There is a fellow I often have political debates with at work, who is a progressive democrat fervently against the federal reserve because it's a "private bank" running the country. He believes in greenbacks, but is totally against the fed despite my efforts of explaining how greenbacks are really no different than what we have now.
Essentially we were talking about the Great Depression and what caused it. And I really can't think of a way to find out whether a statement he made was true. He said a certain Fed chairman admitted to the Fed being responsible for the depression (I know this is true) and he said the reason why was after the roaring 20's the Fed contracted the money supply, like called in dollars and burned them. (he says this most prosperous time was created by inflation, like it was a real good thing.) I sort of agreed stating it was an unsustainable boom that must have been followed by a bust when the fed stopped inflating.
He then said that after creating inflation the Fed purposefully contracted the money supply (to create a depression- those damn Rothchilds!) making it where no one had the money to fund all the projects during the boom. Essentially he was saying if the fed just kept a steady inflation America would have just kept on booming. What do you think?
I really hate that Austrianism was the first economics I've ever learned (still a novice mind you) because I can rattle of business cycle theory from the basics but it's really hard for me to apply these thing to those who disagree.
*BUMP* I have a hard time applying theory to history, I'm not well read on history (see: none.) Though I like to blame that on public school I've never had a history teacher who wasn't a P.E. coach since the seventh grade. Even then all I learned was dates and people's names! I definitely want to read Rothbard's Great Depression book now, these answers are I'm sure already there and all over this site. (But it would be real hard to ask something that wasn't.)
Really what I'm wondering is if and how a monetary base reduction occurs after inflation stops. I'm pretty sure the Fed can't just call back in dollars can it?
Also, I see that with the inflationary money incentivizing higher-order goods, there comes a point where there isn't actual saving amongst the public to buy these long-term projects, hence a crash. But my sparring partner just kept pushing, "yes they did, they reigned in dollars and intentionally made the crash."
But didn't the Fed turn back on the printing press a few years after? This, on top of the numerous amount of spending projects and additional laws created by the government is why The Great Depression lasted as long as it did.
He is partially right and wrong. He is wrong about business cycles. Inflation does create an unsustainable boom so we can't just keep inflating without negative consequences. Of course less inflation means milder recessions. He is right in that the bubble caused by inflation will cause 'good times', but that's not a desirable situation, it's merely a unsustainable misallocation that brings about a bust. Once the bust is due, a contraction in the money supply will really screw up the economy. The Fed contracted the money supply before the great depression, by a third iirc. So he's right about strong deflation 'causing' downturns, but he's missing that the downturn was brought on by inflation and that deflation merely makes it worse. So he's right about the general effects of inflation and deflation, just that he's not aware of business cycles and thinks that inflation is entirely good and deflation is entirely bad.
Edit: Also he might use the terms inflation and deflation referring to price changes, not a change in the money supply.
Your coworker is correct that “a certain Fed chairman admitted to the Fed being responsible for the depression” Then-Federal Reserve Governor Ben Bernanke said, “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to [economists] Milton [Friedman] and Anna [Schwartz]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.”
Can someone explain to me why it is that Rothbard, in America's Great Depression, states that after the stock market crashed the Fed attempted to increase the money supply but the mainstream view is now that the fed cut the money supply by nearly a third?
Just talk to him about how exactly it is that inflation can cause prosperity when the entire thing is an illusion, these projects are not sustainable, they are not profitable, but they are treated like they are, therefore musn't the inflation necessarily lead buisness to invest into projects which are not sustainable or deemed profitable by society?
Thanks for answers!
Emperor Nero: I suspected we both had elements of truth, although I wanted to prove that even without the fed cutting the money supply a bust was sure to happen. I figure I can show that the fed contracting the money supply had not much to do with real savings amongst the public, so it was inevitable either way.
Neodoxy: I'll try something like - The inflation leading to unsustainable projects is a double-whammy: simultaneous disincentive of savings and more incentive toward higher-order goods. Literally no real recourses in the economy to sustain the "growth" of the boom.
Gero: Thanks for the link! I see how in my above post I made it look like I disagreed with the claim of Bernake admitting the fault of the fed for the depression, I should have made it more clear I just don't know how to find how that the Fed actually cut the base money supply by a third. My conspiracy theorist side of me wants to say they did it so the depression would be blamed solely on the contraction, not the initial inflation.
"Also he might use the terms inflation and deflation referring to price changes, not a change in the money supply."
This might be why I feel we're talking past eachother. I even make this mistake all the time (probably above) and I have known better for quite some time. Old habits...
Sorry for talking a lot but I'd also like to know how to explain better that the bust is actually the "good" part, not good that it needs to occur, just good in the way that it is a necessary consequence - a correction. It's easy to start sounding like a fundamentalist, blindly trusting the market without reason, "Don't worry the market will always fix itself!"
I love these little sparring matches with my co-worker but I don't have enough time at work to explain how the economy should work ala those Garrison youtube videos. Maybe I should get his e-mail that video was awesome.
This whole conversation with him actually started from him talking about a Yahoo News article explaining how people in their twenty's are saving "too much" money and ruining the economy. Weird where these arguments go.
He has the upper hand in these arguments to those listening because he can point to a simple causal-relationship, money contraction, then crisis. I have to explain economic theory for ten minutes.
Fear the Boom and Bust: http://www.youtube.com/watch?v=d0nERTFo-Sk
If you start to construct a house and you find that there's a fundamental flaw in its construction should you just keep building until it collapses? Or should you simply start to reconstruct the house? The way that we perceive things fundamentally changes our outlook, and if we perceive the recession as the problem, then we miss it for what it truly is, the solution. It is not a shortfall, a problem per se, but a readjustment to the real conditions of the world. In the long run you will end up with a functioning, profitable free market society, while if you attempt to prevent the recession this will not occur. One of the examples of the most lassez-faire recoveries in history your'e talking about the recession of the early 20's which hit bottom and then returned to normal levels in just about a year, an admirable recovery time. The great depression had huge interventions.
If you boost spending artificially you simply hold off the bust and you will make it more drastic when it occurs and you bump up the interest rate which harms the expansion of industry and simply increases the need for readjustment (which tendancy prevails depends upon the extent of the crowding out effect), if you inflate then you will be doing the same thing, just blowing up the bubble. If you prop up wages then you will simply bring about unemployment.
I still feel like the early 20's recovery is a weak point for me to argue, I feel the opposing side can just say the inflation proceeding that was the solution. I've tried to explain also how holding up wages can decrease the mobility of labor during the crisis, though he still is pushing that had the inflation proceeded, the boom would have never stopped. He also holds that during this inflation minimum wage constantly needs to be pushed up to meet rising prices, I really just don't know where to start with him. Our premises are completely different. He very much "wants to steer markets, I want them set free."
Just to give an idea he also holds that, charging interest is usury, and that a money-less society can be built "like Star Trek" where everyone helps each other and chooses whatever job they want (he's never heard of the Venus Project surprisingly!) This requires enough prosperity from the inflation boom (forget about bust) to get to a point where money is useless. I always ask, "Who will do the shitty jobs?" and he gets real mad and can't answer.
This guy showed me the movie Money Masters which is what led me to this website so I feel if I am correct, I owe it to him to convince him of the right path. He's also "the smart guy" everyone looks up to at work. I love that Hayek quote in the above video, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." Found a sig, hope it's not taken!