Questions about the Great Depression from an Austrian point of view

[jmhudak17]

I've been arguing with someone who's a Monetarist about the Great Depression. I'm not well-versed in Austrian economics, and he had some questions that I was not able to answer, so I thought I'd come hear to get the answers seeing as many of you know much more about economics than I do. Here are his questions below:

1. Where can you show that there was easy credit and massive inflation that caused the Great Depression (graphs, etc.)
2. Why did things get worse after the Great Contraction? If you do not believe in the deflationary spiral, why do all the things attributed to a deflationary spiral happen after massive deflation? http://en.wikipedia.org/wiki/Great_Contraction
3. If we return to the gold standard, how we will prevent deflation?

 

[heavenlyboy34]

One of the best books on the Great Depression by an Austrian is Rothbard's "America's Great Depression". Available free here: https://www.mises.org/rothbard/AGD/contents.asp

As far as returning to the gold standard (I assume you mean the "classical" gold standard, which RP usually talks about), I don't believe the initial deflation would be bad in the long run. The monetary deflation would be offset by stabilized prices and improved credit-worthiness of the treasury. JMHO.

 

[loveshiscountry]

I've been arguing with someone who's a Monetarist about the Great Depression. I'm not well-versed in Austrian economics, and he had some questions that I was not able to answer, so I thought I'd come hear to get the answers seeing as many of you know much more about economics than I do. Here are his questions below:

1. Where can you show that there was easy credit and massive inflation that caused the Great Depression (graphs, etc.)
2. Why did things get worse after the Great Contraction? If you do not believe in the deflationary spiral, why do all the things attributed to a deflationary spiral happen after massive deflation? http://en.wikipedia.org/wiki/Great_Contraction
3. If we return to the gold standard, how we will prevent deflation?

The Forgotten Man by Amity Shlaes is an easy read that explains FDRs and others similar policies that extended the Great Depression. The depression within the depression happened when FDR set wages in some industries higher than "normal" or what the market would set. Second time he did this with failure both times. Prices rose and only those who received the raises weathered the price hike.

from the UCLA study - "In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been."

 

[Legend1104]

The Forgotten Man by Amity Shlaes is an easy read that explains FDRs and others similar policies that extended the Great Depression. The depression within the depression happened when FDR set wages in some industries higher than "normal" or what the market would set. Second time he did this with failure both times. Prices rose and only those who received the raises weathered the price hike.

from the UCLA study - "In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been."

I thought she was also a monetarist?

2. "The Great Contraction" was not due to the Fed's policies at all. As a matter of fact the Fed tried very hard (because of Hoover) to pump in more liquidity. The "contraction" came because banks were worried about loaning out too much and becoming to insolvent so they kept more than the reserve limit, savings decreased as Americans began withdrawing their savings and hording it due to fear of bank runs, and buisnesses did not take out loans to expand due to fear of further market trouble.

This is much like what is happening today. That is why the fed has pumped out more money. Same basic situation.

 

[Legend1104]

2. addition from the other post.

Things got worse because the Federal Reserve was pumping in more and more liquidity. The "contraction" that I mentioned earlier by the banks, American people, and buisnesses was actually a stablizing force that began to help correct the market. That is why things temporarily started to get better after the initial crash. When the Fed continued easy money, the problem began to get worse again.

Look at this and start reading on page 260-263. (Thats 260 on the actual book page, not the pdf program.)

http://mises.org/rothbard/agd.pdf

 

[Legend1104]

I've been arguing with someone who's a Monetarist about the Great Depression. I'm not well-versed in Austrian economics, and he had some questions that I was not able to answer, so I thought I'd come hear to get the answers seeing as many of you know much more about economics than I do. Here are his questions below:

1. Where can you show that there was easy credit and massive inflation that caused the Great Depression (graphs, etc.)
2. Why did things get worse after the Great Contraction? If you do not believe in the deflationary spiral, why do all the things attributed to a deflationary spiral happen after massive deflation? http://en.wikipedia.org/wiki/Great_Contraction
3. If we return to the gold standard, how we will prevent deflation?

3. Preventing deflation in an inflationary system like ours is bad for the market economy. Returning to the gold standard would help create the deflation that is needed for the markets to get better. What we need to do is call deflation by a different name i.e. lower prices. If prices fell, that would be great for the economy. The problem with monetarists arguement here is that they are arguing that deflation is really doing what was caused by inflation. They have gotten mixed up.

 

[Legend1104]

1. I am not an expert on M1, M2, or M3 so maybe someone can help me with this but they do not take into account money that is not in circulation (like money that people and buisnesses are sitting on) does it? That would explain the sudden dip after the crash.

Anyway, as you can see during the "roaring 20s" easy credit and inflation jumping significantly. It was not until the crash (notice that the money supply does not fall until right aroun 1929) when the money supply began to fall (due to my statements earlier).

 

[loveshiscountry]

I thought she was also a monetarist?

She pointed out the blowback from the policies FDR put in place and the reasons behind those policies. Some times there did not seem to be logical or coherent reasons, like setting the price of Gold.

2. "The Great Contraction" was not due to the Fed's policies at all. As a matter of fact the Fed tried very hard (because of Hoover) to pump in more liquidity. The "contraction" came because banks were worried about loaning out too much and becoming to insolvent so they kept more than the reserve limit, savings decreased as Americans began withdrawing their savings and hording it due to fear of bank runs, and buisnesses did not take out loans to expand due to fear of further market trouble.

This is much like what is happening today. That is why the fed has pumped out more money. Same basic situation.

that's not exactly what I read. It wasn't individuals willingly doing it. Concerning the depression within the depression. ~'36-'37. Because of new Federal Laws with stricter reserve requirements banks were forced to keep more cash so they cut back on loans. Fearing inflation they offset gold flows with restrictive action.

Plus savings decreased because earning power decreased. Payments into social security took money out of circulation as did the Wagner Act

 

[Legend1104]

She pointed out the blowback from the policies FDR put in place and the reasons behind those policies. Some times there did not seem to be logical or coherent reasons, like setting the price of Gold.



that's not exactly what I read. It wasn't individuals willingly doing it. Concerning the depression within the depression. ~'36-'37. Because of new Federal Laws with stricter reserve requirements banks were forced to keep more cash so they cut back on loans. Fearing inflation they offset gold flows with restrictive action.

Plus savings decreased because earning power decreased. Payments into social security took money out of circulation as did the Wagner Act

You and I are talking about two totally different events. The Forgotten Man is based mostly on FDR. I was referring to the Depression under Hoover (as does the book America's Great Depression by Rothbard). The events I was discussing occur around 30' 31' 32'.

Did you read my book referrence and the pages I suggested because you would easily see the things that I was mentioning.

 

[RabbitMan]

You and I are talking about two totally different events. The Forgotten Man is based mostly on FDR. I was referring to the Depression under Hoover (as does the book America's Great Depression by Rothbard). The events I was discussing occur around 30' 31' 32'.

Did you read my book referrence and the pages I suggested because you would easily see the things that I was mentioning.

Those 3 pages were talking about the agricultural crash of '21. What does this have to do with '30-'32?

EDIT: DOH! I read the PDF's pages 260-263...still an interesting read though haha!

 

[Legend1104]

Those 3 pages were talking about the agricultural crash of '21. What does this have to do with '30-'32?

EDIT: DOH! I read the PDF's pages 260-263...still an interesting read though haha!

I did the same thing when trying to find the correct page.