Stimulating ourselves to death.

• Author: Tullock, Gordon
• Position: Letters - Letter to the editor

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Veronique de Rugy's "Stimulating Ourselves to Death" (April) successfully attacks the conventional explanation of the Depression itself and its cure. When I first learned economics, in the early 1930s at the University of Chicago, I learned a different explanation, mainly associated with economist Henry Simons, that I found persuasive and continue to believe.

This approach begins by recognizing that our banks are rather dangerous institutions. They lend out most of the money deposited with them. Thus they have a large debt in the form of demand deposits. Their assets are mainly investments in bonds, stocks, and mortgages. They keep only enough cash on hand to permit them to pay out their daily anticipated cash withdrawals by their depositors. The rest is invested in various interest-bearing securities.

The banks' income, used to pay interest on their bonds and other expenses, including the salaries of their officials, is the return on their investments, many of which are short-term loans. If too many depositors want their money at the same time, or if many of their investments fail simultaneously, they are in trouble.

If it is just the depositors in one bank, they can simply sell some of their investments to other banks. Such losses of confidence, however, are apt to be...