Elihu Root and the Federal Reserve

Senator Elihu Root (1845 – 1937) in his prescient understanding of central banking and easy credit:

“Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community. . . . Bankers are not free from it. They are human. The members of the Federal Reserve board will not be free of it. They are human. . . . Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.”

Who knows if he had heard of the Austrian Business Cycle Theory, but for someone speaking during the creation of the current US central bank, he had a clear vision of what would happen in 2008. This reference was made known to me by a good speech from Thomas Woods.

Interview with Israel Kirzner at Mises.org

Thank you Jake for helping me find this. The interview makes some very solid points about Austrian economics and its relation to other schools of economic thought.

On Keynesian economics:

I have never really seen myself as a macroeconomist. Of course I've taught macro for many years, yet I felt I never understood Keynesian economics. It assumes that decision making doesn't matter. All that matters are the relationships between totals. While I often pointed out what seemed to me gaping holes, I had no great desire to counter this with a separate macroeconomic theory of some sort.

On the Austrian Business Cycle Theory:

...it's one thing to develop a theory which could explain a downturn. It's quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no.

On human action:

The fundamental Misesian insight into human action is that it involves a tendency to be right rather than to be wrong. People have an interest in being right. They do not have an interest in being wrong. This definitely, distinctively weights the tendency of human action in the direction of being right.

Each of these points is incredibly interesting in its own right. I think they speak for themselves, but I would like to add to the third point.

If people generally have more of an interest in being right, or getting something right, then in the long run we will all be better off economically. In trading it is often said that when you're losing money the market is trying to tell you that you're wrong. Every person has a different threshold of pain, but once that point is reached people adjust and strive to be right.