9. (2013 June) After the Crash

Designing a Depression-Free Economy

By Mason Gaffney; edited by Clifford Cobb

Since the collapse of major lending institutions in 2008,  pundits have offered various ad hoc explanations of the economic crisis.  They point to specific factors that preceded the rapid decline in housing prices and the instability of the financial sector, and claim they have found the cause of the crash.  Lacking any sense of history, they treat every aberration in the economy as an isolated incident.  As Mason Gaffney shows in this book, however, the crisis was predictable because it was caused by factors that have caused previous economic failures.   Drawing upon Henry George’s diagnosis of periodic contractions in market economies based on land speculation, Gaffney goes a step beyond George and offers a more general explanation of the mechanism that causes economic crises.  The central figure in his story is the rate of turnover of capital.  Rapid turnover of capital promotes a healthy, full employment economy.  By contrast, sluggish turnover leads to a decline of liquidity and flexibility in an economy, with the end result being a condition in which short-term lending virtually comes to a standstill, and the economy freezes.  Since land does not depreciate and thus never turns over, channeling investments into rising land prices is the single biggest factor in creating the conditions for economic failure.  Thus, land value taxation is an important ingredient in maintaining macro-economic health.  But the principle applies more broadly to various forms of capital as well.  Gaffney shows why the most important banking reform involves policies that would restore the “real bills doctrine,” the idea that lending should be limited to short-term projects that will not tie up capital for long periods.  Gaffney criticizes the chimera of a 100% reserve requirement and similar plans to turn banking into a public enterprise.  What is needed is a policy that allows the market to regulate the money supply automatically, not another potential source of failure by direct management.  Thus Gaffney advises reformers to keep their eyes on the two most relevant variables in economic health: the price of land and the liquidity of the banking system.

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