Great Myths of the great DEPRESSION (photos & references)Submitted by Mark Twain on Mon, 10/24/2011 - 15:22
- I. The Business Cycle
- II. The Disintegration of the World Economy
- III. The New Deal
- IV. The Wagner Act
• The Panic and Depression of 1893-95 hit the country after Congress force-fed the economy for years wi th depreciating silver and paper notes.
• And in 1921, a brief but sharp tumble took place after several years of credit and currency expansion to accommodate the spending for World War I.
The common thread woven through all of these earlier debacles was disastrous manipulation of the money supply by government. For various reasons, government policies were adopted which ballooned the quantity of money and credit in the economy. A boom resulted, followed later by a painful day of reckoning. None of these depressions, however, lasted more than four years and most of them were over in two. The calamity that began in 1929 lasted at least three times longer than any of the country’s previous depressions because the government compounded its monetary errors with a series of harmful interventions.
Pumping Up the Volume: Most monetary economists, particularly those of the “Austrian School,” have observed the close relationship between money supply and economic activity. When government inflates the money and credit supply, interest rates at first fall. Businesses invest this “easy money” in new production projects and a boom takes place in capital goods. As the boom matures, business costs rise, interest rates readjust upward, and profits are squeezed. The easy-money effects thus wear off and the monetary authorities, fearing price inflation, slow the growth of, or even contract, the money supply. In either case, the manipulation is enough to knock out the shaky supports from underneath the economic house of cards. This basic business cycle outline applies as perfectly to the events of the 1920s as it does to all of the earlier boom-bust cycles in U.S. history. The fingerprints on the door to the Great Depression belong primarily to the “money monster” of the twentieth century: the Federal Reserve System, known also as the Fed.