Arnold Kling  

The Great Depression

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From my latest essay.


I would have thought that 1929 should have looked pretty good to people living in the depths of the Depression. But one of the many interesting lessons of Amity Shlaes' new history of the Great Depression and Franklin Roosevelt's New Deal is that many Americans, both inside and outside the Roosevelt Administration, thought of prosperity as an aberration. Instead, they saw hard times as the new norm.

The essay came out on TCS today. It would have come out earlier this week, but their site was hit by a hacker from overseas and was down. TCS was also blacklisted as a site that hosts "malware," but that came from the hack and I am told that the site is now clean.

I have said many times that I view the Depression as an extremely important episode that merits deep study. So I am looking forward to reading Randall E. Parker's latest book of interviews with economists, This time, he talks to economists born after the Depression. James Hamilton offers a sneak preview.


there's an implicit view that the relative price of gold isn't going to move very much, that it is basically limited by the supply of mining and so the relative price doesn't change. If the relative price of gold is kind of volatile and wild, it's a terrible system to use because then you're imposing all of this same volatility and wildness on the aggregate price level and we pretty clearly don't want that. So I would say that's an important thing he's left out. All the other aspects he discusses, the maldistribution of gold and problems with cooperation, all of that I would translate into the factors that were causing the relative price of gold to go up and therefore any country that was sticking to the gold standard to experience a severe deflation.

There's more at the link. I expect to have more to say on Parker's new book next week.


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CATEGORIES: Economic History



COMMENTS (6 to date)
James R Ament writes:

I particularly liked your comment "I suspect that one reason that Roosevelt and the New Deal come off so well in the conventional wisdom is that history books are written by professors, not by entrepreneurs" in the TCS article. I posted this: "On this last point, for a very long time it has been said that the winners get to write the history. Kling gives it a new slant... college professors write the history!"

TGGP writes:

Arnold, prosperity is NOT natural. Most of human history has been mired in poverty, and the United States or Anglosphere or First World (depending on your standards) has been unique among the nations of the world in its time.

PJens writes:

My parents came of age during the depression and now my mother (only one living) says we are living high off the hog. Never had it so good. I never experienced life without hot water, a car, and plenty of food. My kid complains about dial up intenet service, a home without a microwave oven and only one TV in the house.

I think the baseline standard of living has risen in ~ 75 years. The US is one country where a major disease of poverty is obesity.

Two generations from now will this time period be seen as prosperity?

Don Lloyd writes:

...If the relative price of gold is kind of volatile and wild, it's a terrible system to use because then you're imposing all of this same volatility and wildness on the aggregate price level and we pretty clearly don't want that. So I would say that's an important thing he's left out....

In a true 100% reserve gold standard, the idea of a price for gold is almost meaningless. A dollar would be a specific weight of gold, period.

The idea that a price of gold is volatile comes from a corrupt gold standard in which the supply of dollars and the supply of gold are independent. Just pegging the price of gold to a given number of dollars by adjusting the supply of dollars is nearly useless. The dollar prices of all other goods will follow the variations in the supply of dollars.

The dollar price of gold has been volatile because of dollar supply fluctuations AND the increased DEMAND for gold as an inflation hedge that results from those fluctuations.

Regards, Don

Bill Woolsey writes:

the _relative_ price of gold exists even if the dollar is a weight of gold. If a dollar is 1/35 of an ounce of gold, the the dollar price of gold is $35 per ounce. The relative price of gold is the amount of various goods and services that can be obtained with an ounce of gold. Roughly, it is the reciprocal of the dollar price level.

Changes in the supply or demand for gold (ceteris paribus,) lead to changes in the purchasing power of gold--inflation or deflation.

Unless the supply and demand for gold remain unchanged (or increase or decrease together) a gold standard, results in inflation or deflation of the gold prices of goods and services.

PrestoPundit writes:

The folks who made Keynes mainstream in America believed in "secular stagnation" (e.g. Hansen at Harvard). "Secular stagnation" meant that by the nature of the case the economy would inevitably run out of opportunities for productive capital investment. Keynes fundamentally shared this view. Deep down what Keynes and these economists had in common was a scientifically bankrupt theory of capital. They failed to extend the marginalist logic of value to heterogeneous capital goods through time, and so lacked a modern economics of the capitalist system through time. What they had instead was a hodge-podge, sort of like a combining Quantum Physics with Aristotelian Physics.

Most economists today are in the same boat as Keynes -- they don't have scientifically sound conception of capital, and indeed have no place for robust capital goods in their theories of money and the trade cycle. They to are working with a hodge-podge, the economic equivalent of mixing Quantum Physics and Aristotle.

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