Stimulating Ourselves to Death
Veronique de Rugy's "Stimulating Ourselves to Death" (April) successfully attacks the conventional explanation of the Depression itself and its cure. When I first learned economics, in the early 1930s at the University of Chicago, i learned a different explanation, mainly associated with economist Henry Simons, that I found persuasive and continue to believe.
This approach begins by recognizing that our banks are rather dangerous institutions. They lend out most of the money deposited with them. Thus they have a large debt in the form of demand deposits. Their assets are mainly investments in bonds, stocks, and mortgages. They keep only enough cash on hand to permit them to pay out their daily anticipated cash withdrawals by their depositors. The rest is invested in various interest-bearing securities.
The banks' income, used to pay interest on their bonds and other expenses, including the salaries of their officials, is the return on their investments, many of which are short-term loans. If too many depositors want their money at the same time, or if many of their investments fail simultaneously, they are in trouble.
If it is just the depositors in one bank, they can simply sell some of their investments to other banks. Such losses of confidence, however, are apt to be contagious. Simons' remedy was for the government to buy sound bonds, particularly its own bonds, with newly printed money.
The result is that banks have enough money on hand to feel secure, and the government holds a lot of bonds and other securities. When the crisis in confidence is over, the government can simply trade its excess holdings of bonds for cash, thus reducing the money supply to its desired level.
The whole thing does not cost the government any money in net and leaves the money supply where it was. With prices not being depressed, and plenty of money available for investment by banks, there is no reason for a continuing depression.
All of this seems simple, much simpler than the remedies discussed by de Rugy. Unfortunately, the Simons approach has never been given a fair trial. I suggest we give it one.
Retired Distinguished Professor of Law and Economics
George Mason University
The Liberaltarian Jackalope
As a subscriper to reason and a liberaltarian, I was surprised to see Matt Welch's distaste for President Barack Obama in "The Liberaltarian Jackalope" (April). I don't know about you, but I'm still celebrating! I cheered when Obama ordered an end to Guantanamo, a pull-out from Iraq, an end to no-bid cost-plus contracting, and greater transparency in government spending—and i think libertarians should still be cheering right along with me.
Veronique de Rugy has debunked the myth that Democrats are the party of big-government spenders and regulators. She diagrammed how George W. Bush outspent and out-regulated them all. Now that the election is over, everyone in the conservative corner—and apparently in the libertarian corner—wants to recast Obama as the champion of big-government spending. Why don't we objectively re-evaluate this myth and see him for the responsible and much-needed centrist that he is? John McCain would be spending no less had he won this election.
It sickens me the way Democrats and Republicans tear the political center apart by casting the other side's every action as extremist. Libertarian apsersions on whichever side happens to be in office don't help. I oppose protectionism and tax breaks for big oil. Now is a ripe opportunity for libertarians to seize the political center.
Correction: In "The Politics of Superheroes" (May), writer Sonny Bunch's name was misspelled.