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The 'Stabilationists', the Great Depression and a Preview of Today's (Purported) Economic Ideal of 2% Inflation


In terms of getting such important things wrong and thus laying the groundwork for enormous economic calamities, the ideas advanced by the “stabilationists” in the 1920s could take the proverbial “Pepsi Challenge” with any of the other economic ideas later championed by the Fed’s Alan Greenspan or Ben Bernanke.  The stabilationists believed that in an ideal economy, prices remained stable or constant.  By simply applying common sense an individual should be able to dismiss as pure folly the idea of anything remaining static – particularly prices for goods – in a dynamic economy where things constantly change.  In this article, and some to follow, the enormous role the stabilationists played in causing the Great Depression, and the similarity stabilationist doctrine has with today’s equally bogus notion that 2% inflation is some sort of economic ideal will be discussed. 

The great Murray Rothbard traces the modern stabilationist doctrine to 1911 with Irving Fisher’s “stable money” movement in the United States.  In numerous writings Fisher called for a “compensated dollar” or a “commodity dollar.”  According to Fisher, the value of a dollar should be held fixed against a basket of commodity goods. (1)

Irving Fisher was the first person to earn a PhD. in economics from Yale and was one of the leading economic lights during the period between the two world wars.  In October 1929, Fisher would famously claim stocks had reached a “permanently high plateau.”  In a little over one week the great stock market crash would begin.  Unlike the elites of today who are sheltered from the consequences of their ignorance and folly by the Federal Reserve, Fisher endured considerable personal suffering as a result of his many mistakes and the inaccuracies of his economic theories.  According to his son he had complete confidence in the “new economy era” of the 1920s and did not notice the faulty financial structure of credit expansion by the Fed it was built on.  From 1929-33 Fisher lost a huge fortune estimated as high as $10-million and was left in nearly $750,000 debt to a relative. (2)

Fisher organized the Stable Money League in May 1921.  At the time the economy was in a severe recession that followed all the inflation induced by World War I.  Unlike the later recession that became the Great Depression, there was no massive interference with the economy by either the Federal Reserve or the government in the recession of 1920-1921.  As a result the recession of 1920 – 1921 – which many people consider a depression in its own right –while being very steep, didn’t last very long.  However, the experience with sharply falling prices, particularly the prices of agricultural commodities – and the impact these lower prices had on farmers – did put a lot of wind, behind the sails of the stable money league.

At its heart, the doctrine of the stabilationists was one of active intervention in the economy to maintain a constant value for the dollar and constant prices for goods.  There is no doubt that of all the bogus ideas promulgated by modern economists, the idea that prices can be held constant in a dynamic economy is one of the silliest.  However, implicit in the stabilationists’ doctrine was vastly more power for governments and central banks.  The ideas of increased power is always the siren’s song to government officials and many in congress eagerly sought to advance the cause of price stabilization – none more so  than James Strong (R-KS). 

All the congressional and central banking star power aligning itself behind the merits of a constant price level notwithstanding, the entire concept is asinine.  Prices – and profits – provide an invaluable function in an economy.  Writing in the early 1930s – when stabilationist doctrine of constant prices lay in the smoking rubble of the Great Depression this doctrine did much to cause – the great Ludwig von Mises compared the old-fashioned gold standard with the modern theory of constant prices;

“The gold standard is certainly not a perfect or ideal standard.  There is no such thing as perfection in human things.  But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard.  The purchasing power of gold is not stable.  But the very notion of stability and unchangeability of purchasing power are absurd.  In a living and changing world there cannot be any such thing as stability of purchasing power…In fact, the adversaries of the gold standard do not want to make money’s purchasing power stable.  They want rather to give the governments the power to manipulate purchasing power without being hindered by an “external” factor, namely, the money relation of the gold standard.” (3)

It is utterly amazing that so many leading economists were blind to the obvious truth that “unchangeability of purchasing power” was absurd economics.  At those times when prices for a good go up, producers of that good will attempt to increase their production to take advantage of the higher prices.  On the other hand, consumers of the now higher-priced good seek out substitutes for this good, or at least attempt to reduce their consumption of it.  Prices and profits can be likened to a traffic cop in the midst of a traffic snarled city intersection.  Prices and profits direct scarce, limited economic resources to where their economic returns are highest and guarantee the most optimum production of goods in an economy.  A simple example that will show the valuable role played by prices (and profits) that will make sense to anyone is the price of beef. 

The only assumption this example requires is that the price of beef rises for some reason other than a disastrous calamity that wipes out cattle herds in the US and the world.  If the price of beef rises in the US, then ranchers will attempt to increase their production of beef.  Even though it can take a considerable amount of time to raise livestock, production can still increase in a fairly short period of time.  Animals that might otherwise not be considered mature enough for slaughter may be, and ranchers may decide to cull their herds to a greater extent than they have in the past to take advantage of the higher prices.  Ranchers in other countries – Argentina for example –may notice the increased price for beef in the U.S. and increase their exports to the US.  Over the longer term, ranchers that raise pork or poultry may switch to the production of beef.  In a myriad of ways, the higher prices for beef will tend to increase the production of beef. 

However, the higher prices for beef will force some consumers to reduce their consumption of beef.  These marginal consumers are the first group of consumers to be effected by the higher prices.  They can no longer afford to purchase as much beef as they used to.  They will be forced to reduce their consumption of beef and substitute it with other types of food – pork, poultry, seafood or even tofu.  (The author runs the serious risk of being deported from the great state of Texas for claiming that tofu is a substitute – even under the most dire circumstances - for beef!) 

The combination of increased production of beef along with lower consumption by consumers will tend to arrest the rise in prices for beef.  In time – and left to its own devices – the market will return to equilibrium.  The historical record on this issue is clear.  When left to operate on their own - free of interference by even well-meaning government bureaucracies and central bankers drunk with unbridled power - prices and profits allow the economy to develop a state of balance that is able to satisfy the maximum amount of demand within the constraints of land, labor and capital that any economy must work with.  Moreover this “balanced” condition provided by the free market always results in both higher levels of production and higher standards of living than government interference in the economy could ever dream of producing.

The stabilationists – by seeking out constant prices for commodities as their goal – would shunt the invaluable communication signals provided by prices.  If the price of beef remained constant, then how would ranchers know to increase their production?  How would consumers know that beef is becomingly increasingly less available and they need to switch their consumption to other goods that are in more abundant supply?  Without the information provided by the pricing mechanism, it is easy to picture hordes of consumers lining up in queues, hours before a store opens to get their hands on the limited amount of beef that is available at some artificially low price that is not reacting to an increasing scarcity of beef.  A perfect example of just such a scenario was of course provided by the Soviet Union.  This will be discussed next.    

Peter Schmidt
Sugar Land, TX
July 7, 2019

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(1) Hans von Sennholz, The Age of Inflation, Western Islands, Boston, 1979, p. 44

(2) Sennholz, The Age of Inflation, p. 43

(3) Ludwig von Mises, Human Action, Liberty Fund, Indianapolis, 1990, p. 473