I was having a chat with this girl I know who is a big Krugman/Keynes enthusiast, and she came up with something quite interesting. She asked, if I am so convinced that government intervention causes so many problems, how do I explain the lack of major financial crises for the 70 years following the great depression.
I did a bit of investigation on Wikipedia, and as it turns out there were no crisis between 1929 and the 1970’s (so her 70 years was a bit off unless the crises of the 70’s/80’s/90’s were insignificant), which if I am not mistaken is when Mr. Friedman came on the scene, who I know was not an Austrian, but was defiantly a Lasses Faire type dude.
Anybody able to explain this?
The Great Depression began in 1929 with the Wall Street crash. It lasted until the Second World War. Roosevelt's disastrous economic interventions contributed to its length and severity.
WW2 was obviously a disaster, but because everyone is employed and lots of money is being spent, it doesn't show up on the balance sheets as a 'recession' or 'depression' - never mind the human loss, rations etc that make everyone's lives utterly miserable.
Following the war, there was a massive economic boom as various economic resources were released back for prosperous and peaceful uses. The Bretton Woods system established the US Dollar as the world's reserve currency, itself backed by gold. The Bretton Woods period was a boom time, but it wasn't sustainable. In 1971 the US finally had to admit that it couldn't honor its obligations to redeem US dollars in gold to foreign holders. The boom had been partially underwritten with unsustainable monetary expansion.
She asked, if I am so convinced that government intervention causes so many problems, how do I explain the lack of major financial crises for the 70 years following the great depression.
I'm not sure how she thinks the U.S. went 70 years without "many problems". By war's end the U.S. was incredibly rich and powerful and the government proceeded to interfere and spend vociferously domestically and internationally. The 1970's are pretty much the major consequence of doing this for two decades without restraint. The fact that there was a lag period of many years does not discount that interventions, both politically and economically, inevitably lead to worse conditions for the economy and the people.
"how do I explain the lack of major financial crises for the 70 years following the great depression."
Umm what?
"The success of regulation following the Great Depression".
Well, in a nutshell: America went from being unscathed from war and incredibly prosperous to telling its foreign creditors only two decades later that it "can't even afford to pay the rent". Some good those regulations did, eh?
Oh I see, don't I feel silly. Any books I can read on this period in history, I am quite interested now
I can't think of any especially relating to the period, but you can check out Tom Wood's bestseller called "Meltdown" regarding the recent financial crsis for a look into how government intervention and regulations most certainly cause economic troubles.
First WW2 did not solve the Great Depression. The Dow Jones finally recovered to its Oct 1929 high in November of 1953 or 24 years later. There was recovery in the USA immediately after the war but the people did not recover their capital until 8 years after the war.
And after the war the countries of the world tried to get back to some sort of gold standard in international transaction which Nixon that jackass ended in 1971 when the Vietnam War bills and the Great Society Programs were overwhelming the Treasury. And to stop the inflation Nixon pass a myriad of regulations with the worst ones on petroleum. Of course the results were predictable: The USA had a decade of high inflation and low growth despite the development of new technologies like the PC. The culminated in a mad rush of de-regulation and the final mess when Regean ended the regulation of Petrol and ended the Synthetic Fuels program. (Sound Familar like the Alternative Energy Initiatives of Today) Oh yeah and the government spent a ton of scarce resources trying to turn food, corn, into ethanol. And it failed just like the same programs are bound to do at this attempt.
OMG!!!!!
What an easy question. LACK OF CRISES FOR 70 YRS AFTER THE GREAT DEPRESSION????
Very easy indeed.
The great depression started with the excesses that started to take place just after the profitable end of WWI for the US. The 1920s fueled a decade of bubble that crashed in 1929 as we all know very well. This crises was officially over by the end of 1945. The US was out of the crises by 1941 due to war production material, nothing else.
At war's end the US was the major industrial power and quickly established an economic-monetary order to favor only the US dollar. It provided great stability until it broke in 1971 by Nixon removing gold backing. Actually excess dollars printed to finance the Vietnam war was the main cause. After 1971 all hell has broken lose. Crises after crises. Every 5 years or more we get a major one.
AT LEAST UNTIL 1971 SOMETHING HELD CENTRAL BANKS FROM PRINTING.
That girls question is half true, half bad cooked.
Thanks for reading.
Corporatism is using state means to enhance market share and profitability of a few favored firms, at the expense of the citizen.
Right, she seemed to think it was the regulation that was brought in following the crash that kept things stable, glad to hear she doesn't know what she talking about. But then....neither do I.
Thanks for the replies.
...she doesn't know what she talking about. But then....neither do I.
You have two advantages though. You know that you need to educate yourself to discuss this stuff intelligently, and you know where to go for that education.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
The alleged period of "economic stability" following the great depression is characterized by 7 major recessions (48, 53, 60, 70, 73, 81, 87), as well as a decade long period of simultaneous economic stagnation and inflation (impossible in the traditional Keynesian model), which nearly crippled the U.S. and English economies. In other words, it's simply a myth.
Additionally, simply pointing out the fact that there hasn't been a major financial panic between the great depression and this most recent recession (a) says nothing about general macroeconomic performance throughout this period (as I've demonstrated above), and (b) does not constitute a valid argument in favor of government interventionism. I would argue that various government interventions (including regulations, taxation, inflationism, "pro-labor" policies, and general Keynesian policy) not only caused economic stagnation and the stagflation crisis, but is also responsible for this most recent financial crisis (for example, the "experimental negotiation act of 1973" can be blamed for the demise of U.S. steel production).
[edited]
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
The U.S. finally recovered from the Great Depression not because of WW II, as is commonly asserted, but because of the end of WW II. Although WW II solved the unemployment problem as a result of the draft and wage controls, depression conditions persisted until 1946, when government drastically cut spending. The draft solved unemployment by sending 10 million unemployed men to Europe to be blown up, and the government imposed wage controls that created labor shortages. However, the standard of living during WW II actually decreased, and the government imposed price controls and rationing, thus creating shortages and widespread privation. For instance, in 1943, my grandmother had to wait two hours to purchase a loaf of bread. It is true that GDP greatly increased during this time, but it was mainly a result of government spending, not increased prosperity.
As WW II was drawing to a close, the Keynesians your friend worships began predicting a huge depression as soldiers would be due to return and government spending would decrease. Thankfully, virtual lifelong dictator Franklin Roosevelt died, and the Truman administration, which was slightly less hostile to free enterprise, cut government spending by two-thirds. Rather than spawning the depression predicted by the Keynesians, the retreat of government unleashed the power of free enterprise, creating a gigantic boom. Also, the United States, though burdened with a larger-than-previously welfare and regulatory state resulting from the New Deal and Fair Deal, was still much freer and more fully intact than the European countries ravaged by war and therefore was poised to dominate the global economy.
The U.S. rode this wave of prosperity through the 1950s, when the Federal Reserve inflated relatively little compared with previous decades. President Eisenhower wanted moderate money growth, and Fed chairman William McChesney Martin obliged. This period saw two or three mild recessions induced by the Fed's moderate inflationary policy.
During the 1960s, the Fed -- in order to fund the New Frontier, Vietnam, and the Great Society -- began heavily inflating once again. This period was one of ostensible economic prosperity; however, the prosperity was the result of an illusory and unsustainable bubble inflated by Fed money printing. The increased money printing spooked European countries, particularly France, which demanded redemption in gold for their dollars. During this time, the Bretton Woods agreement was still in place, establishing an international pseudo-gold standard.
Because of its profligate money printing, the U.S. could not pay its obligations, and Nixon essentially declared the government's bankruptcy when he closed the gold window, completely abolishing the paltry remnants of the gold standard established by Bretton Woods. The final abolition of the gold standard, coupled with Nixon's goading of the Fed to inflate in order to reassure his reelection, inaugurated a phenomenon thought impossible by the Keynesians your friend worships -- stagflation. Stagflation is the simultaneous occurrence of rising prices and rising unemployment, something Keynesian theory could not account for.
The 1970s' Fed, under Chairman Arthur Burns, continually inflated, thus raising prices and unemployment throughout the decade. Initially, President Jimmy Carter supported and even demanded more Burns-induced inflation, but as inflation began to spiral out of control, the Wall Street establishment decided that something must be done, influencing Carter to appoint to as Fed chairman (after the disastrous interlude of G. William Miller) Paul Volker. Appointing the hawkish Volker, Carter was warned, would defeat Carter's chances at reelection; however, Carter took the risk. Volker began aggressively raising interest rates, thus drastically slowing an out-of-control, double-digit inflation rate that threatened to transform into incipient hyperinflation.
With an already-weak economy, Volker's battle against inflation spurred a serious but widely forgotten recession from '81-83, in which unemployment reached more than 10%.
The point here is that in the 1970s, the U.S. faced a serious crisis -- stagflation that threatened to spiral eventually into hyperinflation. And this crisis was the result of decades of the Keynesian philosophy of money printing as a solution for all problems. Only a deep recession cured stagflation -- or at least drastically lessened its effects and staved it off for a while.
We face the growth of a similar crisis today, spurred by the profligate, illogical, and immoral policies of the Keynesians.
For more, read Depression, War, and Cold War by Robert Higgs and pretty much anything by Murray Rothbard and Tom Woods.