Thursday, April 30, 2015

Bankrupt quote

Irish econo-pundit David McWilliams before the parliamentary banking crisis inquiry --

The Irish banking crisis began in 2000, not in 2008 as is sometimes suggested. It began in 2000. The great English economist John Stuart Mill, speaking about the railway crash that happened in Ireland during the Famine, said that crashes do not destroy the wealth of a nation, they merely evidence the extent to which wealth has already been destroyed by stupid decisions taken in the boom.

Much of McWilliams' presentation to the inquiry was about the thousands of words he'd written with no apparent effect. We know the feeling. McWilliams keeps attributing that quote to JS Mill, when it's actually a paraphrase of a quote from proto-Austrian economist John Mills. But what did JS Mill say about the 1847 railway speculative crisis? --

It is not, however, universally true that the contraction of credit, characteristic of a commercial crisis, must have been preceded by an extraordinary and irrational extension of it ... This combination of a fresh demand for loans, with a curtailment of the capital disposable for them, raised the rate of interest, and made it impossible to borrow except on the very best security. Some firms, therefore, which by an improvident and unmercantile mode of conducting business had allowed their capital to become either temporarily or permanently unavailable, became unable to command that perpetual renewal of credit which had previously enabled them to struggle on. These firms stopped payment: their failure involved more or less deeply many other firms which had trusted them; and, as usual in such cases, the general distrust, commonly called a panic, began to set in, and might have produced a destruction of credit equal to that of 1825, had not circumstances which may almost be called accidental, given to a very simple measure of the government (the suspension of the Bank Charter Act of 1844) a fortunate power of allaying panic, to which, when considered in itself, it had no sort of claim.

Mill could not be clearer that he's talking about a financial crisis not caused by a prior lending boom, but instead one arising from borrowing to finance physical investment and thus prone to running out of steam when lending for some reason dries up (in this case, a need for increased credit to pay for food imports). Mill also discusses how although there was no ground for panic (because there was no lending boom), the government could prevent panic anyway by allowing the issuance of additional currency to meet the higher demand for credit.

To review, it was a different 19th century Mill talking about a different crisis, although ironically, a crisis that was handled better by the central bank than the 2008 Ireland/Euro crisis was. Nonetheless, the inquiry committee lapped it up!

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