![]() So, once again, a badly programmed monetary policy prolonged the depression.” – Friedrich Hayek Personal Stories from The Great Depression I am not only against inflation but I am also against deflation. “I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. These policies coincided with Roosevelt’s tax hikes, and a recession occurred within the Depression from 1937 to 1938.Ĭritics of these policies say that this delayed the recovery by years. ![]() During those two years, the Fed not only hiked interest rates, but it also doubled bank-reserve requirements. They also point to the premature tightening that occurred in 19 as a policy failure. The Federal Reserve shouldn’t have done anythingĪustrian economists believe that the Fed and government both made policy choices that slowed the recovery.įor starters, most agree with Friedman that the Fed’s policy choices at the start of the Depression led to deflation. “The contraction is…a tragic testimonial to the importance of monetary forces…ifferent and feasible actions by the monetary authorities could have prevented the decline in the stock of money… would have reduced the contraction’s severity and almost as certainly its duration.” – Milton Friedman (and co-author Anna Schwartz) The Fed’s failure was in not realizing what was happening and not taking corrective action. Milton Friedman claimed that the Federal Reserve made the wrong policy decision, which extended the length of the Depression.īetween 19, the monetary supply dipped 27%, which decreased aggregate demand and then prices. “ abandonment of policies coincided with the strong economic recovery of the 1940s.” – Cole and Ohanian Lastly, one other charge leveled at Roosevelt by his critics is that the sprawling policies from the New Deal ultimately created uncertainty for business leaders, leading to less investment. They calculate that this, along with the aftermath of these policies, accounted for 60% of the weak recovery. To do this, it got industry leaders to meet and establish minimum prices and wages for workers.Ĭole and Ohanian claim that this essentially created cartels that destroyed economic competition. Established in 1933, the goal of the NRA was to lift wages. The National Recovery Administration (NRA) is a primary subject of this criticism. Some economists believe the New Deal had a negative net effect on the recovery. ![]() Roosevelt’s economic policies through The New Deal were too cautious. Keynesians such as Paul Krugman believe that Franklin D. Keynes advocated massive deficit spending to offset markets’ failure to recover. The Central Bank could not ultimately push banks to lend, and therefore demand had to be created through fiscal policy. Looking back on The Great Depression, John Maynard Keynes believed that monetary policy could only go so far. To this day, economists disagree on why the Depression lasted so long. The Great Depression lasted from 1929 to 1939, which was unprecedented in length for modern history. Real interest rates (nominal rates minus inflation) can rise as inflation is negative, causing unwanted tightening. Real value increases: cash is king and gains in real value. Here’s how “real value” is affected in a deflationary environment: Wool had a drop from $0.24 to $0.10 per pound, and most other goods followed the same price trajectory. The price of butter went from pre-crisis levels of $0.21 to $0.13 per pound in 1932. ![]() fell by nearly 50% from their pre-WW1 levels. Instead of spending money on new things, people hoarded their cash.įewer dollars spent meant more drops in demand and prices, which led to defaults, bankruptcies, and layoffs.Īs a result of this spiral, the prices for many food items in the U.S. The Deflationary SpiralĪfter the stock crash, money and consumer confidence was hard to find. The resulting aftermath was so bad, that almost every future Central Bank policy would be designed primarily to combat such deflation. Regardless of the causes, the combination of deflationary pressures and a collapsing economy created one of the most desperate and miserable eras of American history. Many reasons have been supplied by the different economic camps for the cause of the Great Depression, which we reviewed in the first part of this series. More than 5,000 banks collapsed, and there were 12 million people out of work in America as factories, banks, and other shops closed. ![]() The economy of the United States was destroyed almost overnight. The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money. Life and Times During the Great Depression ![]()
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