Arnold Kling  

Depression Economics

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All Depression, All the Time... I Get Noticed...

My latest essay says,


most of the ignorance that plagued policymakers during the 1930's was conceptual. They did not understand the difference between lost resources and under-utilized resources. They did not understand the relationship between financial markets and markets for goods and services. And they did not understand the issue of deflation.

...the New Deal consisted of a mixture of business-bashing, pain-sharing, and attempted central planning. By today's standards, the results were abysmal. Even relative to what was known at the time, it was shockingly misguided and counterproductive.


Several of the economists interviewed in Randall Parker's book discuss the issue of what economists and policymakers were thinking during the 1930's. One theme is that monetary doctrines, such as the gold standard and the real bills doctrine, condoned what Milton Friedman and Anna Schwartz famously called "the great contraction" of the money supply.


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CATEGORIES: Economic History



COMMENTS (6 to date)
Floccina writes:

Arnold could you contrast FDR's approach to the depression with Martin Van Buren's approach to the depression in his era.

Murray Rothbard argues that if FDR just refused to act or acted to decrease Government's economic activities (as Martin Van Buren did) that prices things would have crashed quickly and then liquidated quickly and then ramped up again quickly with everything including labor at now at lower prices reflecting the contraction in the money supply. Seeing that the Federal Reserve had failed to prevent what it was created to prevent cutting Government's economic activities (specifically eliminating the Federal Reserve) would have seemed to be reasonable reaction.

Floccina writes:

BTW here is a link to an article by an austrian economist about Martin Van Buren:

http://www.mises.org/story/2201

Floccina writes:

Sorry for the multiple posts but here in except the article about Martin Van Buren

(http://www.mises.org/story/2201)

“Many economists have been struck by the comparison between this second episode, the deflation of 1839 — 1843, and the subsequent Great Depression of 1929 — 1933. Qualifying as the two most massive monetary contractions in American history, they were of identical magnitude and extended over the same length of time. But there the similarities end. During the Great Depression, as unemployment peaked at 25 percent of the labor force in 1933, US production of goods and services collapsed by 30 percent. During the earlier nineteenth-century contraction, investment fell, but amazingly the economy's total output did not. Quite the opposite; it actually rose between 6 percent and 16 percent. This was nearly a full-employment deflation. Nor are economists at any loss to account for this widely disparate performance. The American economy of the 1930s was characterized by prices, especially wages, that were rigid downward, whereas in the 1840s, prices could fall fast and far enough to quickly restore market equilibrium.[31]

Many economists have been struck by the comparison between the deflation of 1839 — 1843, and the Great Depression.

The two most massive monetary contractions in American history, they were of identical magnitude and extended over the same length of time. But there the similarities end.

But why were prices and wages so much more flexible when Van Buren was at the helm? The fact that the Great Depression, America's deepest and longest economic downturn, was also the first to be met with a comprehensive program of federal intervention offers some hint. Intervention commenced, furthermore, not with the well-known New Deal of President Franklin D. Roosevelt, who did not enter office until early 1933 when the economy was almost at rock bottom, but with his predecessor; Herbert C. Hoover. This progressive Republican's long tenure during the 1920s as secretary of commerce, promoting trade associations, product standardization, and business cartels, prepared him to meet the stock-market crash of October 1929 with a vigorous effort to stop any fall of prices. Starting with a series of White House conferences jawboning business leaders into "voluntarily" holding up wage rates, Hoover pressed with mixed results for further cartelization in agriculture, in the cotton textile industry, in commercial aviation, and in the energy industries — coal, oil, and electricity. He also signed into law in 1932 the largest peacetime tax increase in US history, and practically closed the borders to foreign trade with the Smoot-Hawley Tariff of 1930, the highest in American history in an effort to hold up prices internationally. Roosevelt's National Recovery Administration and Agricultural Adjustment Administration simply made this concerted campaign for price supports more formal.[32] Prices did indeed still drop by 31 percent from 1929 to 1933, but not nearly as much as during the deflation of the 1830s and 1840s. Although government policies may not explain fully the price rigidity of the 1930s, they explain a lot.”

TGGP writes:

Rather than Van Buren, I would suggest Harding as a better example because it was less distant in time so the circumstances were more similar. He inherited a Depression from Wilson that was more severe than the Great Depression but only lasted a year. His solution was to remove the "shackles" he said were on business. It worked. Yet he is remembered as possibly our worst president and FDR as one of the best. Maybe Harding needed to have gotten us into a big war like the other "greats".

David Z writes:

Thanks, J.M. Keynes!

spencer writes:

Earlier you talked about how expensive this book is --$125.

I had my local library order it through interlibrary loan this afternoon.

They said their were only 14 copies in the entire system -- all at major university libraries.

It sure looks like someone really mispriced this book.

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