Hayek, British Deflation, Keynes, DeLong, 1925-1932 and all that

Here is some of what Friedrich Hayek actually wrote and said about deflation, British economic policy 1925-1936, Keynes, etc. [More will be added later, time permitting].


“The moment there is any sign that the total income stream may actually shrink [during a post-bust deflationary crash], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.”


“The unfortunate decision taken in 1925 made a prolonged process of deflation inevitable, a process which might have been successful in maintaining the gold standard if it had been continued until a large part of the prevailing money wages had been reduced. I believe this attempt was near success when in the world crisis of 1931 England abandoned it together with the gold standard.”


“This does not mean that wee need to go through another period of unemployment as we did in the 1930s. That was due to the failure to prevent an actual shrinkage of the total demand for which there was no justification.”

Hayek discussing the deflationary British return to gold at par in 1925 as the backdrop disaster overshadowing British economic policy considerations in the period between 1925 and 1936:


“I agree with Milton Friedman that once the Crash [of 1929] had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.”


“Such a “secondary depression” caused by an induced deflation should of course be prevented by appropriate monetary counter-measures. Though I am sometimes accused of having represented the deflationary cause of the business cycles as part of the curative process, I do not think that was ever what I argued. What I did believe at one time was that a deflation might be necessary to break the developing downward rigidity of all particular wages which has of course become one of the main causes of inflation. I no longer think this is a politically possible method and we shall have to find other means to restore the flexibility of the wage structure than the present method of raising all wages excep those which must fall relatively to all others.”

[More later]

UPDATE: A helpful discussion of these issues from Richard Ebeling.

More Hayek:

“We must certainly expect the recovery to come from a revival of investment. But we want investment of the kind that will prove profitable and can be continued when a new position of fair stability and high-level employment have been achieved. Neither subsidization of investment nor artificially low interest rates [emphasis mine] is likely to achieve this position. And least of all is the desirable (i.e. sable) form of investment to be brought about by stimulating consumer demand.”

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