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Essential Characteristics Of The Great Depression

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softwareNerd

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When you say "money supply", do you mean currency -- i.e. more currency was being printed and circulated; or, do you mean M2 or M3 or some other such "broader" measure. (If it's mentioned in Rothbard's book, I'll find it there.)

It is indeed in Rothbard's book. It is layed out in a table on page 134 of the PDF, and it is a broader measure, but it is hard to read since it is sideways, and my hardcopy of the book is packed up for a move.

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True, but that still about a 1-2 billion drop in international trade, compared to (offhand guesstimate) a 50ish billion drop in GDP and extreme unemployment. I know that a small change in one economic variable can sometime cause a significantly larger change in another, but I question whether things were so delicately balanced that international trade (a small part of the US economy at the time) could really be the tipping point, as opposed to just another (comparatively) minor detriment.

'Course, this does perhaps give even more weight to other pre-Depression causes e.g. Fed manipulations and the onset of fiat money. I'm still looking for info on that.

If I remember right from what I've looked up the last few days, two announcements, one that the tariff rates would be higher than proposed originally and the second that opposition against the tariff had crumbled coincided with two of the major crash days.
Might've been coincidental, or at least a minor thing that seems more ominous by coincidental timing. The timing is interesting, at any rate.

Just as an added thought, is there any interest in what pulled us out of the depression? Was it a repeal of any of the measures that had been put into place to prolong it? Or was it simply the ramping up for the war effort?
The main thing being offered seems to be that a slackening from statist principles got us out of the Depression. Personally, I'd like to see arguments for this and for WW2 being the relief factor. I'd probably be best to go in a chronological order though, taking what caused the GD, what maintained it, and then what ended it.
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Just as an added thought, is there any interest in what pulled us out of the depression? Was it a repeal of any of the measures that had been put into place to prolong it? Or was it simply the ramping up for the war effort?

You’re parroting socialist economics again. Tanks and bombs don’t help the economy – they divert resources from more productive uses. This is just the fallacy of the broken window again.

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Though it doesn't pertain directly to the great depression as far as I remember, anyone with an interest in economics should start with Hazlitt's Economics in One Lesson. This is the most clear and enjoyable book on the subject I have read.

The full text in availble online HERE.

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  • 4 weeks later...

This is from http://cafehayek.typepad.com/hayek/2006/06...enging_a_d.html

Higgs's thesis in this chapter, which is backed by data (including interesting data on bond yields from the mid-1920s through the mid-1950s), is that the Great Depression was prolonged and deepened by the "regime uncertainty" created by FDR and the New Deal. As it turns out, Uncle Sam never engaged in wholesale nationalizations and other whacky central-planning schemes -- but no one in the 1930s knew what the future held. For investors back then to believe that any investments they made in the U.S. might be confiscated or regulated to smithereens was not unreasonable, given the rhetoric of the time and the shift in policy brought by FDR and his "brain trust."

This "regime uncertainty" stifled investment, keeping the economy stagnant.

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  • 3 months later...
  • 3 years later...
Can you be specific, like which policies did the Government enact that caused the Great Depression?

Here is a book written in 1963 by a student of LVM on the subject:

http://mises.org/rothbard/agd/contents.asp

After giving you a primer on the Austrian theory of the business cycle and a critisizm of Keynesianism, it focuses in on exactly what caused the Great Depression starting by examining the beginnings of its roots in 1921, the Federal Reserve's inflationary policies and the Hoover administration's interventionist efforts up until the close of his administration in 1933.

"If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire—to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch. Any propping up of shaky positions postpones liquidation and aggravates unsound conditions."

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I've always thought of the stock market crash as being the most important event of the "Great Depression".

I want to take time to put together a decent response to your question, snerd, but I wanted to let you know about a very important source. This book has a forward by Henry Hazlitt. It was highly praised by Ludwig von Mises in Planning for Freedom.

I bought it from the bookstore selling Objectivist material in 1969 after reading a glowing review, probably in their catalog. It is Economics and the Public Welfare by Benjamin McAlester Anderson. He was a professional economist, decidedly for free markets, and was a witness to the whole mess.

His primary take on the cause at the beginning was that there were huge swings in the manipulation of the money supply. Many times the changes we see today (except for the last year). Plus, international trade was essentially stopped with new high tariffs worldwide and the Roosevelt administration engaged in wild, wide ranging regulation and interference in the economy for nearly a decade. People spoke of a second depression starting in 1937, which happened because of new, vigorous attacks on the economy by FDR.

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Also, let us not forget that Smoot-Hawley was proposed in 1929, before the crash. Stock prices reflect investors' expectations of future business opportunities--and as those opportunities evaporate, so do the prices.

Do not forget that the boom in the stock market was supported by inflation. People were borrowing heavily to buy stocks. When the money supply was constricted heavily those loans were called. That is why people lost everything and jumped from windows, their loans were called and the stock prices had fallen below the loan amount. They had to sell their houses, etc., to pay the loan.

The Dow peaked at 380 in July 1929, its next high was 186 in Febuary, 1937, then the "next depression" in 1979. The next high was after WW2. The market did not recover much after the crash, as suggested elsewhere in this thread.

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... Economics and the Public Welfare by Benjamin McAlester Anderson. ...
Thanks for the recommendation. Since starting this thread (a long while back) I've bought, read and enjoyed Andersen's book. I would recommend it as the top read on the topic, though I found it wanting in some ways. (I would have loved to see Andersen add more abstract commentary to the various facts, tying things together into a set of principles.) Other books that I've read meanwhile, and that I'd recommend are:

  • Rothbard's book mentioned above (okay, but I did not find it very convincing)
  • Amity Shlaes: her famous "Forgotten Man" (she's clearly not a great economist, but the book is great if one wants to get a color of the political events)
  • Kindleberger's "The World in Depression: 1929-1939" (University of California Press, 1973) (Read this for a counter-point. He's the kind of economist who provides 10 reasons for any event)

My current view is that the crash was a mix of poor government policy mixed with "irrational exuberance". However, the depression was not caused by the crash. Rather, poor government handling of the post-crash scenario led to the depression.

What the government did wrong could be summarized as: not letting events play out, but trying to maintain the status quo to enable a soft-landing. Republican Hoover probably has the most guilt for this, because if he had allowed a liquidation, we might have seen a recovery before Roosevelt came in. Instead, in moves that were echoed by Bush decades later, Hoover tried to fight against the reality of the market. His most egregious error was price-support. He convinced industrialists to keep wages up, and he allowed government to support commodity prices. These actions slowed down what would otherwise have been a normal market-clearing process.

Then, as now, monetarism had a strong public voice; and, it was causing the same mischief in economics as it does today. At that time it was Prof. Irving Fisher, who -- in true monetarist fashion -- thought deflation must be fought by government intervention.

After Hoover let things drag along, Roosevelt came in to try his own experiments. One also has to remember the historical context here. Lot of intellectuals were saying that the Soviet union had found the right system, and would far surpass the U.S. (This is something that another destructive economist -- Paul Samuelson -- echoed even decades later in his widely-read textbook.) Against this background where the world was experimenting with communism and socialism, it is hard to say whether someone else in power might actually have done worse than Roosevelt -- it is a possibility, I suppose.

The real secular and sustainable upturn in the economy only came after Roosevelt was out of office, and WW-II was ended.

Edited by softwareNerd
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  • 2 weeks later...
The market did not recover much after the crash, as suggested elsewhere in this thread.
It did not recover back to its peak, but it recovered a lot of its loss. In fact, its recovery was very much like the sharp upturn we've seen in the market since our recent bottom. By early 1930, the stock market had recovered to where is was less than 18 months's prior. The market had been going up for a while. The 1929 crash did not even go below levels from early 1928, and the level of early 1930 was already 50% higher than the level through most of 1928. That's a pretty strong recovery if you place yourself in 1930.

If one reads the WSJ of 1930, you get a sense quite like what you get from the WSJ of 2009. i.e. that the bottom had been reached, that optimism was returning. Check out this blog for details. Unfortunately, Hoover insisted on slowing down the adjustment, and Smoot-Hawley made matters worse.

It is true that, in retrospect, the 1930 rebound appears like a blip, but that is mainly because Hoover and FDR took the country into further and further spirals of terrible policies. Would the rebound have lasted otherwise? Perhaps not...perhaps the economy would have bounced up and down a few times and even found some level that was reasonable. However, there's no doubt that the 1929 drop did not make up a majority of the drop during the entire depression; also, 1930 saw a sharp rebound even from this drop.

post-1227-1256967013.jpg

For a more complete version of the graph, see Steve Keen's Debtwatch (occasionally good stuff, mixed with some oddball posts)

post-1227-1256967013_thumb.jpg

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It did not recover back to its peak, but it recovered a lot of its loss. In fact, its recovery was very much like the sharp upturn we've seen in the market since our recent bottom. By early 1930, the stock market had recovered to where is was less than 18 months's prior.

It will be interesting to see whether history repeats itself. It will all depend on how much Obama is allowed to "accomplish."

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It will be interesting to see whether history repeats itself. It will all depend on how much Obama is allowed to "accomplish."
Yes, it will. I must say that it can be a curse to live in interesting times.

Added: I don't mean I think we're headed down a Great-depression like path; I don't. I think a FDR-like path is more likely than a Hoover-like one.

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I don't mean I think we're headed down a Great-depression like path; I don't. I think a FDR-like path is more likely than a Hoover-like one.

Yup, that's what I would predict as well. As I said, I think it's all up to how much new statism Obama can introduce; so far, his most ambitious plans have been health care and the carbon-cap stuff, but fortunately his progress on both fronts has been slower than on the Nobel Prize front. :nerd:

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The dollar was convertible to gold at a fixed rate in the 1920s, so I doubt there could have been much inflation.

????? Rather than look something up you are making a deductive argument?

The Fed was created in 1913. It had all of the powers that it has today. All of them!

A common misconception about the gold standard was that there was a relation on one dollar issued for each dollar of gold. There wasn't. It means that a U.S. gold certificate could be redeemed for gold. The U.S. gold reserves were very large after WW1. The Fed could have doubled the money supply and not have violated the gold standard. The Fed pumped money into the economy during the later 20's.

Capitalism Forever, look it up, please. I am not asking you to take my word for it. I am suggesting that your "doubt" should be a reason to do research.

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The U.S. and Britain ran a fairly loose money policy after WW-I. The Republicans ruled throughout and they thought cheap money was good for business. In addition, the monetarist notions were in vogue (Irving Fisher), so central bankers no longer liked falling prices which resulted from increased productivity. They feared price-decreases as being "deflationary". The loose money policy culminated in a famous 1927 conference where Norman (UK) and Strong (US) agreed on keeping policy loose (Britain had kept money too loose and need the U.S. to help it out). The French and Germans objected, but lost the argument. Some people (Benjamin Andersen and Paul Johnson) argue that the policy of 1927 was instrumental in taking what had been a good rally and changing it into a frenzy. There is one problem though: interest rates were actually quite high in 1929. Benjamin Andersen (whom I trust on this) explains that a cheap-money rally can become self-perpetuating and last even when rates are raised, because extrapolating the past into the future, people think it is worthwhile even to borrow at the raised rates. So, when the U.S. tried to raise rates, it did not dampen the stock-market, until it actually broke late in the year.

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  • 4 months later...
What were the characteristics of the Long Depression? And how did we get out of it?

According to one school of thought, the long depression was caused by continued government experimentation (FDR's word) with the economy. The communists who surrounded FDR could not get their theories to work, and continued tinkering, that is, redirecting capital from its natural, efficient course, to sectors of the economy chosen by the gov't. The real effect of this was to continuously change the rules of the game in markets. Businessmen could not plan beyond the horizon of FDR and his red circle's next whim. So they stopped taking chances and effectively went Galt.

WWII changed the situation by forcing the government to adopt consistent market policies towards the clear ends of winning the war. Smart businessmen could anticipate market trends by anticipating war requirements, and were able to plan at least a year or two into the future. By the time the war had ended, FDR was dead, and the needs of rebuilding Europe and Asia provided more incentives for businesses to self-direct towards those ends.

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