Lets AGAIN REVIEW the WHOLE POINT IN CONTEXT !
- 3. The Federal Reserve’s Tight Monetary Policy Caused the Great Depression.
Federal Reserve Chairman Ben Bernanke and the late Nobel Prize-winning economist Milton Friedman blame the Federal Reserve for the Great Depression.
But they do so for the wrong reasons.
While Milton Friedman was correct on many economic issues, he was wrong on monetary policy.
He was a monetarist who incorrectly believed that the money supply determines the level of economic activity.
In his view, an increase in the money supply will lead to more economic activity.
In A Monetary History of the United States, Friedman argued that the economy was strong in the 1920s until the year 1929 when a typical economic downturn occurred. He believed that the economic recession turned into a depression because the Federal Reserve did not print enough money between 1930 and 1933.
Friedman and Ben Bernanke essentially blame the Great Depression on the Federal Reserve’s failure to inflate the money supply.
The real problem is that the Federal Reserve inflated the money supply in the 1920’s.
Inflationary booms induce widespread malinvestment -- bad investment decisions made under the influence of easy money and credit.
Malinvestments inevitably lead to wasted capital and economic losses.
An economic recession is actually necessary to correct all of the previous malinvestment.
At Milton Friedman’s ninetieth birthday party in 2002, Ben Bernanke even said
- “I would like to say to Milton and Anna:
- Regarding the Great Depression. You’re right, we did it.
We’re very sorry.
But thanks to you, we won’t do it again.”
The current economic situation may not be as severe as the Great Depression — though economists such as Peter Schiff say it could get as bad.
But it's clear that the central bank was the main culprit in both financial crises.
The Federal Reserve’s expansionary monetary policy in the 1920’s caused the Great Depression,
- not the central bank’s “tight” monetary policy in the early 1930’s.
I will REPEAT the truth for you again !
The real problem is that the Federal Reserve inflated the money supply in the 1920’s.
Inflationary booms induce widespread malinvestment -- bad investment decisions made under the influence of easy money and credit.
Malinvestments inevitably lead to wasted capital and economic losses.
An economic recession is actually necessary to correct all of the previous malinvestment.
... But it's clear that the central bank was the main culprit in both financial crises.
The Federal Reserve’s expansionary monetary policy in the 1920’s caused the Great Depression,
- not the central bank’s “tight” monetary policy in the early 1930’s.
- 3. Hoover’s high wage policy
The net result of the bank failures and the check tax was a credit-driven deflation the likes of which the U.S. had never seen.
As Milton Friedman and Anna Schwartz explain in their landmark Monetary History of the United States:
The contraction from 1929 to 1933 was by far the most severe business-cycle contraction during the near-century of U.S. history we cover,
and it may well have been the most severe in the whole of U.S. history. . . .
U.S. net national product in constant prices fell by more than one-third. . . .
From the cyclical peak in August 1929 to the cyclical trough in March 1933, the stock of money fell by over a third.
Why is a deflationary contraction so devastating ?
A major reason is because prices don’t adjust uniformly and automatically, which can lead to what scholars call economic dis-coordination.
In particular, if wages don’t fall in line with other prices, this effectively raises the cost of labor, leading to — among other damaging consequences — unemployment.
And during the Great Depression, although most prices fell sharply, wage rates did not.
One explanation is that wages are what economists call “sticky downward”:
- people don’t like seeing the number on their paychecks go down, regardless of whether economists are assuring them that their purchasing power won’t change.
What is certainly true is that government intervention kept wages from falling — particularly the actions of President Hoover and, later, President Roosevelt.
Hoover believed in what was called the “high wage doctrine,” a popular notion in the early part of the 20th century.
The high wage doctrine said that keeping wages high helped cure economic downturns by putting money into the pockets of workers who would spend that money, thereby stimulating the economy.
When the Depression hit and prices began falling, Hoover urged business leaders not to cut wages.
And the evidence suggests that they listened
- (whether at Hoover’s urging or simply because they too accepted the high wage doctrine).
Average hourly nominal wage rates paid to 25 manufacturing industries were 59.3 cents in October 1929, and 59.5 cents by April 1930.
Wage rates had fallen only to 59.1 cents by September 1930, despite substantially reduced output prices and profits.
Compare this to the 20 percent decline in nominal wage rates during the 1920-21 depression.
During the first year of the Great Depression the average wage rate fell less than four-tenths of one percent.
Hoover would go on to put teeth into his request for high wages, signing into law the Davis-Bacon Act in 1931 and the Norris-LaGuardia Act of 1932, both of which used government power to prop up wages.
FDR would later go on to implement policies motivated by the high wage doctrine, including the 1933 National Industrial Recovery Act, the 1935 National Labor Relations Act, and the 1938 Fair Labor Standards Act.
The problem is that the high wage doctrine was false —
- propping up wages only meant that labor became increasingly expensive at the same time that demand for labor was falling.
Remember:
- Hear now this, O foolish people,
- and without understanding;
- which have eyes, and see not;
- which have ears, and hear not ...