March 24, 2020


The real lesson of the Great Depression (Tim Worstall , 3/23/20, CapX)

Here's the thing. The Depression was over in the UK by 1934. The country was, already by then, back to 1929/30 levels of output.As we know the American disaster toiled on rather longer.

So, what were the big differences?

Firstly, the Americans took the decision to allow the banking system to go bust. As Milton Friedman and Anna Schwartz showed in A Monetary History of the United States, this was the single most disastrous decision of the time. There seems little chance contemporary politicians would let the same thing happen now, and more fool them if they did.

While America was expanding the reach of government, the UK cut state spending and put the budget into surplus. At the same time it devalued the pound. This is known as "expansionary austerity" - and it worked pretty well. [...]

As to our current problems. The cause is entirely different, it is not economic in nature in the slightest. In technical terms it is "exogenous", from entirely outside the economy and nothing to do with any economic structure or policy we have been following. It is not, therefore, a crisis of capitalism any more than it's a crisis, or endorsement, of socialism or any other -ism. It simply is and is something to be dealt with. The only useful question is, well, what is to be done?

Useful answers including not making the mistakes of the past. Don't allow the financial system to fall over. Don't try to fix or raise wages artificially, don't start to plan and enforce cartels, even if they're of labour not producers. And yes, once the crisis passes, we will need to cut government spending if only because of all the debt we have accrued dealing with the cursed virus.

Reasoning from a price change caused the Great Depression (Scott Sumner, 5/31/17, Econ Library)

The Great Depression had two primary causes: an excessively tight monetary policy caused NGDP to drop in half between 1929 and early 1933, and then a set of New Deal policies such as the National Industrial Recovery Act (NIRA) slowed what would have been an extremely fast recovery after the dollar was devalued in 1933.

I've already talked about how reasoning from a price change contributed to the tight money policy of 1929-33. Most pundits and policymakers looked at the rapidly falling level of nominal interest rates and assumed that money was easy. In fact, rates were falling because of a decline in demand for credit, caused by the Depression itself. Money was actually very tight.

Posted by at March 24, 2020 12:00 AM