Here we go again. Although every recession is unique in the details, this one and those the country has experienced since the 1800s have at least one fundamental underlying similarity: The boom that preceded them.
Let’s compare what is happening today to what happened during the Great Depression. In the 1920s after World War I inflating of the currency, Florida underwent a damaging real estate boom and bust cycle. Florida’s experience was so violent that one contemporary economist in 1928 called it "the Florida gamble."
When Florida land first started its upward course there were good substantial reasons for advancing prices ... [but] advancing prices drew those individuals who were speculatively inclined as molasses draws flies...
... Large building projects gave an appearance of substance and worth to the whole affair. In 1924, pessimists were nearly all united that the Florida boom must soon end. But the mass of people, than whom there are no greater gamblers, had Florida fever. ... Then the bubble broke, as they always have and always will. In the wake of the boom followed disaster, defunct banks, and depression.
Hmm. Real estate bubble. Sounds familiar.
In 1925 through 1928 as the Florida gamble unwound, the concomitant U.S. stock market boom was showing foreboding signs of euphoria. The article continues:
The [stock market] boom has not collapsed, and, from all appearances, is stronger than it has been for some time. That seeming invulnerability and capacity for unlimited progress is a market feature of all such speculative periods as they near an end. It is to be hoped that the Florida bubble will not be completely paralleled [in the stock market]. Banks all over the country have entered on a new experiment in the past few years, the practice of loaning large amounts against securities [italics added]. [Also sound familiar?] A collapse in the stock market would make thousands of banks unwilling investors, very much as the Florida banks found themselves in the real estate business after 1925. Such an experience, with the inevitable blood-letting at the hands of receivers for the least fortunate, would be a blow to our progress that would force upon the country many months of painful convalescence." [Quote from an unpublished paper, "Stock Speculation Versus Florida Memories," E.C. Harwood, 1928.]
As we now know, the Florida real estate bust of 1925 was followed by the stock market crash months after Harwood wrote this prescient article.
Hmmm. Stock market bubble. Again, sounds familiar.
Between 1800 and 2008, Americans have experienced boom and bust cycles; yet economists as a class are known for their disagreement about the cause, with two notable exceptions.
One is the Austrian school of economists, scholars like Von Mises and Hayek, to whom our attention seems to turn cyclically after every recession, but of whom we tend to lose sight as soon as we get another taste of easy credit. They've been warning about credit imbalances and poor banking practices for over a century.
A more scientific thinker, this time from among the empirical economists, is the author of the articles noted above. Through extensive study of banking statistics, Harwood concluded that markets in general, and international markets in particular, work best when unhampered; but that they can only function well when the trading medium is staid.
Like the Austrians, he concluded that fluctuating fiat currencies and/or poor banking standards are a catalyst for excessive credit creation, resulting in speculative boom/bust cycles. Using his analysis, he predicted the 1929 crash as evidenced in his articles published in The Annalist of 1928 and early and mid-1929. He also predicted the devaluation and flight from the dollar of the 1970s.
Furthermore, he maintained that the world would continue to suffer damaging speculative peaks and crashes until voters realize that it is our incompetent monetary policymakers who create them. Legislators must acquire enough humility to admit that human agents cannot micromanage the quantity of money—a failing even Milton Friedman feared—and that government’s only role should be to support the natural money-creation process through the establishment and maintenance of sound banking principles and of some form of currency measuring stick.
Both Harwood and the Austrians believe that, to date, the only such device that has succeeded for any length of time is the gold standard in one form or another. The duty of our economic wizards is to find the version of it that fits today’s parameters.
What are the chances our present or future administration will see fit to look for this solution? About zero. Expect more rides in the future.