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.
Depressions are not caused by not pumping money into a faltering economy. The bad part if the cycle is not the slump; it is the boom. That’s when things get out if joint. The following slump, which was caused by inflation, is what corrects maladjustment. Reinflating only perpetuates problems. Bad markets need to be liquidated to figure out where everyone stands so production can start growing again. Bernanke confuses symptom for cause.
I realize the federal reserve wad created to bail Bug Business out of its mistakes purportedly for the general good, and I shouldn’t expect its chairman to k ow any better. But how many times does reinflation have to fail and inflation bubbles cause recessions for us to notice? How much government spending, unprecidented federal regulation of markets, going for the first time off the good standard, inrernational trade wars and regime uncertainty did there have to be 33 to 36 not to blame the second dip on the bogey of tight money?
I love Friedman, but between income tax withholding, the earned income tax credit, and the deflation theory of great depression he has helped big giverment more than any libetariam who ever lived.