Whenever discussing the Great Depression, it is always argued that high interest rates imposed during the Great Depression (Specifically 1931) worsened the Depression because investment was curtailed. This of course seems to run contrary with what an Austrian would argue. There was obviously credit inflation prior to the Great Depression, which I always bring up, but such points are ignored. The focus is always on the rise in interest rates. How can this be explained?
Here is the argument: "Interest rates didn't need to rise when there was deflation. Interest rates were raised to stem the outflow of gold, not because of inflationary pressure. Accumulated deflation during the Depression was something like 20% from 1929 to 1933. The fact that rates were lower than they were the year prior is not a reason to raise rates. They should have been lower than 4% in 1930. Raising interest rates when prices are collapsing is insane."
Of course, the above poster does not realize the money supply can expand as prices rise, or although prices do not rise, th effects of inflation persist. Also, why were prices falling? Obviously it was not due to an increase in production.
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The problem with that narrative is that it supposed that people could pay off the debt from their investments. I don't see how that would be possible from the information that we have on that time period.
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He also said that falling prices meant that interest rates were too high, and that high interest rates caused the 1920 depression.
I don't think so. Many people were overleveraged (much as the governments are now). It was pretty clear that it was a boom, interest rates merely reflected the worsening of expectations in terms of paying back loans vs the deposits that enabled them.
OP, read this.
http://www.ok-safe.com/files/documents/1/Gold_and_Economic_Freedom_an_Article_by_Alan_Greenspan_1966.pdf
Before he went over to their side Greenspan knew how it worked. Excess, or artificial, credit was induced to support (bailout) the British Pound and their mistakes during WWI.
I'm pretty sure that most people who didn't get themselves into excessive debt during the roaring 20s credit boom were fine when the money supply contracted at the end of the decade. My grandmother's mother and her stepfather didn't mortgage their home (or if they did, they didn't borrow much) and they came out of the GD just fine. They were never anywhere close to wealthy either, but since they didn't speculate, they were fine. As for my parents, my dad does make quite a bit more than most people, but they're actually in quite a bit of debt, which indicates that the people hurt most by the GD were actually well connected debtors. Robert Morris was a wealthy speculator, after all (although he didn;t live during the GD).