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The Australian economy and the history lesson we never learn
Gerard Jackson
Current comments about the direction of the Australian economy contain much wishful thinking, confusion and outright economic illiteracy. That the present boom is the product of another splurge of loose money seems to have completely eluded our commentators.
Questions about money supply do not appear in the media. One expects this from shabby rags like The Age and Rupert Murdoch’s Australian — but The Australian Financial Review? Economic commentary has certainly taken a sorry turn for the worse. It was bad enough in the 1980s, now it is just plain shocking.
It used to be, in those primitive days before Keynesianism took root, that any half-competent economist would have had no difficulty predicting the dismal consequences of our loose money policies. Not anymore. The fact that when monetary control is abandoned or very loosely exercised the result is usually a boom is something that our present crop of media economic commentators have forgotten, if they ever knew it.
The results are always the same booming assets, massive malinvestments (empty office blocks and malls, for example), rampant speculation, current account deficits and usually rising prices, though a low CPI is perfectly consistent with a dangerous boom. One only has to think of the Roaring Twenties. But economic thinking has reached such a low that 2 per cent inflation is now considered stable and safe.
This used to be called creeping inflation and was even defended in the 1950s by some economists, e.g., S. H. Slichter, who argued it was necessary to maintain full employment. History, however, tells a different story, which brings us to the 1980s boom fuelled by the biggest and most prolonged credit expansion in Australian history.
The same thing happened in England in the early eighteenth century when rapid credit expansion created the likes of the South Sea Bubble. When the boom finally collapsed in 1720 so did asset prices and the febrile speculation that market this event evaporated overnight.
The same thing happened when France engaged in a policy of credit expansion at about the same time as England, but with much more enthusiasm — or should I say recklessness. In 1716 France was in a very depressed economic state. John Laws, a Scottish financier advised the Government that the country’s depression was caused by an absence of effective demand. (Does this sound familiar?).
His solution: expand the money supply. So the government did. By 1720 the French economy was in disarray, the currency was worthless, speculation had been frenzied and prices had rocketed, for which, as usual, business got the blame.
The French made the same mistake again in 1790. In April of that year, the National Assembly authorised the issue of 400 million livres, in September 1,400 million and so on. By 1796 the currency was worthless, Once again the whole sorry story of cheating, lying, gross speculation etc., had repeated itself.
The economic history of the Weimar Republic is probably the most graphic example we have of the folly of inflation-fuelled growth. In 1919 the Weimar government initiated a massive ‘investment’ boom by abandoning all monetary controls. The results were spectacular. An average of 30,000 firms set up in each of the inflation years. The capital goods industries boomed, activity in the finance sector exploded and rampant speculation became the norm. By the end of 1923 the country was an economic ruin.
Economic history is economic theory’s laboratory. That so few economic commentators use it is a disgrace — that our self-appointed guardians of the free market ignore it is a scandal. Of those that do use history, only a few seem able to correctly interpret it. This is equally scandalous.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 20 June 2005