Jude Wanniski
October 27, 1999


From: "Bartley, Bob" <Bob.Bartley@wsj.com>
To: "'Jude Wanniski'" <jwanniski@polyconomics.com>
Subject: RE: 1929
Date: Wed, 27 Oct 1999 13:41:22 -0400

ain't what i said.

-----Original Message-----
From: Jude Wanniski [mailto:jwanniski@polyconomics.com]
Sent: Wednesday, October 27, 1999 10:02 AM
To: Bartley, Bob
Cc: ram@* * * *.edu
Subject: 1929

I see you now credit Milton Friedman with the Crash and Smoot-Hawley with helping the Depression along. Bob, you have had 22 years to check out the Friedman hypothesis. The Fed made no errors in 1929 and Friedman can only infer them. When there is a fiscal shock to the system, the demand for liquidity dries up and the Fed must withdraw the surplus or abandon the
commitment to the dollar/gold unit of account. This happened briefly in March 1929 when Smoot-Hawley passed the House easily, but with reports the bill would be killed in the Senate later in the year, the market recovered and so did the demand for liquidity -- which at the time could only be provided through the discount window. It was not yet legal for the Fed to monetize federal debt. The same conjunction of monetary and fiscal policy occurred in October. The market fell because the entire risk-structure of the national economy had been altered by the reversal of Senate opposition to the tariff. In a paper I wrote in December 1997 for my SSU class (which you continue to scrupulously ignore), I presented my findings that the Fed acted properly. When Glass-Steagall made it possible for the Fed to monetize public debt, the gold outflow was so instantaneous that the Fed had to halt the monetization. Friedman and others then argue the Fed could have monetized eligible commercial paper, but they play around with dates and numbers so you have to examine this history to realize the continued stock market decline -- because of Hoover's tax hikes -- had made commercial paper that was eligible in 1930 ineligible in 1931 and 1932. The Fed was not allowed to lend against assets that were under water.

My longstanding argument with Mundell is that he was TAUGHT that the Fed made errors in this period, but that he never did the research himself. Nor have you. If you had and found support for your position, and I could not trump you, I would have given way. As in so many areas, you stop asking questions because you are afraid of getting inconvenient answers. Am I wrong? Why else have you let 22 years go by without challenging my hypothesis? I love Mundell, Bob, and I will always love you too. You are my brothers.

If I am a constant itch, it is because I want to be proven wrong or accepted as right, so we can all move on. I understand you can only move so fast because you are piloting a big ship. I can also understand why Mundell is careless in this area. He is a theorist, not an empiricist. Like Einstein who could not pass an alegbra test but could conceive E =MCsquared, Bob often floats in the clouds of theory. Because I have to know the answers, I keep digging until I can't find any more answers. Now that he has his Nobel Prize, Bob may finally getting around to reading TWTWW, which he never did. When I met with Buchanan last week, he admitted he had not read it. The National Review lists it as one of the one hundred most influential books of the century, but many of my friends did not read it because they figured I had told them what was in it anyway.

I will dig out the 1997 paper and e-mail it to you and to Bob.

P.S. Buchanan is not anti-Semitic. Nor is Farrakhan. Me neither.