If We Seek Recovery, Emancipate Prices

The ultimate effect of shielding men from the effects of folly is to fill the world with fools. - Herbert Spencer

At one time in America, long, long ago, failure was not rewarded nor was it punished; it was simply allowed to happen. Andrew Mellon, the long tenured Secretary of the Treasury under Harding, Coolidge, and Hoover, gave some sage advice in the Great Depression's early stages. "Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate...it will purge the rottenness out of the system. High costs of living and high living will come down. Values will be adjusted, and enterprising people will pick up from less competent people." He was ignored, and the depression turned great.

Mr. Mellon would likely be appalled at the Federal Reserve's response to our current economic downturn, at its refusal to allow prices to adjust, all to fight a beast called "deflation". Deflation, properly defined, is a reduction in the money supply, an event that triggers a widespread fall in prices. Falling prices are what bring the components of a moribund economy back into harmony, it allows demand and supply to meet at their proper levels, and it is a positive benefit to savers. Savings, accumulated capital, is the backbone of all economic growth.