A Weekly Dose of Hazlitt: Why Cheap Money Fails

Why Cheap Money Fails” is the title of Henry Hazlitt’s Newsweek column from November 24, 1958. Here, Hazlitt shows that lowering interest rates in the 1930s did not end mass unemployment and that despite higher interest rates in the 1950s, unemployment remained low. The lessons for today should be obvious.

The late Lord Keynes preached two great remedies for
unemployment. One was deficit financing. The other
was artificially cheap money brought about by central
bank policy. Both alleged remedies have since been
assiduously pursued by nearly all governments, and are
still being assiduously pursued by our own. The result
has been worldwide inflation and a constantly shrinking
purchasing power of monetary units. But the success in
curing unemployment has been much more doubtful.

In Newsweek April 28 I published a table comparing
the deficits and unemployment for the ten years from
1931 through 1940. The average annual deficit in this
ten-year period was $2.8 billion (equivalent to nearly
$16 billion today as a comparable percentage of national
income), yet unemployment then averaged nearly 10
million, or 18.6 percent of the total working force.

Does cheap money have any better record as a cure
for unemployment? Here is a table covering the twelve
years from 1929 through 1940 inclusive, comparing the
average annual rate of prime commercial paper maturing
in four to six months with the percentage of unemployment
in the same year. Both sets of figures are from
official sources.

Year|Commercial Paper Rate|Percentage of Unemployment
1929 5.85% 3.2%
1930 3.59 8.7
1931 2.64 15.9
1932 2.73 23.6
1933 1.73 24.9
1934 1.02 21.7
1935 .75 20.1
1936 .75 16.9
1937 .94 14.3
1938 .81 19.0
1939 .59 17.2
1940 .56 14.6

In sum, over this period of a dozen years low interest
rates did not eliminate unemployment. On the contrary,
unemployment actually increased in years when
interest rates went down. Even in the seven-year period
from 1934 through 1940, when the cheap-money policy
was pushed to an average infra-low rate below 1
percent (.77 of 1 percent), an average of more than
seventeen in every hundred persons in the labor force
were unemployed.

Let us skip over the war years when war demands,
massive deficits, and massive inflation combined to
bring overemployment, and take up the record again
for the last ten years:

Year|Commercial Paper Rate|Percentage of Unemployment
1949 1.49% 5.5%
1950 1.45 5.0
1951 2.16 3.0
1952 2.33 2.7
1953 2.52 2.5
1954 1.58 5.0
1955 2.18 4.0
1956 3.31 3.8
1957 3.81 *4.3
1958 (July) 1.50 *7.3

It will be noticed that though the commercial paper
interest rate in this period averaged 2.23 percent, or
three times as high as that in the seven years from 1934
through 1940, the rate of unemployment was not higher,
but much lower, averaging only 4.3 percent compared
with 17.7 percent in the 1934–40 period.

And within this second period itself the relationship
of unemployment to interest rates is almost the
exact opposite of that suggested by Keynesian theory.
In 1949, 1950, 1954, and July of 1958, when the commercial
paper interest rate averaged about 1. percent,
unemployment averaged 5 percent and over. In 1956
and 1957, when commercial paper rates were at their
highest average level of the period at 3.56 percent,
unemployment averaged only 4 percent of the working

In brief, neither deficit spending nor cheap-money
policies are enough by themselves to eliminate even
prolonged mass unemployment, let alone to prevent
unemployment altogether.

The only real cure for unemployment is precisely
the one that the Keynesians and inflationists reject—
the adjustment of wage rates to the marginal labor
productivity or “equilibrium” level—the balance and
coordination of wages and prices. When wage rates
are in equilibrium with prices, there will tend to be
full employment regardless of whether interest rates
are “high” or “low.” But regardless of how low interest
rates are pushed, there will be unemployment if wage
rates are too high to permit workable profit margins.

*Unemployment percentages before 1957 are
based on Department of Commerce “old definitions”
of unemployment; for 1957 and 1958 they are based
on the “new definitions,” which make unemployment
slightly higher—4.2 percent of the labor force in 1956,
for example, instead of the 3.8 percent in the table.

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