“when tightening occurred triggering a double dip sever recession.”
That didn’t happen. But ideas have consequences and since everyone in power think depressions are caused by deflation we will get endless helicopter dumplings. Or maybe ideas don’t matter and government control of monetary systems will only ever produce one answer, Keynes and Friedman or no.
It is true that people are sitting on money, and that it is not changing hands at rates satisfactory to our overlords. But once in a blue moon businessmen forecast correctly, and maybe skittishness is justified. For one thing, why expand if you don’t Knowles whether the federal government will up and confiscate your profit tomorrow?
In 1937, the economy was getting on its feet after the calamity of the Depression. Did the policy makers move too quickly in 1937 as they may have done in 2011 to withdraw government support for the US economy? In the long run, the budget deficits were and are still, clearly not sustainable. However, as FDR’s closest aide Harry Hopkins famously said, “People don’t eat in the long run; they eat every day!” And today’s approach, if 1937 is a guide, could create not only more suffering but also less prosperity. In order to grow, the economy needs people who eat, people who work, people who produce and people, as well as businesses, that contribute to the Treasury by paying taxes.The Federal Reserve did its part to throw the US economy back into recession by tightening credit. Wholesale prices were rising in 1936, setting off inflation fears. There was concern that the Fed’s easy monetary policies of the 1920s had led to asset speculation that precipitated the 1929 crash and ensuing Great Depression. The Fed responded by doubling banks' reserve requirements between August 1936 and May 1937, in several stages, leading to a sharp contraction in the money supply.
Read more: Is It 1937 All Over Again?
That 1937 feeling all over again
"Federal Reserve Chairman Ben Bernanke, an expert on the Great Depression, once promised that the central bank would never repeat its 1937 mistake of rushing to tighten monetary policy too soon and prolonging an economic slump."
The Perfect Storm
In the decades following Friedman and Schwartz’s work economists started examining other government-policy failures in the aftermath of the crash. They have found an abundant supply of them. Here are several key examples of these bad policies: 1) In response to a sharp decrease in tax revenues in 1930 and 1931 (caused by a slowdown of economic activities), the federal government passed the largest peacetime tax increase in the history of the United States, which clearly applied the brakes on any recovery that could have taken place; 2) the federal government also passed the Smoot-Hawley Tariff Act in 1930, substantially increasing tariffs and leading to retaliatory restrictions by trading partners, which resulted in a considerable decrease in demand for U.S. exports and a further slowdown in production (not to mention a loss of mutually advantageous division of labor); 3) the federal government also instituted all sorts of “public works” programs, beginning under Herbert Hoover and increasing dramatically under FDR; the programs removed hundreds of thousands of people from the labor market and engaged them in economically wasteful activities, such as carving faces of dead presidents into the sides of a mountain, preventing or delaying necessary labor-market adjustments; 4) another federal policy that prevented (labor and other) market adjustments was the price and wage controls enacted under the National Recovery Administration and in effect from 1933 until 1935 (when ruled unconstitutional); this policy massively distorted relative market prices, impairing their ability to function as guides to entrepreneurs; 5) the Fed was not blameless after 1933 either. It increased bank-reserve requirements in three steps in 1936 and 1937, leading to another significant decrease in the money supply. The result was the 1937–38 recession within the Depression, adding insult to injury.