“ANATOMY OF THE CRISIS”

Although each group of circumstances that characterize a concrete economic situation is radically original and unrepeatable, from time to time it is important to fly over the critical analysis of the situation that tortures us, to contemplate the present faced with the future, with the historical perspective that past experience gives us. If regarding the sciences of nature, the economy has the disadvantage of not being able to carry out laboratory experiments, it also has the advantages (because of being a human science) of firstly being able to exploit personal introspection and secondly that of being able to study the historical constants of the unfolding of the basic characteristics of that human nature.

Leafing through the book Freedom to Choose (1980) by Milton Friedman over the last few days, I discovered that the reading of its third chapter was specially attractive today, not only because of its title “Anatomy of the Crisis”, but also because of its author and above all because of its content. The evolution of some important events of the mythical and disastrous crisis of the 30’s is analysed and reflected on, as well as the interpretation of Friedman on its causes. Reiterating beforehand the abysmal differences between that crisis and the current one, it cannot be bad to learn from what happened then to try to improve the critical situation today.

For the author it is already generally accepted doctrine that the depression was not due to a failure of the private company, but rather to a failure of the Administration and more precisely, to a bad performance of this in a field of its complete responsibility: that of coining currency, regulating its value and that of foreign currencies. The performances of the monetary authority are decisive in the solution or worsening of crises. When a greater future autonomy and independence of the Bank of Spain has just been set in motion, its responsibility in the service to the general interest will increase.

For Friedman the later performance of the Federal Reserve System reinforced the depressive effects of the crash of the Stock Exchange considerably. “Instead of increasing monetary offer quickly in a superior percentage to the current to compensate economic contraction, the “Fed” let the quantity of money diminish slowly throughout 1930.” The combined effect of the consequences of the stock exchange crisis and the slow reduction of the quantity of money during that year was a quite severe recession.

Later on, he indicates that in September of 1931, date in which Great Britain abandoned the gold standard, the reaction was to increase interest rates to an all-time high. This decision was taken to prevent the foreign possessors of dollars from reducing the systems’ gold reserves, due to the British abandonment of the gold standard. However, the domestic effect was very deflationary, creating greater problems for commercial banks and companies.

It is assumed that our monetary authority is acting correctly in our current situation and that also, our joining Europe and the European Monetary System transfers many responsibilities to the exterior, especially to the German Bundesbank, but it is important to be aware of our internal problems and to respond to them in the environment of our sovereignty. Because of that, I cannot resist transcribing the last paragraphs of that chapter: “In one aspect, the system has been totally coherent throughout its existence. It accuses external influences of all the problems that it cannot control and it becomes responsible for each and every one of the favourable events. It continues, therefore, fomenting the myth that the private economy is unstable, although its behaviour continues to document the reality that today the State is the most important source of economic uncertainty.”

 

 
 Joseph John Franch Meneu

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