The Interaction of Economists and Money Cranks in the Depression Years

by Philip Pilkington

Article of the Week from Fixing the Economists

Recently I ran a post that briefly delved into the connection between Keynes and the money cranks of the 1920s and 1930s. There I showed that Keynes’ ideas cannot be said to have been influenced in any substantial way by the money cranks. Rather they were an outgrowth of a modifying of his earlier views, put forward in his Treatise on Money and taken from the Swedish economist Knut Wicksell.

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In what follows I will draw upon an article by Robert Dimand entitled Cranks, Heretics and Macroeconomics in the 1930s. Dimand’s narrative is centered on a periodical that was started in the US in 1932 entitled Economic Forum. The goal of Economic Forum was to bring together open-minded economists and people who would otherwise be considered money cranks. Keynes was, of course, a contributor, as were the money cranks C.H. Douglas and Frederick Soddy.

It should be noted that back in England the money cranks were already getting a hearing. R.G. Hawtrey, who was then at the British Treasury, publicly debated Douglas and Lionel Robbins — hardly a progressive economic thinker — saw Douglas’ ideas as having enough validity that he devoted a major portion of his British Association address to analyse them.

Clearly the ideas of the money cranks were in the ether at the time, in both the US and in England. This is not surprising because the unemployment situation had become so bad and economists were having a desperately hard time explaining it. So, those who were attempting to explain it were met with attention by the economists — even if the latter often approached the ideas of the former with the intent of discrediting them.

All of this is important to understand because it allows us to see that Keynes was not the only one engaging with the money cranks in this era. Many economists were — including many economists who would be very unsympathetic to easy money policies and fiscal expansion. During the Depression, the money cranks became regulars on the economic circuit.

Those involved with the Economic Forum also launched clever schemes to bring mainstream economists into the fold and engage with money crank theories directly. William Trufant Foster, for example, offered a $5,000 prize to the economist who could best refute his crank book on money and profits which advocated massive public spending. Fifty professional economists responded with entries and Foster’s ideas would go on to have a major influence on the Roosevelt-appointed Federal Reserve president Marinner Eccles.

Many of the theories of the money cranks were flimsy at best, however, and some had markedly negative tendencies. C.H. Douglas’ theories of social credit were influenced by Medieval Scholastic ideas about a ‘Just Price’ and manifested a tendency to blame most of the world’s economic ills on ‘usury’. In the hands of their most famous proponent — the American fascist poet Ezra Pound — they were easily combined with virulent antisemitism and Nazi idealism.

Those like Pound — who was later diagnosed as having a narcissistic, megalomaniacal personality by psychiatrists after his mental breakdown which was precipitated by his incarceration for treason after the war — who supported the theories did not respond well to rational criticism. F.S. Flint, for example, pointed out that there were many technical flaws in the argument — most notably the theory’s inability to recognise that interest paid is also interest income received — and Pound flew into an irrational rage saying that Flint had no right to comment on matters of algebra which were far above him (i.e. Flint). Flint was, of course, a mathematician employed as a statistician by the Ministry of Labour, while Pound was a mentally unstable poet who lived a life of wandering in search of fascist ideals.

Pound became something of a propagandist for the money cranks in this era. He gave lectures in Italian under invitation by Angelo Sraffa — Pierro Sraffa’s father! Pound’s writings contain bitter vitriol against Keynes; vitriol that comes across as highly personalised and reflective of Pound’s mental instability. But one gets the distinct impression that Pound was threatened by Keynes’ embrace of reasonably similar policies at the time — the narcissism of small differences and all that.

Pound’s presence in the debates shows up two strong traits of money cranks: namely, that when errors in their theories are pointed out they ignore them and get angry with the person making them and also that they have a strong emotional attachment to the theories that borders on zealousness. This is markedly different from the discourse of real economics wherein when people disagree with each other it is generally not over the acceptance or dismissal of logical errors but over the interpretation of various aspects of theory.

For example, New Classical macroeconomists will not argue that fiscal stimulus does not lead to increased GDP by accounting identity but instead will furnish a behavioral theory that negates any impact this might have (i.e. Ricardian equivalence). This gives economic discussion a level of academic rigour that the discussions of the money cranks lack entirely. In the land of the money crank once the theory is accepted as True it cannot be revised in light of evidence, whether logical or empirical, to the contrary.

Other cranks tended to get angry because they saw professional economists as poaching their ideas. Soddy was enraged that Irving Fisher’s proposal for 100% reserve banking was identical in many respects to the one he had put forward ten years earlier. Of course, Fisher never made claims to originality and listed Soddy’s work in the bibliography along with other similar historical work — such as a proposal from 1823! Many of the money crank ideas that were embraced by economists during the Depression had been around since the time when economics as a discipline started.

The Economic Forum also carried a wide range of other authors. Many of these were prominent people working within Treasury departments in major Western powers who had schemes of their own to get the economy moving again. It also carried some work by market socialists who claimed that marginalist equilibrium economics was to be the true functional economics of advanced socialism (an historical point of interest often forgotten in contemporary left-wing critiques of marginalist economics!). By the mid-1930s, however, the periodical had been hijacked by mainstream thinkers from banks who advocated austerity together with newly emerging public relations men like Sigmund Freud’s nephew Edward Bernays.

Funnily enough, the question as to what constituted an economist at this moment in history was slippery at best. Dimand notes that Keynes had a degree in mathematics, Kahn in mathematics and physics and Harrod in the classics. It was not until after WWII, with the emergence of the neoclassical-synthesis, that economics began to become a truly formalised discipline.

But it is also clear that the likes of Keynes and Kahn were seen in the eyes of their peers as actual economists while people like Soddy (a Nobel Prize winner in chemistry) and Douglas (an army engineer) were seen as cranks. Again, I think that this has to do with the manner in which the two groups debated and discussed issues — as well as how they responded to actual logical errors in their doctrines.