The Great Depression - why did it end?

[Toro]

Actually it didn't end until after WW2 when spending was cut and taxes were cut. War-time spending certainly didn't get us out, because that's always destructive to the economy.

This is incorrect.

If the government significantly increases demand to go blow things up over there, then the war is stimulative to the domestic economy. It is bad for over there but it is good for right here.

For example, corporate profits hit a multi-decade high in 1918 and were not surpassed until the 1950s.

A majority of production moving into supplying instruments of war is not helpful to the economy at home, because the only demand is from the military and not any domestic sources. Furthermore, the money spent on the war was taken from the citizens through taxation and inflation, which of course takes us to Bastiat's "What is seen and unseen."

Military demand is the domestic source.

But of course, domestic source does not matter. Exports are not a domestic source yet they add to the aggregate demand of the economy.

Your statement is only correct if there is no excess capacity in the economy. There was significant excess capacity after the Depression.

It also assumes that the velocity of money is high. If the velocity of money is low, government spending is stimulative even if there is taxation. For example, if everyone is sitting on their hands not spending and letting the money sit in the bank (or their mattress as was common during the Depression), the government taking the money and spending increases economic activity. This is known as The Paradox of Thrift.

 

[elvis]

Did the Vietnam War boost the economy?

 

[Kevin_Kennedy]

This is incorrect.

If the government significantly increases demand to go blow things up over there, then the war is stimulative to the domestic economy. It is bad for over there but it is good for right here.

For example, corporate profits hit a multi-decade high in 1918 and were not surpassed until the 1950s.

A majority of production moving into supplying instruments of war is not helpful to the economy at home, because the only demand is from the military and not any domestic sources. Furthermore, the money spent on the war was taken from the citizens through taxation and inflation, which of course takes us to Bastiat's "What is seen and unseen."

Military demand is the domestic source.

But of course, domestic source does not matter. Exports are not a domestic source yet they add to the aggregate demand of the economy.

Your statement is only correct if there is no excess capacity in the economy. There was significant excess capacity after the Depression.

It also assumes that the velocity of money is high. If the velocity of money is low, government spending is stimulative even if there is taxation. For example, if everyone is sitting on their hands not spending and letting the money sit in the bank (or their mattress as was common during the Depression), the government taking the money and spending increases economic activity. This is known as The Paradox of Thrift.

Yes, there was demand for the production of war materials, but they were of no value to anyone domestically. The average joe certainly couldn't afford, and would have had no use for a tank or a missile. For all the good war spending does at home the government might as well have paid people to go into a desert and dig holes, then pay another group of people to go fill them in again. As to the "paradox of thrift," I'm familiar with it. But whether people are "hoarding" their money or not we still fall into Bastiat's "What is seen and what is unseen."

Bastiat: Selected Essays, Chapter 1, What Is Seen and What Is Not Seen | Library of Economics and Liberty

If we take money from people just because they're saving it, we still hurt the economy. What would they spend that money on in the future is what we have to ask, and how many jobs are we going to lose if we stop them from spending that money in the future?

Consumers Don't Cause Recessions - Robert P. Murphy - Mises Institute

 

[Kevin_Kennedy]

Did the Vietnam War boost the economy?

No, war spending is always destructive to the economy. The government must take the money for the war from the private sector, and whether they do this immediately through direct taxation, borrow money which leads to future taxation, or inflate which reduces everybody's wealth it hurts the economy. It means that people cannot then spend that money that was taken on what they otherwise would have, and jobs must then be lost in the process.

 

[Chris]

A better question would be, what got us into the great depression?

Unregulated greed and protectionism.

 

[DiveCon]

A better question would be, what got us into the great depression?

Unregulated greed and protectionism.

it was more people over extending their means

but it figures you would be clueless

 

[Toro]

Yes, there was demand for the production of war materials, but they were of no value to anyone domestically. The average joe certainly couldn't afford, and would have had no use for a tank or a missile. For all the good war spending does at home the government might as well have paid people to go into a desert and dig holes, then pay another group of people to go fill them in again. As to the "paradox of thrift," I'm familiar with it. But whether people are "hoarding" their money or not we still fall into Bastiat's "What is seen and what is unseen."

Bastiat: Selected Essays, Chapter 1, What Is Seen and What Is Not Seen | Library of Economics and Liberty

If we take money from people just because they're saving it, we still hurt the economy. What would they spend that money on in the future is what we have to ask, and how many jobs are we going to lose if we stop them from spending that money in the future?

Consumers Don't Cause Recessions - Robert P. Murphy - Mises Institute

I am very aware of "what is seen and what is unseen." "The Law" was the second book I ever read on economics. The first was "Economics in One Lesson," which I am sure you heard of.

You argument assumes that prices are always in equilibrium. But that is not always the case. Here is a conversation I have been having many times over the past several months.

Me: "Why don't you invest now? Asset prices are cheap."
Them: "We are waiting to see the economy improve."

Everyone whom I have asked this question has given me this exact answer, or some facsimile. If everyone is waiting to see the economy improve, it won't. It is very, very easy to see that if financial crises continue, then everyone sitting on their hands because the economy is awful becomes a self-fulfilling prophecy. In this, the perception becomes reality. George Soros called this "reflexivity." If everyone believes something will happen in financial markets and economics, then it can and does.

This is what happened during the Depression as thousands of banks failed. With massive excess capacity and consumers not spending, the government stepped in to replace the absent demand.

The problem with the argument you present is that you assume people are always rational. If people were always rational, people would not react with fear and greed. When people are fearful and paralyzed, their lack of action can become a self-reinforcing cycle.

 

[Kevin_Kennedy]

A better question would be, what got us into the great depression?

Unregulated greed and protectionism.

The Federal Reserve, the same way they created our current problem.

 

[DiveCon]

A better question would be, what got us into the great depression?

Unregulated greed and protectionism.

The Federal Reserve, the same way they created our current problem.

chris is too stupid to understand you can not regulate greed
and yes, greed had a part in it, but if they didnt allow investing on margin, that wouldnt have caused the same problems

 

[Toro]

A better question would be, what got us into the great depression?

Unregulated greed and protectionism.

The Federal Reserve, the same way they created our current problem.

chris is too stupid to understand you can not regulate greed
and yes, greed had a part in it, but if they didnt allow investing on margin, that wouldnt have caused the same problems

You cannot regulate greed but you can create a regulatory architecture such that greed doesn't completely destroy an economy, or at least limits the damage. Simplistically, if we required all financial institutions to hold an excess amount of capital - which we did not leading up to this crisis - then the likelihood of a credit-induced implosion is far less likely.

The Fed was probably the primary culprit of turning a nasty recession into The Great Depression. However, people have to remember why the Fed came into being in the first place. People had concluded that the cyclicality and instability of the financial system was increasing the volatility of the real economy without a central bank.

 

[editec]

The banks were lending 35 times as much money as they had in reserves to begin with.

And when those dubious assets they held turned out to be worth far less than they thought they were?

DEFLATION was the inevitable outcome.

Had it not been for FDR's banking REGULATION called FDIC, the run on the banks would have caused every bank in the United States to fail.

Anyone care to despute that theory?

Particularly anyone who believes that all regulations on capitalism are a bad idea?

 

[Yukon]

Who are the 'Bankers', where do they come from, who do they report to, why do they get away with crimes against humanity, is it a conspiracy? Tell me.......................

 

[Kevin_Kennedy]

The banks were lending 35 times as much money as they had in reserves to begin with.

And when those dubious assets they held turned out to be worth far less than they thought they were?

DEFLATION was the inevitable outcome.

Had it not been for FDR's banking REGULATION called FDIC, the run on the banks would have caused every bank in the United States to fail.

Anyone care to despute that theory?

Particularly anyone who believes that all regulations on capitalism are a bad idea?

And if the government did not allow fractional reserve banking, which can be defined as fraud, then bank runs wouldn't be a problem.

 

[Yukon]

Kevin,

You would be wise to say nothing about banks. You'll seem brighter than you really are.

 

[Kevin_Kennedy]

Kevin,

You would be wise to say nothing about banks. You'll seem brighter than you really are.

I'm too young to be wise.

 

[Yukon]

Kevin,

You are truthful my son !

 

[editec]

The banks were lending 35 times as much money as they had in reserves to begin with.

And when those dubious assets they held turned out to be worth far less than they thought they were?

DEFLATION was the inevitable outcome.

Had it not been for FDR's banking REGULATION called FDIC, the run on the banks would have caused every bank in the United States to fail.

Anyone care to despute that theory?

Particularly anyone who believes that all regulations on capitalism are a bad idea?

And if the government did not allow fractional reserve banking, which can be defined as fraud, then bank runs wouldn't be a problem.

If there was no fractal banking, if, as I presume you are suggesting but didn't clarify, all money was backed by gold?

Then we would have to restructure our economy to cope with continuous deflation.

Now there may be a way to do that and still have a thriving growing economy.

Only I cannot imagine how it will work.

How, for example, does a farmer or an industry (traditionally they borrow every year to invest in their businesses) borrow money when the money they will pay back will be worth MORE than the money they recieved, PLUS the prices the will get for their goods will ALSO be declining?

It seems to me that we must have a continuously growing amount of cash in circulation if our society is continuously increasing the amounts of goods and services it is producing.

As to crashing the FED and returning to private banking?

That doesn't in ANY WAY address the problem of DEFLATION in a gold standard economy.

Now if somebody can explain to me how a gold back economy can work in a modern industrial society, one where the amount of population and goods and services it produceds continue to rise every year, then I'm more than willing to consider the gold standard.

As to fractal banking?

UNTIL fractal banking was invented there really was no banking industry.

I suspect bank can NOT lend only the money that they have in deposits and thrive as a business.

Not unless you're talking about returning to 14th century SHYLOCK banking, of course.

The Mafia can do that, becaause the interest they charge is so enormous, and failure to pay doesn't lead to legal bankrupsy, it leads to leg breaking.

 

[disciple2184]

The war left many millions dead and this was a big help in saving the world from the depression, population control.

 

[edthecynic]

Actually it didn't end until after WW2 when spending was cut and taxes were cut. War-time spending certainly didn't get us out, because that's always destructive to the economy.

This is incorrect.

If the government significantly increases demand to go blow things up over there, then the war is stimulative to the domestic economy. It is bad for over there but it is good for right here.

For example, corporate profits hit a multi-decade high in 1918 and were not surpassed until the 1950s.

A majority of production moving into supplying instruments of war is not helpful to the economy at home, because the only demand is from the military and not any domestic sources. Furthermore, the money spent on the war was taken from the citizens through taxation and inflation, which of course takes us to Bastiat's "What is seen and unseen."

That is not 100% true. Refrigerators and air conditioning, etc., were originally invented for battleships and later made available to the domestic market, which has kept up demand to the present.

 

[Kevin_Kennedy]

This is incorrect.

If the government significantly increases demand to go blow things up over there, then the war is stimulative to the domestic economy. It is bad for over there but it is good for right here.

For example, corporate profits hit a multi-decade high in 1918 and were not surpassed until the 1950s.

A majority of production moving into supplying instruments of war is not helpful to the economy at home, because the only demand is from the military and not any domestic sources. Furthermore, the money spent on the war was taken from the citizens through taxation and inflation, which of course takes us to Bastiat's "What is seen and unseen."

That is not 100% true. Refrigerators and air conditioning, etc., were originally invented for battleships and later made available to the domestic market, which has kept up demand to the present.

That's an interesting fact, and not something that I was aware of. However, the fact remains the same that war-time spending is always destructive to the economy. These things may have been developed for naval use originally, but demand for these types of appliances would have led to the private sector supplying them at some point.