The increase in credit would create malinvestments that would be exposed as losers when the supply of credit was stabilized, allowing interest rates to rise.  The credit expansion that began in 1924, Anderson said, went into the financial markets.  It was not reflected in higher consumer prices, other than real estate.

Corrigan traces the movement of bank credit since 1994 into these same markets.  He sees a parallel.  Especially ominous is a report from the FDIC REGIONAL REVIEW (4th Quarter, 1999).  (The FDIC insures U.S. bank deposits.)  It speaks of the deteriorating quality of bank loans.  It concludes that “the currently strong economic outlook may be subject to sudden deterioration in the event of market shocks that sharply raise interest rates or lower stock prices.”

Corrigan quotes Anderson to the effect that by continuing to expand credit, the Federal Reserve made the subsequent financial crisis that much worse.  This is what concerns him today.

Greenspan is trying to engineer a soft landing by raising rates a quarter point at a time.  The stock market shrugs off these moves as meaningless.  But Greenspan has made it clear that he intends to call a halt to what he regards as a malinvested stock market.  He is doing his best to avoid a financial panic.  The trouble is, the FED’s actions seem marginal.  Investors are ignoring these rate hikes.

If Mises and Anderson were correct, there will not be a soft landing.  When pricked, bubbles do not deflate slowly.  All those people who are rushing into stocks at the end of the longest economic boom in U.S. history will not be able to sell at the top and move into money-market funds.

Someone has said that the second most pleasurable experience is being out of a market that is falling.  It more than offsets the uncomfortable feeling of being out of a rising market.