|
|
 1920-1929: an Era of exceptional
Prosperity
The post war
period was an era of great prosperity generally
referred to as the roaring twenties. Great
innovations
such as electrification, radio and telephone, the introduction of  new tools and
assembly
lines all
increased productivity. The new technologies
boosted
prosperity and brought a wide range of new machinery as well as new
consumer goods.
The communist
experiment in the Soviet Union was still young and initially looked
like a success story. Many considered the economic model organised by
"central
planners" as a modern and "rational alternative" for the "irrational
anarchy" of free markets. In Europe as well as in the U.S., the
economic dispute between the socialist - interventionist ideas of J.M Keynes' and the classic liberal ideas of the "Austrian school"
of Von Mises
and Hayek
was at the centre of the political
debate.
 Easy access to
cheap money
By the end of
the
decade the economic boom culminated in a general euphoria, particularly
in the U.S. Prices of most
assets skyrocketed.
Prior to the euphoria a long period of low interest rates
exacerbated
by massive German reparation payments for war
damages had caused the money supply to grow much faster than the real
economy. Inflationary
pressures increasingly built up in Europe as well as in de
U.S. Particularly between 1928 and 1929, the easy access to cheap
credit caused reckless speculation on stock markets and on assets in
general. Prices gradually inflated to an unsustainable asset
bubble.
Hoping to
contol the speculation and to slow down the economy, the political
authorities and still young and inexperienced Federal Reserve
(1913) took some most unfortunate measures. Today most
economists consider their
anticyclic policy overdone. Free market economists generally consider
the interventions
as a totally superfluous absurdity.
Political Blunders
In an effort to
control speculation, US government first banned
bank
loans for margin trades, while the FED
drastically raised its discount rate from 3.5% (Jan 1928) to 6% (Aug
1929) and
unexpectedly contracted the money supply by a
massive one third in six months
from August '29 till
March '30.
 The market
reacted most vigorously. Stocks plummeted
and asset prices crashed, causing a dramatic contraction of the real
economy. In an effort to
remedy the
accelerating recession the US
Government then relied on most protectionist measures.
The US raised import
duties on 25.000 articles to an average rate of 65%, causing most
vigorous reprisal
protective measures by trading partners. The
trade war that followed just killed international trade, with
devastating effects on productivity and boosting unemployment to
unprecedented levels.
Facing
budget deficits due to declining revenues and increasing welfare
demands President Hoover then decided to double
income taxes. The 1932 Revenue act increased
top
tax rates from 25% to 63%. Most tax exemptions were
drastically reduced, particularly hurting middle income groups.
Then in 1933,
Roosevelt unexpectedly seized peoples gold
holdings, abandoned the
gold standard, and devalued the dollar with 40%, setting in motion a
downward spiral of "reprisal devaluations"
by the trade partners
all over the
world. 
Unpredictable
interference created uncertainty.
As the crisis
deepened further panic spread tot
the political leaders who ever faster took new emergency measures. The
rapid succession and total unpredictability of government interventions
created a climate of general legal uncertainty and deteriorated the
poor business
environment even further. Rapidly changing tax and subsidy regimes,
regulations of wages, prices, interests and production were all new
government interventions creating a general atmosphere of uncertainty.
Faced with so much uncalculable risk industrialists mostly preferred
to postpone
investments till things had settled.
Devastating Social Damage
It was in deed
not
free market failure which produced the 1929 depression. It was
interventionism and political bungling on a grand scale,
with the one policy
blunder succeeding the
other: trade crushing
tariffs, incentive-sapping
taxes,
mind- numbing controls on production
and competition, senseless destruction of
crops, coercive labor laws and not in the least the FED's
mismanagement of the money supply.
 The social cost
of the political blunders was the
severest crisis in history. Stocks
fell to 10% of their pre-crash value, income
fell by 28%, car
sales fell by 75%, banks
failed in record
numbers, dragging down hundreds of thousends of customers. 13
million
unemployed in the US causing rumors of revolt
even.
Conclusion
The specialists on the matter Murray Rothbard, Laurence Reed, Stefan
Molyneux, Amity Shlaes... all unanimously agree: the
great depression was not a crisis of
capitalism but merely a crisis of interventionism. Politics
completely mishandled a mild recession. It was not free market
failure but the combined mistakes of Central Banks
and Central Government. Irrational fear for deflation led them to
prevent prices and wages
from falling. The interventions therefore hindered
markets from ajusting to the new situation and from finding a new
equilibrium. This caused serious
distortions which lead tot massive
misallocation of scarce resources ultimately turning the
natural
slowdown of the business cycle into the deep depression.
Politicians
would much better have left markets to themselves. The price mechanism
guided by the collective
wisdom of millions of
individuals as expressed in billions of free economic choices
would have lead markets in just a few
quarters to a new equilibrium
at a much mor stable price and wage level .
Laurence
Reed convincingly
demonstrates that
Roosevelt's
deficit spending did not boost demand as the massive resourses
absorbed in the low
productive public investments outcrowded
much more productive business investment as well
as private consumption. In
this way Roosevelt's
Keynesian socialist-style remedies of the New Deal and the and excessive
(near fascist) dirgism in the National
Recovery Act (NRA) rather than
remedying
the 1929 crisis, prolonged it well into the
40's.
Paul Vreymans
 |
Freedom and the
Great Depression:
How
the Federal government caused economic collapse in the 1930s
By Stefan
Molyneux
|
 Since it first appeared in 1963, it
has been the definitive treatment of the causes of the depression. The
book remains canonical today because the debate is still very alive.
Rothbard opens with a theoretical treatment of business cycle theory,
showing how an expansive monetary policy generates imbalances between
investment and consumption. He proceeds to examine the Fed's policies
of the 1920s, demonstrating that it was quite inflationary even if the
effects did not show up in the price of goods and services. He showed
that the stock market correction was merely one symptom of the
investment boom that led inevitably to a bust.
The Great Depression was not a crisis for capitalism but merely an
example of the downturn part of the business cycle, which in turn was
generated by government intervention in the economy. Had the book
appeared in the 1940s, it might have spared the world much grief. Even
so, its appearance in 1963 meant that free-market advocates had their
first full-scale treatment of this crucial subject. The damage to the
intellectual world inflicted by Keynesian- and socialist-style
treatments would be limited from that day forward.
GDP Evolution during the Great Depression: a lost decade
Index of the NY Stoch exchange from 1926 to 1939
Some basic numbers
during
the Depression
| Year |
Nominal GNP |
% change |
Real GNP |
% Change |
CPI |
% Change |
M1 |
% Change |
M2 |
% Change |
Bank Failures |
Fail Deposits |
Interest rate |
Real Rate |
| |
(1) |
|
(2) |
|
(3) |
|
(4) |
|
(5) |
|
(6) |
(7) |
(8) |
(9) |
| 1920 |
88.9 |
11,93 |
73.3 |
-1.22 |
85.7 |
14.68 |
23592 |
9.80 |
34708 |
13.52 |
167 |
5.42 |
-9.26 |
|
| 1921 |
74.0 |
-18.34 |
71.6 |
-2.35 |
76.4 |
.11.49 |
20955 |
-11.85 |
32212 |
-7.46 |
505 |
172188 |
4.83 |
16.32 |
| 1922 |
74.0 |
0.00 |
75.8 |
5.70 |
71.6 |
-6.49 |
21618 |
3.11 |
33646 |
4.36 |
366 |
91182 |
3.47 |
9.96 |
| 1923 |
86.1 |
15.14 |
85.8 |
12.39 |
72.9 |
1.80 |
22653 |
4.68 |
36411 |
7.90 |
646 |
149601 |
3.93 |
2.13 |
| 1924 |
87.6 |
1.73 |
88.4 |
2.99 |
73.1 |
0.27 |
23226 |
2.50 |
37992 |
4.25 |
775 |
210151 |
2.77 |
2.50 |
| 1925 |
91.3 |
4.14 |
90.5 |
2.35 |
75.0 |
2.57 |
25362 |
8.80 |
41691 |
9.29 |
618 |
167555 |
3.03 |
0.46 |
| 1926 |
97.7 |
6.78 |
96.4 |
6,32 |
75.6 |
0.80 |
26082 |
2.80 |
43539 |
4.34 |
976 |
260378 |
3.23 |
2.43 |
| 1927 |
96.3 |
-1.44 |
97.3 |
0.93 |
74.2 |
-1.87 |
25796 |
-1.10 |
44384 |
1.92 |
669 |
199329 |
3.10 |
4,97 |
| 1928 |
98.2 |
1,95 |
98.5 |
1.23 |
73.3 |
-1.22 |
25761 |
-0.14 |
45861 |
3.27 |
498 |
142386 |
3.97 |
5.19 |
| 1929 |
104.4 |
6.12 |
104.4 |
5.82 |
73.3 |
0.00 |
26189 |
1.65 |
45918 |
0.12 |
659 |
230643 |
4.42 |
4.42 |
| 1930 |
91.1 |
-13.63 |
95.1 |
-9.33 |
71.4 |
-2.63 |
25293 |
-3.48 |
45303 |
-1.35 |
1350 |
837096 |
2.23 |
4.86 |
| 1931 |
76.3 |
-17.73 |
89.5 |
-6.07 |
65.0 |
-9.39 |
23883 |
-5.74 |
42598 |
-6.16 |
2293 |
1690232 |
1.15 |
10.54 |
| 1932 |
58.5 |
-26.56 |
76.4 |
-15.83 |
58.4 |
-10.71 |
20449 |
-15.52 |
34480 |
-21.14 |
1453 |
706188 |
0.78 |
11.49 |
| 1933 |
56.0 |
-4.37 |
74.2 |
-2,92 |
55.3 |
-5.45 |
19232 |
-6.14 |
30087 |
-13.63 |
4000 |
3596698 |
0.26 |
5.71 |
| 1934 |
65.0 |
14.90 |
80.8 |
8.52 |
57.2 |
3.38 |
21068 |
9.12 |
33073 |
9.46 |
57 |
36937 |
0.26 |
-3.12 |
| 1935 |
72.5 |
10.92 |
91.4 |
12.33 |
58.7 |
2.59 |
25199 |
17.90 |
38049 |
14.02 |
34 |
10015 |
0.14 |
| | |
