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Source link: http://archive.mises.org/10182/the-great-depression/

The Great Depression

June 24, 2009 by

Many Americans are convinced that the Great Depression reflected the breakdown of an old economic order built on unhampered markets, unbridled competition, speculation, property rights, and the profit motive. According to them, the Great Depression proved the inevitability of a new order built on government intervention, political and bureaucratic control, human rights, and government welfare. FULL ARTICLE

{ 19 comments }

Brad June 24, 2009 at 8:26 am

It’s sad that such truth is incomprehensible to most and we are doomed to repeat the cycle over and over again.

It would be interesting to have insight into what people can do to gird themselves against the inevitibility of such times. Perhaps more financial than economic, but is there anything in the vaults which instruct individuals to weather such times?

John Heckmueller June 24, 2009 at 9:37 am

Everything Hans says makes perfect logical sense.
But then why after WWII did we not descend into another depression? Labor Unions continued to grow stronger and tax rates remained confiscatory. Yet as many classical economists of the time espoused that we would slip back into depression after the war, we did not. Why not?

fundamentalist June 24, 2009 at 9:43 am

Sennholz: “He seized the people’s gold holdings and subsequently devalued the dollar by 40 percent.”

This is a great summary of the disastrous policies that created the Great D. Bernanke is supposedly the great scholar of the depression, but I doubt he knows any of this. He still thinks it was a result of the Feds being asleep at the wheel.

I wish he had elaborated on the theft of gold by Roosevelt. I think that was a unique feature of the Great D compared to more recent depressions. Gold was still money back then and paper money was just a claim on so much gold. The Great D caused people to lose confidence in paper money and exchange it for gold. The psychological effect of stealing their gold would have been enormous. Today, it would be worse than telling people they could not carry paper money and had to use debit cards.

In addition, Roosevelt illegally violated the bond contracts of holders of WWI bonds which stipulated that they be paid in a specific quantity of gold. Roosevelt, along with Congress and the Supreme Court, stole the savings of those patriotic bond holders by forcing them to accept worthless paper money instead of the gold specified on the bonds.

Brad: “…is there anything in the vaults which instruct individuals to weather such times?”

This crisis won’t play out like the Great D. The most likely scenario is asset price inflation followed by consumer price inflation. You can protect yourself if you have the cash to invest in assets that will appreciate with the coming price inflation. Typically, those include the stock market, real estate, and commodities such as oil, silver and gold. In addition, if you can afford it, you can borrow money at the low current fixed rates and repay those loans with devalued dollars when price inflation kicks in, but be sure to pay them off before the next crash hits.

newson June 24, 2009 at 10:42 am

i’d say residential and commercial real estate in the developed world is dead for many years, fundamentalist, as that’s the asset class against which most of the debt has been accumulated.

jim rogers is very bullish on farmland, which hasn’t been sexy these last years.

Borislav June 24, 2009 at 10:52 am

In Economics faculty I learned in Macroeonomics that Keynes saved capitalism and Western world from free market failure (liberal capitalism)…

Thank you God I found out Austrian economics.

A. Viirlaid June 24, 2009 at 11:44 am

While Hans Sennholz is no longer with us, his words will live forever, travelling like an undying postcard, from one reader to the next.

Some day, history will record that the predominant economic paradigm or worldview did finally move from Keynesianism to the Austrian one.

Dr. Sennholz will then inevitably be one of those fighters that we can thank for his heroic efforts to spearhead the defense of truth and liberty.

Let’s hope that we can live to see that day.

Between now and then I predict that all of the talking heads at The Federal Reserve will have a lot of explaining to do.

They will have to explain why all of their current ‘heroic’ efforts to print money and spend our wealth did not work and made things so much worse. Of course the Treasury will have to share in the blame.

Future generations will wonder — Why did these ‘authorities’ so strongly believe that they were doing good when in fact they were doing grievous harm?

In that sense they will be like the wonderful and incisive Dr. Sennholz who was able to look back at the Great Depression and, unlike our woeful Dr. Bernanke, actually understand what transpired.

filc June 24, 2009 at 12:24 pm

John,

Sounds like your confused. Poor economic policy in and of itself may not necessarily cause a depression. Though may cause massive amounts of harm in various industry’s.

What most classic economists of the Austrian school say is that un-sustainable booms cause depressions. This is different then the forms of government intervention your referring to. While those items caused a great deal of many problems they don’t cause the equivalent type of mayhem that credit expansion does. Credit Expansion, Booms and Busts. Thats what we are talking about here.

The second paragraph touches on the Business Cycle. There are many other references to problems during the 90′s related to government intervention on this site if your interested.

David Spellman June 24, 2009 at 12:28 pm

During the great depression, and everywhere in the world suffering economic disaster at any time, the following things will help you survive:

1. Own your home free and clear as a hedge against inflation.

2. Be out of debt so you are not a slave to creditors.

3. Own tools and means to produce something of value to your immediate neighbors.

In other words, being a self-reliant free person is the best chance to ride the wave of destruction successfully. Homelessness, unemployability, and bondage to debt is a recipe for drowning in the undertow.

fundamentalist June 24, 2009 at 1:17 pm

newson: “jim rogers is very bullish on farmland, which hasn’t been sexy these last years.”

I’ll bet farmland would be a good investment. You get the benefits of higher prices for farm products plus the appreciation in land values plus the ability to borrow on it and pay back the loan with worthless dollars. It seems that farmland was a very good bet in the stagflation of the 1970′s.

dadofeleven June 24, 2009 at 3:09 pm

I feel our writer nailed it on the head in the last paragraph.
Notice neither political party nor economic lean is really the source of nor the answer to the problem.The Great depression followed the roaring thirties. It marked an unparelled disintegration of social morality.
We would laugh at the idea of flappers today but in their time it created social chaos. Any society that becomes seduced away from common decency slowly loose all rationality. Such people become slothful, unmotivated & tending to the higher powers for answers to all the needs they themselves are to lazy to address.
Democratically elected officialdom become Kings to such a generation. Give me time, give me money, do my work, take away our problems.
Come on folks! Do you really think Obama is going to fix the problem that 15 presidents before him created?
He IS the product of their making. Another child leader in the Whitehouse.
Never been a leader so quick to copitulate to the existing power structure.
Americas problem is a CHARACTER problem. Sound economics never becomes of a morally bankrupt people.
Party on America…You are whistling in a Graveyard & your problems are just beginning…

Mrhuh June 24, 2009 at 5:31 pm

“Everything Hans says makes perfect logical sense.
But then why after WWII did we not descend into another depression? Labor Unions continued to grow stronger and tax rates remained confiscatory. Yet as many classical economists of the time espoused that we would slip back into depression after the war, we did not. Why not?”

After WWII, Truman cut federal SPENDING by over 1 trillion dollars. Keynes said that it would lead to disaster, yet he was absolutely wrong on all accounts (something that doesn’t unfortunately prevent his followers from still existing).

ABOM June 24, 2009 at 9:14 pm

Farmland should appreciate and is insurance against a breakdown in social order.

Ask yourself: How many days could I survive if the division of labor broke down and food supplies ceased to occur into all major cities?

What supports the division of labor? Money. What supports money? Government under a fiat system. Who trusts government to preserve the integrity of the monetary unit so that the price signals it provides are not distorted by either govt intervention or fractional reserve banking?

Anyone?

We all need self-sufficient farmland and there is not enough to go around. Something is gonna have to give, unless we learn to eat each other….and I don’t think I want to acquire the taste for human flesh.

newson June 24, 2009 at 11:58 pm

in its pure form (war socialism in the ussr and in cambodia under pol pot), people end up as hunter-gatherers and the cities empty. not to say this is our destiny, but the bush is likely to do better than the city, reversing the secular trend of urbanisation.

Nathan June 25, 2009 at 2:37 am

I think it’s important we take notice of the Undistributed profits tax of 1936 (which I’ve never heard of until now).

An attack often levied by Krugmanites is how Austrians explain the mini recession in 1937.

A 73.91% tax on corporations is certainly a powerful cause.

Along with significant expansion of the FDIC controls and solidification of union power, another recession seems inevitable now.

Justin June 25, 2009 at 3:01 am

Being a bit picky here…but the below paragraph shouldn’t say “selling” and “bought heavily on the way down” etc…For every seller there is a buyer; likewise, for every buyer there is a seller. To say that there are “avalanches of selling” implies that there’s an equal avalanch of buying – it’s redundant. He simply should have said “activity” or an “avalanch of transactions” or “heavy trading”. You get the point.

“The security market reached its high on September 19 and then, under the pressure of early selling, slowly began to decline. For five more weeks, the public nevertheless bought heavily on the way down. More than 100 million shares were traded at the New York Stock Exchange in September. Finally it dawned upon more and more stockholders that the trend had changed. Beginning with October 24, 1929, thousands stampeded to sell their holdings immediately and at any price. Avalanches of selling by the public swamped the ticker tape. Prices broke spectacularly.”

fundamentalist June 25, 2009 at 7:51 am

Back in 2007 I read an article in The Economist about the coming financial crisis and the author told people to go out a by 40 acres and a mule. That way you would at least have food. It hasn’t gotten that bad yet, but who knows?

fundamentalist June 25, 2009 at 11:55 am

The Adam Smith Institute across the pond has the answers in a great pdf doc “The Recession: Causes and Cures” by David Simpson. Here’s a blurb from the summary:

҉ۢ The only way to avoid a recession is to restrain the antecedent boom.
However, once a recession is under way, there may be ways to mitigate its
worst effects and bring it more quickly to an end. The key is to re-establish
a climate of business confidence.
• The best way to do that is to set a long-term course for lower corporate
and personal tax rates, and stick to it. In the medium term, higher taxes
can only be limited by reducing government expenditure, not by borrowing.
Large-scale borrowing does not inspire confidence, because it gives rise to
an expectation of future tax rises, which discourages investment.”

It’s available at http://www.adamsmith.org/images/stories/the-recession.pdf.

fundamentalist June 25, 2009 at 11:56 am

The Adam Smith Institute across the pond has the answers in a great pdf doc “The Recession: Causes and Cures” by David Simpson. Here’s a blurb from the summary:

҉ۢ The only way to avoid a recession is to restrain the antecedent boom.
However, once a recession is under way, there may be ways to mitigate its
worst effects and bring it more quickly to an end. The key is to re-establish
a climate of business confidence.
• The best way to do that is to set a long-term course for lower corporate
and personal tax rates, and stick to it. In the medium term, higher taxes
can only be limited by reducing government expenditure, not by borrowing.
Large-scale borrowing does not inspire confidence, because it gives rise to
an expectation of future tax rises, which discourages investment.”

It’s available at http://www.adamsmith.org/images/stories/the-recession.pdf.

Brian Mallard June 25, 2009 at 12:41 pm

Several years ago, once I knew the Fed is a deceptive, private, for-profit institution, the rest of the Fed is easy to understand, and the return on my investment dramatically improves. Central banks in countries such as US, UK, Germany, France, Switzerland, Italy, Israel, and even Japan are run by the same criminal-minded, parasitic Zionist cartel using many forms of sophisticated Ponzi schemes. Ponzi scheme is what a parasite is good at; create nothing and receive everyhting! (Yes, we never learn such an ingenious Ponzi scheme at an economic class.) People who only use the classical economic thinking to understand the Fed only fool themselves. For sure, the cartel is going to be at the receiving end during this deflationary depression where stock, real estate and commodity prices will all be so cheap at the same time, only then we’ll begin to see inflation and perhaps hyper-inflation.

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