It’s really remarkable how more than 80 years later, Paul Krugman and the Keynesians are STILL attacking Andrew Mellon despite the fact that his liquidationist policies weren’t implemented back in 1929 and they’re not being implemented now:
When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. … It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.”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….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 already 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, of course, anathema to Mellonites, who wrongly
see it as more of the same policies that got us into this trap. And
that, in turn, tells you why liquidationism is such a destructive
doctrine: by turning our problems into a morality play of sin and
retribution, it helps condemn us to a deeper and longer slump.The bad news is that sin sells. Although the Mellonites have, as I said,
been wrong about everything, the notion of macroeconomics as morality
play has a visceral appeal that’s hard to fight. Disguise it with a bit
of political cross-dressing, and even liberals can fall for it.But they shouldn’t. Mellon was dead wrong in the 1930s, and his avatars
are dead wrong today. Unemployment, not excessive money printing, is
what ails us now — and policy should be doing more, not less.
Notice that despite the complete failure of the concept due to the stagflation of the 1970s, Krugman, ever the True Keynesian, still believes that there is some kind of meaningful tradeoff between unemployment and inflation. There isn’t. Neither printing money nor increasing credit necessarily creates any jobs.
And how is it possible for liquidationist policies to be failing today when none of the insolvent banks have been liquidated?