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Myths of the Great Depression

jimtimmy2
Posts: 403
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5/22/2013 3:05:31 PM
Posted: 3 years ago
The common story of the Great Depression we are told in the media and our history books is simple. Radical free market fundamentalists like Coolidge and Harding let the market run wild with financial deregulation, tax cuts for the rich, and massive spending cuts.

All of this led to a stock market crash and massive depression caused by overproduction. There was too much production and too much inequality so the masses couldn't buy goods and services. And, of course, there was another free market fundamentalist in charge by the name of Herbert Hoover who believed in laissez faire economics and was a liquidationist who believed that markets had to "correct" in order for prosperity to be restored and thus refused to intervene in any major way.

Thankfully, FDR rode in on a statist white stallion and implemented massive public spending, new social programs, price and wage controls, massive subsidies, expansionary monetary policy, and massive new regulations all funded by deficits and taxation largely aimed at capital.

This all helped the economy recover. But, it was not enough. Finally, World War II broke out and justified the kind of massive public spending and deficits needed to bring about real recovery. The command and control economy brought about by the war ended the depression. What happened after the war is another story for another time.

Of course, anyone who knows anything about history or economics knows that this is absolute nonsense. Yet, we hear this story on the news, in our history books, and from our teachers all the time (at least I did).

This is not even what economists believe these days. Economists typically take some variant of the Friedman view that money was way too tight in the late 1920s and early 1930s which lead to the Great Depression and easing of monetary policy was what led to recovery. That view is wrong too, but it is much less wrong than the view dominant among the public. Even hardcore, old fashioned, "progressive" keynesians who really do think massive deficits ended the Depression acknowledge that many parts of the New Deal did more harm than good.

But, let us look at what really happened. First, Hoover, as anyone who knows anything about Hoover knows, was not anything close to a believer in laissez faire. Indeed, Hoover intervened with price and wage fixing, increases in public spending, unprecedented protectionism, and large tax rate increases. Roosevelt's running mate even called Hoover a socialist in the 1932 presidential election. And, later on, Roosevelt's aides would admit that most of FDR's programs were extrapolated from Hoover programs.

As for Harding and Coolidge, these two presidents were closer to the non interventionists that we hear about in the books. However, their policies actually worked pretty well. In the pre Herbert Hoover 1920s, we saw a Depression that Harding inherited turn into unprecedented prosperity and surpluses that went on through Coolidge. The spending cuts and tax rate cuts of these two administrations were quite successful.

The cause of the crash was, actually, the easy money policy of the 1920s (economists get the stance of monetary policy this decade wrong). Low interest rates led to major malinvestment that needed correction. Unfortunately, the interventionist policies of Hoover and FDR artificially kept wages and prices too high not allowing them to correct. And, the anti business policies of FDR led to regime uncertainty that stifled private investment which saw very little to no recovery under him.

Indeed, the New Deal extended the Depression by about seven years. As for World War II, aggregate economic statistics did recover, but standard of living declined. Private consumption and investment plummeted during the war years. The production increased only because of war goods not consumer goods. Consumer welfare declined. All that happened is that we depleted all of the nation's capital in order to build war goods. This led to a temporary bump in GDP and employment but no real economic progress.

Finally, after the war, there were massive spending cuts and tax rate cuts, some of the New Deal was rolled back, and a new environment of business certainty was brought about. Keynesians predicted doom and gloom in the post war demobilization. Free market economists predicted the opposite. It turns out that the free market economists were right, as they always have been.

The real story of the Great Depression is not one of government intervention saving the free market. Instead, it is one of government intervention creating a problem, failing to solve the problem and actually making it worse in the process, and finally getting out of the way to enough of a degree to watch the problem solve itself.
jimtimmy2
Posts: 403
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5/22/2013 3:06:39 PM
Posted: 3 years ago
By the way, I have evidence to support all of my claims here, but I am too lazy to source every single claim. If someone disputes a particular claim with an actual intelligent objection (not just saying I need proof), I will gladly find and provide the evidence.
16kadams
Posts: 10,497
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6/3/2013 9:20:38 AM
Posted: 3 years ago
At 6/3/2013 9:05:04 AM, leojm wrote:
wow there were myths?

lol
https://www.youtube.com...
https://rekonomics.wordpress.com...
"A trend is a trend, but the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?" -- Alec Cairncross
slo1
Posts: 4,353
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6/3/2013 10:06:04 PM
Posted: 3 years ago
jimtimmy2,

What is your evidence that explains why there was 10% annual deflation while on the gold standard from 1931-1933, well prior to Roosevelt taking office?
jimtimmy2
Posts: 403
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6/4/2013 8:24:51 AM
Posted: 3 years ago
At 6/3/2013 10:06:04 PM, slo1 wrote:
jimtimmy2,

What is your evidence that explains why there was 10% annual deflation while on the gold standard from 1931-1933, well prior to Roosevelt taking office?

The Fed pursued an incredibly deflationary monetary policy. Inflationary in the 1920s and deflationary in the immediate aftermath of the crash.

I support abolishing the fed and allowing for free market money.