Thank You - Brandon
Here you have a good summary:
Great Myths of the Great Depression, by Lawrence W. Reed
http://www.fee.org/publications/the-freeman/article.asp?aid=3489
Hope this helps. If you want more essays about this issue, just ask. Good luck
I haven't read Murray's book yet but as I understand it, the Great Depression is an example of a classic business cycle although much much deeper than any other.
Throught out the 20's the fed was pumping dollars into the economy to maitain a "stable" general price level. The general price levels, both producer and consumer, were indeed relatively stable.
The problem was that a "stable" general price level merely disquised the massive and unsustainable increases in capital assets and inventories. So while there wasn't really "price" inflation, there was in fact massive asset inflation, which in actuality was caused by what inflation is truly defined as, monetary inflation.
Further, relatively stable general price levels mask dramatic shifts in relative price levels. Accordingly, everyone thought that a new era in economic growth had taken hold during the 20's.
Eventually, as it must be so, many of the entrepreneurs who had become successful because of all the phony credit during the 20's realized their insolvency and the economy crashed.
I don't know the exact trigger; whether it was the stock market crash or the fed pulling back on credit expansion I'm not sure (Rothbard's book would obviously explain this in detail). Nonetheless, I think this is generally what happened.
The reason the Depression was so long was because of the policies of Hoover and Roosevelt. Keeping wages artificially high, intsituting various programs, etc. retarded the process of readjustment which is utterly necessary.
Sounds like classic Keynesian bullsh!t if you ask me.
of course it sounds like Keynes, the entire assumption that people are too stupid to take care of their own affairs is elementary.
George Reisman, in 'Credit Expansion, Income Inequality and Stagnant Wages' says that credit expansion causes artificial income inequality. So, what books say (that's what Galbraith say in his book about the Depression) about that might be true, but the cause of it would be credit expansion, and not capitalism in itself.
Reisman says: "It is not accidental that the two leading periods of credit expansion in history — the 1920s and the period since the mid-1990s — have been characterized by a major increase in economic inequality. Both in the 1920s and in the more recent period, a major cause of the increased economic inequality is that the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains."
http://blog.mises.org/archives/007651.asp
Sorry, I missed the chance to respond in time for your test, but I'd like to add a few comments:
10Brandonr:The history book says that during this time there was an uneven distribution of income, it says that "In 1929 the top 5 percent of all american households earned 30 percent of the nation's income.
Interesting that your textbook would point out the uneven distribution of income. Do they go on to compare that to the uneven contribution to production of these two groups? To the extent that "30 percent of the nation's income" was earned by "the top 5 percent of American households" through voluntary exchange, they must have contributed to far more than 30 percent to the nation's production. Otherwise, why would the remaining 95 percent have bothered to associate with them? It isn't unreasonable to expect that this top 5 percent would have accumulated the vast majority of all the capital stock (machinery, factories, etc) used in production at the time. Now, just imagine what the lower 95 percent would have been able to produce without this accumulated capital? Certainly, the 70% they did earn with the assistance of the wealthy capital owners is incomparably greater than what they could have produced with their bare hands. It is not very difficult to imagine that most factory workers would have simply starved to death without the factories which allowed them to produce enough to at least meet their basic survival needs.
It goes on to explain how Americans would buy on the installment plan, but eventually would run out of spending money from paying off their debts and consumers would no longer consume, this slowed down sales, which led to over-production, which meant that production needed to be slowed, which forced laborers to be laid off, which meant less spending money. So, what I was wondering was, Is there an Austrian explanation for the uneven distribution of income?
In a strangely naive way, most of this statement is actually more or less consistent with the Austrian theory of the business cycle. The credit expansion of the 1920's did indeed mislead entrepreneurs by creating the illusion of savings and available wealth beyond what existed in reality, all the while discouraging actual savings and encouraging consumer debt. Entrepreneurs rushed to invest this new credit into higher orders of production in a manner that would eventually reveal itself to be unprofitable. In that sense, there was an overproduction of higher-order capital goods with respect lower-order goods which were in fact more urgently needed meet the needs of consumers.
However, this does not imply "over-production" of the entire economy, just that investors were too optimistic about the value of high-order goods produced and would have been forced to lower their price and accept a loss so as to liquidate their malinvestment. Unfortunately, government intervention through wage and price controls (and worse...) prevented this liquidation from occurring, and extended what would have been a short 1929 recession into a 15+ year major depression.
Of course, production did not need to be slowed, it only needed to be reallocated to lower-order goods which better met the needs of consumers. The very idea that "over-production" can ever exist in the aggregate is in itself contradictory. It is instructive to step back a minute and exclude the monetary aspect of trade. What any individual can demand, is simply the value of what they produce. If a farmer produces more eggs, he can demand more goods in exchange for those eggs. There can never be an inequality between production and consumer demand, since production is consumer demand. However, the farmer in doubling his production of eggs, may expect to double the value of his production. But the additional eggs entering the market, not necessarily meeting the needs of consumers in a most urgent manner, might not be valued as highly as the original production of eggs. Although consumer demand for those eggs might not be as high as originally expected by the farmer, the problem is not over-production per say, just that the farmer was mistaken about the subjective value attributed to the additional eggs by consumers. Either he must accept to sell the additional eggs at a lower price, or, shift his additional production into, lets say, milk, or maybe loan or sell his factors of production to someone else who might better be able to make use of them. Of course, the existence of money does not change the underlying economic reality. Less money available during the 1930's deflation simply meant that money was more valuable and goods would have to be sold at a lower nominal price. Money in any form is only an intermediary and does not change the reality that goods are exchanged for goods, and thus that there cannot be "over-production" of goods.
Could people making purchases on an installment plan really cause an economic collapse?
I would say that yes, this is the case, but only due to the credit expansion by the banks. By artificially lowering interest rates, individuals are discouraged from saving and are more likely to buy on credit. Of course, some one else did have to save in the first place for goods to be available to be bought on installment plans, and furthermore, since more savings are not forthcoming, capital consumption results. Under free markets, interest rates would have to be bid up to make new savings available for such installment plans to exist. Capital consumption can only go on to the extent that it has been accumulated previously. The result of all capital being consumed would be absolutely calamitous, as witnessed by the gradual collapse of the soviet economy, for example.
Unfortunately, our current rulers (Mr. B., et al) are leading us down this path at an alarming rate...
A-R:Interesting that your textbook would point out the uneven distribution of income. Do they go on to compare that to the uneven contribution to production of these two groups? To the extent that "30 percent of the nation's income" was earned by "the top 5 percent of American households" through voluntary exchange, they must have contributed to far more than 30 percent to the nation's production. Otherwise, why would the remaining 95 percent have bothered to associate with them?
Erm, I'm not sure I follow you there. If we lumped all the bureaucrats together and summed up their net worth as a percentage of the total net worth of the population do you think we'd have an accurate representation of their contribution to society? As another example, if we took all the burglars and theives and took their total net worth as a percentage of the total wealth of the nation, does that accurately reflect their "contribution"? Obviously not. There are various ways of acquiring money - you can make something and trade for it or you can just outright steal it. The amount of money you end up with at the end doesn't necessarily imply anything about how you obtained the money or what your overall contribution to the system was... there are plenty of parasites (especially in highly bureacratic countries).
For example, if you were to read Rothbard's "The case against the Fed" and if you believed everything in that book then you'd quickly come to the conclusion that the greater part of the wealth owned by the banking sector currently fits into the "stolen" category (aquired not so much by outright theft but, more accurately, embezzlement). So even if they paid most of the taxes, it wasn't really their money they were paying it with in the first place... if you get my drift.
Back to the essay, it seems noteworthy that the texts Brandon was asked to read state "Stock Market Crash - the stock market was running out of new customers"... This cuts directly to the heart of the problem in fact. Essentially the stock markets at the time were just a big Ponzi scheme - wild speculation which only worked as long as the prices of stocks continued to go up since there was fundamentally no P/E ratio justifying holding onto the stocks otherwise. All of that could only be funded by monetary inflation and the inverse pyrimids that the Austrians talk about. But as soon as ensuing price inflation becomes a problem, the pyramid has to come tumbling down.
I justin finished Rothbard's book. Does anyone else feel that what is happening right now with government action, real estate, the stock market, people, international trade, all sounds eerily similar with the book? The stock market stalled, with little spurts on "positive" news from the government. (I say positive, because most people think "Hey, were are reducing the rate again" is positive. I, however, cringe. As has been said on the site, giving the addict another hit from the crack pipe.) The protectionist rhetoric. If I actually lived in the States right now, I would be buying gold and guns, and sleeping on my money.
The fact that most of my fellow American's don't get it tends to make me sad. They seem so eager to be taken advantage of. "Oh, the government would never do anything to hurt me! The Fed is the only reason our economy works!" Yikes!
BTW, I think it is great that you are willing to go outside your class text and actually read something that makes sense. Don't let your teacher get you down!
One hundred trillion Zimbabwe dollar note
jimmy: A-R:Interesting that your textbook would point out the uneven distribution of income. Do they go on to compare that to the uneven contribution to production of these two groups? To the extent that "30 percent of the nation's income" was earned by "the top 5 percent of American households" through voluntary exchange, they must have contributed to far more than 30 percent to the nation's production. Otherwise, why would the remaining 95 percent have bothered to associate with them? Erm, I'm not sure I follow you there. If we lumped all the bureaucrats together and summed up their net worth as a percentage of the total net worth of the population do you think we'd have an accurate representation of their contribution to society? [...]
Erm, I'm not sure I follow you there. If we lumped all the bureaucrats together and summed up their net worth as a percentage of the total net worth of the population do you think we'd have an accurate representation of their contribution to society? [...]
Jimmy, my comments were specifically directed towards those who "earn [their] income through voluntary exchange". I agree with you that most of the wealthy today do not fall in this category but rather have indeed achieved their wealth through coercive means. I'm not defending these types of individuals at all, and think we all should certainly defend ourselves (if possible) against aggression initiated by such individuals whenever it is employed or threatened.
However, Brandon's history book which is advocating redistributionist "New Deal" policy on the grounds of income inequality clearly is not targeting bureaucrats or banking elite. It is the most productive free marketeers that are the most attractive targets since all wealth must be produced by productive individuals in the first place. His book insinuates that these productive individuals are somehow bringing about harm onto others simply by virtue of their high level of productivity, when in fact they are doing the most to improve the prosperity of the whole society.
You would be correct to point out that no one falls into this idealized category of free-marketeer (or did, even prior to the New Deal), since even the most honest business men are themselves coerced into (indirectly) employing coercion onto others. Simply abiding by regulations which may prevent competitors from gaining market share through employing more efficient processes would be an example. But, again, my comments were only intended to the extent that income was earned through voluntary exchange.