Such radical action by central banks – quantitative easing (QE) – has its critics on the right and left. Just as striking is that many prominent economists and economic historians have rallied in support of QE in responding to the threat of economic crisis. Their remarkable certainty reveals a story about how our understanding of present crises came to be dominated by lessons drawn from past crises, and in particular the Great Depression in the 1930s and its interpretation by economists, Milton Friedman and Anna Schwartz, in their 1963 book, A Monetary History of the United States. At the start of the COVID-19 pandemic in March 2020, US Federal Reserve System governor Jerome Powell made an extraordinary declaration: “We’re not going to run out of ammunition.” The central bank stood ready to take any action necessary to stem the mounting economic crisis. Three months later, the Fed injected nearly USD 3 trillion dollars of liquidity into the US economy.
Friedman and Schwartz claimed that the Federal Reserve System was responsible for turning an ordinary economic downturn into the Great Depression. When a massive financial crisis led to a sharp decline in the stock of money in the US economy, the Fed failed to take action to mitigate the problem. In 2011, the European Central Bank made EUR 171 billion out of nowhere. Just like we’re doing. Only bigger … ‘Liquidity injections,’ they called it. I’m making a liquidity injection, but not for the banks. I’m making it here, in the real economy.
That flood of liquidity into capitalism’s financial system is remarkable in historical perspective, surpassing all previous records for monetary interventions, outside of wartime, since the beginning of the 20th century. It defines our economic reality to such an extent that the fictional story of a mysterious “Professor”, who meticulously plans a raid on the Royal Mint of Spain to print billions of euros, became the basis for the wildly popular television series, La Casa de Papel. As the Professor explained: The Professor made these remarks long before central banks responded to the coronavirus crisis with an even greater flood of liquidity.
The US Federal Reserve Board Building.
Steve Heap/Shutterstock By the end of the 20th century, their interpretation of the Great Depression had become sufficiently dominant in economics and economic history to qualify as the orthodoxy. When the global financial crisis struck in 2008, the Federal Reserve System proposed aggressive policies of monetary expansion to avoid its supposed mistakes during the Great Depression.
The onset of the Great Depression coincided with “a golden age” of theoretical and empirical research on business cycles and crises. Although they did not agree on the causes of cycles, economists tended to look for explanations of the recurrent fluctuations in economic activity in the internal dynamics of the economic system. This emphasis is readily apparent in the work of Wesley Clair Mitchell, an American economist in the early 20th century who was the foremost global authority on business cycles. Historical analysis as economic heresy
The depth and persistence of the Depression, especially in the country that seemed to embody capitalism in its most sophisticated form, reinforced the importance of understanding fluctuations in economic activity. A novel perspective proposed by John Maynard Keynes attracted particular attention: Keynes looked to the internal dynamics of the economic system for the roots of cycles, echoing other economists’ scepticism about its capacity for self-adjustment, but identified a significant new role for government in ensuring economic stability. To Mitchell, it was the “precarious dependence” of material wellbeing on an economy organised for profit-seeking that generated business cycles: “Where money economy dominates, natural resources are not developed, mechanical equipment is not provided, industrial skill is not exercised, unless conditions are such as to promise a money profit to those who direct production.” He looked to the dynamics of enterprises’ profit-making to explain the recurrent phases of business activity and how they “grow out of and grow into each other” in a process of cumulative change. Mitchell began his career as a monetary economist at the University of Chicago where he met Thorstein Veblen and was inspired by the unconventional economist’s criticisms of orthodox economic theory and, in particular, its neglect of the process of “evolutionary” economic change.
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