Here’s my most in-depth discussion of the Depression of 1920, which reversed itself in the face of dramatic government budget cuts and a Federal Reserve that did not use its money creation powers. The article is a more formal version of my presentation at the Mises Circle in Colorado Springs back in April:
Source link: http://archive.mises.org/10805/how-the-depression-of-1920-was-conquered/
How the Depression of 1920 Was Conquered
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Highly recommend the article, not only for its particulars on the Depression of 1920, but for its outline of the Austrian theory of the business cycle and the notion of the natural market rate of interest (not to mention Dr Woods’s explication of lower and higher orders of production).
A great introductory essay for the student of Austrian economics.
And now I see it’s been made into a movie, too!
Commemorating the death of Ludwig von Mises (1973)
question: would keynesian stimulus be okay if the govt actually ran a surplus during the good times which it uses to help those afflicted by the downturn?.
Inspiring stuff
Now I just have to get my hands on “Meltdown”.
Thanks Tom for showing how to really simplify the message.
I’ve always wondered if the 1920 depression would have been mitigated had the monetary base been expanded to prevent a secondary downturn – a la Hayek.
Sheridan,
The problem being that the 1920 depression was CAUSED by the expansion of the monetary base to pay for WW1.
Shall we somehow cure the problem by doing what caused the problem in the first place?
Pravin:
Inducing a large monetary of fiscal injection only postpones the issue at hand.
If there is an economic downturn caused by the misallocation of resources input during a previous economic downtown, then large aggregate monetary and fiscal injections during that economic downturn, no matter where it’s relegated, would serve only to provide misallocation for a further economic downturn.
Pravin, with a stable currency there would be an automatic stabiliser doing that, Pigou’s Real Balance Effect. Theoretically, Keynesians could run deficits and surpluses according to the state of the economy, in a way that matched that. The result would be as though the state itself were a large private actor in the economy, responding like the real private actors, and it would be constructive. The catch is given away by that description: the state wouldn’t be responding to the need to be frugal alternating with getting in on cheap deals but to political motives, it would be too large to participate properly even if it were working by the right criteria because of the calculation problem, and there would be the continuing problem of having it around as a large entity crowding out individuals’ places in the economy.
It comes down to, it’s not intrinically and theoretically impossible from a solely economic perspective, but states aren’t like that, and the cost wouldn’t be justified by the benefit anyway because a true free market would deliver the same benefit anyway.
Pravin: “question: would keynesian stimulus be okay if the govt actually ran a surplus during the good times which it uses to help those afflicted by the downturn?”
In every way, the answer is no.
1) The “government” could never call the tops or bottoms.
2) Even if they could, they can’t move fast enough to be “right” on the timing.
3) Spending would always be politically, not economically driven
4) The bias would always be to act as if the economy needed help.
5) The money is never spent as efficiently as when spent by the one who earned it.
6) The results are always better when the actions are driven by millions of individuals making their own decisions than one politician deciding what is best for all.
7) It is theft
8) It is theft
9) It is theft
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