Jan. 23 (Bloomberg) — Ben Bernanke is spooked. That's one explanation for the Federal Reserve chairman's decision to lead the Open Market Committee in yesterday's unprecedented 75-basis-point cut in the fed funds rate.

The Fed spoke of a "weakening of the economic outlook and increasing downside risks to growth," a vague phrase that reminds us that what Milton Friedman said in 1965 is still true: "We are all Keynesians now," monetary and fiscal fiddlers who think the government has a broad mandate to manage the economy.

But what Bernanke was also saying was that he fears a more general contraction of money and credit. If not outright deflation, then disinflation, a slowdown in price increases.

He and his allies note, in defense of their move, that long-term interest rates aren't high and, indeed, have generally headed down this month. That suggests that investors don't fear inflation. Still, if you look at some of the other standard measures, you don't see deflation or disinflation, or anything else that starts with "D." You see an "I" — inflation.

With deflation, borrowing becomes hard even for worthy customers. Today, even not-so-worthy customers lack mailboxes big enough to hold the solicitations from lenders.

With deflation, the price of gold and other commodities usually goes down. Before the Fed moved yesterday morning, gold was at $865 an ounce, or triple the price for an ounce in 2002. The metal is so much in demand as a cultural symbol that real estate is pretending to be gold. At least that's the conclusion one could draw from the Century 21's "gold standard" campaign. So much gold shows up in its ads that you would think they were about commemorative coins, not ranches or split-levels.

Strong Dollar?

With deflation, the currency strengthens. These days the dollar is retreating, to put it kindly. Shorting the dollar is so hot that every fool and his brother is clicking on "prudentbear.com," a fund that claims it can help investors protect against a weakening greenback.

Bernanke knows the difference because he spent so many years describing the great deflation that was the Great Depression. Then, as Bernanke noted in a 2002 speech, prices dropped an average of 10 percent a year — for four years in a row.

For farmers, such declines came on top of commodity-price drops that had persisted through the otherwise prosperous 1920s. The building where Bernanke now sits is named after Marriner Eccles, a Utahan who himself blocked an early 1930s run on a family bank in Ogden by ordering the tellers to count the cash for customers slowly, and to "smile, be pleasant, show no signs of panic."

Play Money

Towns resorted to mimeographing their own monopoly money, local scrip, to trade. But local courage alone couldn't overcome a monetary shortage.

In his essays, some of the greatest in his field, Bernanke painfully describes the housing market of 1933. It was so far from Century 21 and condo flipping as to be another world. Half of all farms were late on payments. One in five owners in major cities was in default on payment of interest or principal, and in places such as Cleveland, Indianapolis and Birmingham, Alabama, half or more of families were in danger of losing their homes.

Bernanke has pointed out that governments often mislabel other problems as deflation. In the same 2002 speech where he talked about the Depression's price decreases, he noted that Japan's troubles in the 1990s were in part due to the country's unwillingness to reform its banking and financial industries.

The focus, however, is a shame, for the 1930s comparison isn't the only relevant one. Some of my blogging colleagues have been debating whether 2008 is more like 1971 than 1929. The argument for the '71 analogy is strong. In the summer of 1971, unemployment was in the high 5s and low 6s, something like today.

Prices were suggesting inflation, and the U.S. was struggling with its monetary links to a big foreign power — Europe.

Volcker to Rescue

President Richard M. Nixon lived up to the famous statement about us all being Keynesians, not on the monetary side, where he broke apart Keynes's own gold-exchange system, but on the fiscal side, where he ordered short-term measures that yielded the stagflationary '70s.

Trouble ended only when Paul Volcker had the courage to push up interest rates and squeeze inflation out of the economy.

Today, Senator Hillary Clinton, or George W. Bush's administration for that matter, can talk about how "the middle class is stalled," and express concern for those seeking homes. But "stalled" only describes a small group. Half a year into the credit crisis, a good share of Americans are still customizing their mortgages, like someone placing a latte order at Starbucks.

You Want 'Stalled'?

"Stalled" isn't something we have experienced. "Stalled" is what heads of households were in January 1982, when they went into a bank and learned the fixed rate for a 30-year mortgage was about 17.5 percent.

Anyone who talks about the end of the housing dream may want to reacquaint himself with the story of Tall Paul. That many adults have no financial memory of that period or the Nixon-Lyndon Johnson years before that may be the best explanation for the mysteriously low long-term rates of today.

So our national problem may be that we remember the 1970s too little and the Depression too well. The country will live with the consequences, good or less good. In any case, one thing is true: We are all Bernankes now.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

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