“Similarly, given Hoover’s program, the Depression would have been much less severe if monetary policy had responded to keep the price level from falling, which raised real wages.”

This is the essence of the Keynesian fraud. Ohanian seems to be saying that because wages were so artificially high, that the Fed should have diluted the money supply to artificially raise prices thereby making the artificially high wages no long so high. Hayek himself described this in 1977 as the essential mechanism of Keynesianism, that is, using monetary dilution to trick labor into accepting lower real wages without realizing it:

http://consultingbyrpm.com/blog/2008/12/hayek-tells-bill-buckley-that-even.html

Elsewhere, Bob Murphy has shown that the NY Fed had lowered interest rates to historical lows during 1931 with a rate of 1.5%:

“This changed after the stock-market crash. On November 1, just a few days following Black Monday and Black Tuesday — when the market dropped almost 13 percent and then almost 12 percent back to back — the New York Fed began cutting its rate. It had been charging banks 6 percent going into the Crash, and then a few days later it slashed by a full percentage point.

Then, over the next few years, the New York Fed periodically cut rates down to a record low of 1 ½ percent by May 1931. It held the rate there until October 1931, when it began hiking to stem a gold outflow caused by Great Britain’s abandonment of the gold standard the month before.”

See:

http://mises.org/daily/3327

Yes, and intuition would lend support to this thesis, as the labor market being out of equilibrium will prevent resources from being directed to their most productive use.

sooo….
the real cause of the Great Depression was that wages were too high?

Or at least my account balance from all those banks that took my cash.

The wild distortion of market signals today are not limited to the government either.

When the banks started tranching debt, even if they got the risk models correct, had a far-reaching effect that I’m still not convinced is acknowledged enough.

When debt is turned into a commodity by mining from everywhere and putting it in a box with coupons sticking out all over the place, inwestors don’t not only didn’t want to open the box, they never questioned where it was all coming from. They just wanted more boxes.

The factories creating these boxes needed to mine more and more debt to fill them up. The pricing mechanism that regulates supply and demand was removed from box-o-debt commodity.

Furious activity was happening in other commodity markets where the debt was being harvested, and in order to continue supplying boxes, it was important to overcome the pricing signals and increase demand. This is something that is impossible to do in a market where transactions are settled instantly, but with debt, that’s another story. Just keep mining into riskier places, but defer the risk for a while, and that way you can continue to fill boxes of debt that are decoupled from all the pricing signals.

I thought debt played a roll in the Great Depression.

I would have named it the Bad Depression.

Also, how do you model alternatives for an entire economy? Assuming Hoover’s actions were politically motivated, then there was some chance of something happening that he wanted to avoid. What were those things, and what chance did they have? I hope those were accounted for in the alternative model.

We know “Let them eat cake” could introduce a discontinuity in the model.

Oddly enough some Keynesians were claiming that the economy would plunge back into recession after WWII becuase of the reduction in government spending. Here’s Samuelson on the matter:

“there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.”

Of course, no such collapsed occured.

Of course, the Hoover-Roosevelt policies were disastrous. But it was specifically the lack of gold money and private banking and the presence of fractional-reserve banking that did permit the money supply to expand, first, and then to contract. Why be surprised that the contraction would lower wide aggregates of spending such as GDP?

To me it’s primarily a question of central banking: first, the artificial “boom”; then, in the case of the 1930′s, the artificial contraction. Meanwhile, idiotic “policies” and programs terrified businesses, hindered employment, etc.

http://img91.imageshack.us/img91/8486/table10.jpg

As an aside, this table isn’t on the AGD contents page:

http://mises.org/rothbard/agd/contents.asp

Good show!

You have identified a wonderfully clear empirical demonstration of the fallacy of Keynesian economics – we didn’t have a great depression in 1946 – in fact, the economy got better despite the great scaling back of massive government intervention following the end of WWII.

For more, you could explore “The great Depression of 1946″ from the Review of Austrian Economics – here is a link to the paper: http://mises.org/journals/rae/pdf/R52_1.pdf

best wishes

I’m assuming you were either adolescent or young during the end of WW2. You seem to beleive in the popular theory that WW2 saved us from the depression. A simple search of this website regarding WWII will give you plenty of counter evidence. Unlike the rest of this society this site doesn’t live in fantay land with make beleive historical facts.

I have conveniently provided an article for you below. You can start there.
http://mises.org/Controls/Media/MediaPlayer.aspx?Id=3085

Mr. Salerno, have you considered sending this fellow a copy of Rothbard’s “America’s Great Depression”?

I think it would be hilarious to send him a tome which better explains the case AND came out nearly 50 years before his thesis.

Is this related to Hayek’s idea of monetary policy targeting a stable NGDP?

Anyone have any good sources to read concerning Hayek and NGDP targeting?