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Source link: http://archive.mises.org/9895/did-fdr-make-the-depression-great/

Did FDR Make the Depression Great?

May 5, 2009 by

Robert Murphy demonstrates in this excellent book a penetrating ability to explain the essence of fallacious economic doctrines. As he notes, three theories offer competing explanations of the Great Depression: the Keynesian account, which stresses a lack of aggregate demand; Milton Friedman’s monetarism, which ascribes the severity of the early years of the Depression to a drastic cut in the money supply by the Fed; and, of course, the Austrian theory that Murphy himself favors. FULL ARTICLE


A.Viirlaid May 5, 2009 at 9:57 am

I question the validity of the last statement in the article.

“If enough people read Murphy’s hard-hitting book, we can strangle in its cradle Obama’s prescription for economic disaster.”

President Obama could himself read Robert Murphy’s fine work, and I predict that this administration’s “prescription for economic disaster” would change not one wit.

Sad to say, but true, IMHO, that is.

Joseph Keckeissen May 5, 2009 at 10:45 am

I subsribe all the way to Professor Gordon´s marvelous summary of Professor Murphy´s marvelous arguments. But what I think should be beefed up is details of the malinvestments that needed to be eliminated. I think that the first maliinvestment was that the excessive creation of money landed in the stock market on Wall Street (and not on Main Street, due to the simultaneous rise in both American and European productivity) I think we need more details of the actual malinvestments to make Murphy´s argument irrefutable.
Best always, Joe Keckeissen in Guatemala.

befree May 5, 2009 at 10:53 am

I agree with A. Viirlaid. Enough mainstream people do not understand economic and money issues explicitly, and probably never will. Government has its agenda and will always select the point of view that suits the agenda. Free men will have to find their own point of view and I don’t think there will ever be enough of those. Most people want somebody to think for them.

My take is that you can’t save fools from themselves, you can only save yourself from becoming a fool, and as much as possible, get out of the way of fools.

This mad bullet has left the gun, each of us has now to make sure we are not in its path.

A. Viirlaid May 5, 2009 at 10:55 am

On April 17 of 2009 I wrote a reaction to another blog that seems appropriate here today in reaction to all the attention being paid to the phony issue of stimulating aggregate demand with phony newly-printed FED ‘money’ and with that same money ‘borrowed’ via newly-printed Treasury bonds.

“Give me a trillion dollars and I’ll show you a good time too!”

That supposedly was once said by Warren Buffett, the Oracle of Omaha.

He might well have added “in the short run only, of course!”

Please see http://www.moneyweek.com/investments/the-strange-bond-boom.aspx for that quote.

What long-term self-sustaining recovery can we expect from the little ‘party’ we are now having that our kids and their kids are going to be paying back for with their hard work for their entire lives?

Of course things are going to look up for a while. You can buy a good time in the short run with more Debt-based consumption. A trillion dollars can buy a lot of party balloons. But the last thing we need now is more Debt.

Will this ‘recovery’ magically really become self-sustaining? This IMHO is only delusional thinking on the part of The Federal Reserve and on the part of the Treasury. Our ‘experts’ have deluded themselves into thinking that not enough ‘stimulation’ was brought to bear (in a timely enough fashion) on the Great Depression by the ‘experts’ back in the 1930-s. They are going to do things ‘better’ and more expeditiously and more expediently.

So not to worry — our current ‘experts’ are smarter. What hubris! What ignorance! We will learn the hard way that we know no better and no more. IMO we know even less.

What everyone seems to be praying for is:

“Dear Lord, please give me just one more artificially-FED-induced, debt-based, consumption-driven, binge-spending, BUBBLE, and I promise You that I won’t throw away its ‘blessings’ this time!”

But a credit implosion caused by a collapsing Debt Mountain cannot be FIXED with MORE Debt.

Debt-based discretionary consumer spending is the road to economic (and social) hell, especially when it is only facilitated by FED-injected, helicopter-dropped, Ben Bernanke-blessed, modern-invention-called-the-printing-press-created ‘money’.

It was the same road to hell that we took from 2001 to 2008. Now we are getting our autos out of the ditch and revving them up to go down that same road, only 10 times faster!

We should know better by now. History has many lessons that show that such money injections can ultimately only lead to misery.

Our Central Banks (most especially The Federal Reserve) have been creating artificial bubbles for so long, that this is all they seem to be able to do.

They create the booms and the busts and then come back to us and tell us that they will save us from the busts. What temerity! What arrogance! What fraud!

Our Central Banks do a disservice to savers. But most importantly they fail to recognize that by favoring debt-based spending over saving for such consumption (that is, we should save before we buy) our Central Banks undermine our economies in the long-run.

Their actions cause a failure of the needed slow accumulation of savings and capital that are required to move our economies forward. Such muddled Central Bank thinking and actions (making money far too ‘easy’ for borrowing) does usually ‘stimulate’ in the short run.

But such money-printing only brings growth forward in time, at the expense of future growth. It is always so, even if the inevitable slowdowns are temporarily forestalled. The Austrian School of Economics has been teaching this principle for more than a hundred years.

No amount of printed money (“created from thin air”), or lent money from banks, or borrowed money of corporations, which is NOT backed up by REAL savings of people and companies in society, can in actuality lead to real sustained growth with real jobs.

Printed money is really only indirect taxation of those who have cash balances in savings. It only causes a redirection of resources that would have gone somewhere else. Nothing ‘extra’ is created with such printed money.

Aggregate demand is boosted in some sectors at the cost of other sectors and other times. That is what we did over the last 8 years and then we got the current slowdown. Now we are going to repeat THAT process?

Personal choice has been abrogated by the actions of these undemocratic institutions. There is no ‘outside’ when it comes to the economies of the world — all such ‘stimulation’ comes purely at the cost of stealing resources from somewhere else in the economies of the world (or from our kids’ futures).

It is a shell game played by charlatans and sadly it manages to fool most of the rest of us most of the time.

Even now as Ben Bernanke’s easy-money actions in America may succeed in creating some growth, it will be at the inevitable cost of future growth. That future growth will necessarily be inhibited. IMO it won’t work this time, because too much such past stimulation has already exhausted that future-growth source-well.

Too many bad investments have been made, and too many ‘future’ houses and automobiles have been purchased. Too much Entropy (i.e., physical and financial disorder) has been created in the Economic and Financial System. It is payback time.

Beyond this, there is the moral question of why we are making Debt-Slaves of the generations that will follow us. How can they ever forgive us?

Imagine if a time traveler could go back to 2001 and warn Greenspan not to spin more of the green stuff by dropping rates and making money ‘easy’.

What pain we could have avoided.

Now we are going to do the same in spades? We cannot steal such growth from the future with some magic plan to then boost our current real growth. It cannot happen. The past and the future will NET out.

It may even be worse. The future growth may suffer more than a simple netting-out calculation might suggest. Our future time-traveler is yelling to us from the year 2015 “please desist from what you are now doing!”

How can you delay SAVING to ‘save’ the Economy now, and then auto-magically start SAVING at some undetermined future date? This is witchcraft and muddled wishful thinking.

The President is correct to want saving. But there is no advantage in waiting. Besides it is infeasible to spend now and save later.

There will be no economic or social tomorrow without SAVING now — at least not one that is to be envied. We may be creating the conditions for war and other misfortune, as history so many times has witnessed through the well-meaning actions of those who say “we need more money in the system NOW”.

John Law proved around 1720 in France that this approach can NEVER work. And it can lead to revolution and more economic depression.

Do we really think that the Paradox of Saving can be avoided to save the Economy?

The only way to avoid this Paradox in the future is to make sure overall saving in the Economy never again drops to negative levels. That would lessen these severe busts and booms. We’d get a sustainable, but slower, growth rate.

In the first place the FED should NEVER have engaged in Social Engineering to induce people to spend money they didn’t have. The FED has to start focusing on maintaining the value of money.

As it is now, we will both debase our currencies and lose out on economic growth. This is medieval thinking — no, I will take that back — the medieval thinkers were not that stupid. Maybe John Law was, or maybe he was ‘forced’ into it. You can read up on him and decide for yourselves.

The FED created the conditions we have today. They created the conditions where we even HAVE TO WORRY about the Savings Paradox. The Federal Reserve has been doing this since 1913. It created the Great Depression and then made it worse.

The FED is doing the same thing now. It has always done the same. It is not independent. It is even more harmful in its actions than the short-term thinking of its political masters might indicate.



We cannot fix the unfixable.

Let’s just resolve not to get into this hole again (assuming we get out).

By the way, IMO the current ‘depression’ is unavoidable, since our individual and collective Balance Sheets have gone into such FED-induced disrepair. It will take a long time for those entropically-challenged Balance Sheets to be repaired.

The current FED (and other Central Banks) and Federal Governments are prolonging this recovery process. Instead of a 2-year depression we are likely to have a 10-year depression, with some periods when things occasionally look rosier but are in reality not.

Beware of those who promise paradise through more “Quantitative Easing”. That is only a euphemism for melting away the value of your money.

joebhed May 5, 2009 at 1:13 pm

central government planner here.

Superlative authorship and even more superlative writings in review of the superlative writings on the Austrian answer, which blows Keynes away and points out Friedman’s inadequacies.

I’m still with Milton Friedman on this one.
Insofar as, like, had the Fed NOT increased the money-supply during the Roaring Twenties – resulting in all that malinvestment that we like to call it, then the road to economic prosperity would have been slower to be sure.

Slower money growth equals slower path to prosperity, primarily because of the so-called multiplying factor of fractional-reserve banking. Given that it was the bankers that gained from all that market speculation, and not the government, I fail to see the government having any advantage here.

Had the government monetary authority set money-growth target levels, again, as Friedman states, then the money supply would have grown much slower – basically matching proper economic indices.

But, of course, the sh*t hits the fan in a fractional-reserve lending system on the downlow. The reductions in deposits translate into multiplying calls for loan repayments, which carries on for a few years, cutting the legs off the economy, putting people out of work and businesses into bankruptcy. It becomes Great.

I know the Austrians like to say that we in the government and they in the private Fed banking industry offices are a fascist conspiracy against liberty, and that we are collectively to blame for all this, but I don’t see it that way.

The Fed is a private banking institution that operates for the benefits and profits of its member banks. The government is the body that the bankers use to transfer monies from the taxpayers to the owners of the banks and their corporate brethren.

So, I agree with the Austrians that there is a need to abolish the Fed, as we know it. I agree with the Austrians that we need to move to a full-reserve banking system, where, by definition, banks lend the real money equivalent of their deposits.

I don’t agree that we should rely on a free-banking system to either create the new money needed to maintain price stability, or to select the right amount of money to be created for any social or economic purpose.

That should be the job of the government. That’s why we fought the Revolution. And that’s why I agree with Friedman’s Framework for Economic Stability.

Abolish the Fed.
The Chicago Plan for Monetary Reform.

Jonathan Finegold Catalán May 5, 2009 at 3:33 pm

To be fair, shouldn’t the title be “Did Hoover Make the Great Depression?” or “Did Roosevelt Make the Depression Worse?”.

Joe Stoutenburg May 5, 2009 at 3:56 pm


The Fed is a private banking institution that operates for the benefits and profits of its member banks.

The Fed has been granted monopoly status to manage the currency of the United States. I think that you and are exactly opposite on our positions. You seem okay with this monopoly but think that it should require full reserves. I don’t care as much about the reserve standard. I just want to free the banking market.

I believe that government granted monopolies are trouble whenever enacted. In the provision of money, they are especially pernicious since they affect any transaction involving the exchange of currency.

Bill Anderson May 6, 2009 at 7:01 am

While the ATBC is internally complicated because of the intricate nature of the structure of production, nonetheless it also is disarmingly simple and logical. In my class yesterday, I explained to my students how the fundamentals of an economy come out of balance, and how a recession actually is necessary to put them back into place again.

I first had given them the Keynesian theory through the AS-AD analysis, complete with the AS curve that starts out flat and gradually goes upward. While that is a more simple theory, it did not take long for one of my students to comment that it sure did not look to be sound economics.

Keep in mind that I teach the Keynesian theory objectively; I don’t throw in a bunch of ad hominems or anything like that. I try to keep it as simple as possible, and explain that to a Keynesian, the relationships of the factors of production, factor prices and consumer prices and everything else are thrown into the AS curve.

The thing to keep in mind is that the Keynesian explanation always will be more popular because of the following reasons:

1. It permits those in government to be able to claim that it is the private markets that always are at fault, and that government comes to the rescue;
2. It makes any kind of government spending a heroic endeavor;
3. It makes private spending a patriotic endeavor in which our spending can have a larger national purpose in that we are keeping an economy afloat.
4. Since most journalists are hardcore statists, it always will be much more popular than the ATBC, which actually condemns the government position, something a state-loving journalist cannot accept.

As for the reasons the Keynesian paradigm dominates the economics textbooks, I offer two reasons (and neither is because Keynesian economics “passes the market test”):

1. Econ professors are able to continue the same stuff they learned in graduate school, so they can continue to use the same notes;
2. Keynesian theory makes the mainstream economists look as thought they know something, as opposed to the damned fools they have become.

joebhed May 6, 2009 at 8:21 am

to joe s.

I couldn’t exactly get your point here because there seemed to be some word(s) missing from your comment.

However nothing in your comment seemed at odds with the quote from my comment, so, ………

Why would you presume that I am Ok with the private Fed’s monopoly of money-creation that has been granted under the FRA. I’m totally against it, because it’s a government-granted private monopoly.

joe s “I don’t care as much about the reserve standard. I just want to free the banking market.”

ummmmm, I think I agree about the free private banking market. But, to be sure, the money-creation power has nothing to do with banking.
Banking is what happens after money has been created. That is the essence and the purpose of full-reserve banking.

As I said, I support Friedman’s Framework discussion. It proposes to abolish the private creation and destruction of capital(private fractional-reserve banking), and to install a totally free private banking system operating on a full-reserve basis – which I thought we all agreed on.

Where I fall out with Mises/Hayek is in the money-creation power. That belongs to the sovereign people of the United States and has since the Revolution of 1776. I want it back from the private banking cartel of the Fed.

Michael A. Clem May 6, 2009 at 3:28 pm

Money in a free society is whatever commodity people most freely trade for the purpose of indirect exchange. As such, *anybody* should be free to “create” money, but without coercion-nobody should be forced to use any particular money. Getting rid of the Fed and giving the power of money creation back to the U.S. Treasury (or some other federal agency) doesn’t get rid of the monopoly. Only free banking ends the monopoly.

wuzacon May 6, 2009 at 7:21 pm

I have seen many commentators state that the Great Depression ended at or around the end of World War II. Arguments supporting the cause for the end of the Great Depression include an increase in savings, a reduction in regulation, or massive government spending.

But has anyone ever studied whether the Great Depression in fact ended around World War II? It seems to me that the prosperity of the average American has not increased with anywhere near the same velocity as was prevalent between 1800 and 1913.

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