So from what I’ve gathered, FDR in 1937 tried to balance the budget because of pressure from Conservatives in congress, and the economy entered a severe recession between 1937-1938.
So doesn’t this provide evidence that FDR’s new deal was stimulating the economy and that cutting fiscal deficits were bad for the economy?
it provides evidence for austrian economics.
the “stimulus” is a malinvestment and as soon as spending is reduced to bring debts down, the economy goes back into recession (the recession being a period of necessary readjustment). it shows how dumb stimulus is… when you stop it, you slide back into recession cause the activities you propped up aren’t desired by actual consumer demand.
also, you have it mixed up, the artificial bubble is the bad thing, and the bust is the necessary correction obligated by the boom.
an alternative is where Japan did 20 years of stimulus, never letting up, and their stock markets is 80% lower and have had more than a “lost decade”
alright. So why take this as evidence for austrian economics rather than keynesian or monetarist economics?
so from what i’ve gathared, Harold the Heroin addict, tried to go a day without Heroin in 1937 because of pressure from his parents who are squares, and by the next morning, he suffered tremendous pain and wretchedness.
so doesn’t this provide evidence that Percy the Pushers, New Heroin Marvel was keeping Harold in good health, and cutting back on the ‘medicine’ was counter to the project of Good Health for Harold?
cause they both want stimulus in their own ways.
Austrians argue for liquidating the malinvestment, reducing government. This worked at the end of both world wars. 1920 recession lasted just a year cause gov. spending was cut by 1/2. And 1946 war homecoming wasn’t the bust that the mainstream thought, cause gov. cut spending 2/3, and the reallocation of resources occurred naturally.
again, the bust is the cure. It allows a reallocation of resources from artificially-determined uses into activities that are determined by actual consumer demand. But the transition takes a bit. You have to let it happen.
When you stop running current through a dead frog’s legs, the legs stop twitching.
What it proves to me is that one of the consequences of Keynesian economics is to create an economy totally dependent on the government.
Possibly OT but to add an additional point on this subject. It’s not that stimulating an economy can or cannot not occur. It’s whether or not stimulation creates objects that are considered wealth by the individual subjective values of man.
Austrian’s make the point all the time that if we want to spur ‘production’ and eliminate unemployment we could easily employ everyone digging ditches and holes in the ground. Such activities however add no economic value, though on paper we would appear to be very productive.
Huh?.. A steep recession… In the middle of a great depression… I fail to see the significance. Anyway it was probably the market trying to reajust, the bust after the boom. The great depression showed just how Keynsian economics failed, the deficit spending never got the U.S out now did it??? The great depression only ended when spending was almost totally cut
Falling GDP figures and contractions in the money supply are not the problem but rather the solution. The focus should be on the duration of the great depression, the numbers, figures, and Roosevelt’s policies. Furthermore, if cutting spending is as bad as the average Keynesian proclaims, why is it, then, that the economy soared after spending was cut dramatically after world war two? The Keynesian’s said that cutting spending would cause another great depression.
The problem in the way non-Austrians think of recessions is to think that they are bad. For that matter, they are not recessions. A fall in “aggregate demand” means diddly to me. In other words, the argument includes a Keynesian assumption as a premise.
I’m a bit late (half a month, it seems), but I recently wrote this on the topic (The Dangerous Lessons of 1937):
The second alternative cause was a decrease in the government deficit. Apart from the fact that a drop in government spending did not result in widespread recession after the Second World War, and the fact that Herbert Hoover’s deficits did nothing to assuage the great contraction which took place between late 1929 and 1932, this theory is unsound. First of all, a reduction in government deficit does not immediately mean that there was an equal reduction in government spending. In 1936, the annual government deficit stood at $4.3 billion, in contrast to the deficit of $2.193 billion ran during 1937. However, total government outlays decreased only from $8.228 to $7.580 billion. Interestingly, the deficit in 1935 was at $2.803 billion, while total federal spending was actually lower than both 1936 and 1937. Meanwhile, while the economy managed to begin recovery anew by late 1938, the fact remains that the government deficit for 1938 was only 89 million! What explains a decrease in the deficit between 1935 and 1936 was an immense increase in total receipts; from almost four billion in 1936 to $5.3 billion in 1937. If this is not enough, month by month government expenditures during 1937 and 1938 did not change wildly, and unsurprisingly, the months of surplus saw hikes in expenditures. The surpluses owed their existence entirely to the fact that these months fell in line with tax months. Given these statistics, it cannot follow that the decrease in the deficit is at fault for the contraction of 1937. The entire position, in fact, is untenable.
Excellent article, Jonathan. Thank you.
It’s not too verbose, and clearly illustrates key points.
Actually, the second recession of the great depression was not caused by your evidence. In fact it was, just as the original contraction, ignited by federal reserve mismanagement. In a scare of potential inflation, the fed caused banks to intensely increase their reserves.This caused less money to be lent out and thus reduced the money supply.
This reduction in money supply restricted aggregate demand and thus the economy again receded. The government did a few other things that were stupid (undistributed profits tax…sighhhh), but the root cause was monetary mismanagement.
This is one of two popular neoclassical theories (the other being the more correct high wages theory). I touch upon it in the article, drawing from arguments made by Joseph Salerno and Benjamin Anderson:
There was a substantial decrease in the money supply between late 1937 and the end of 1938.[43] This has been attributed to an increase in reserve requirements by the Federal Reserve.[44] Although Kenneth Roose’s thesis that the increase in the reserve requirements led to a decrease in the price of government bonds,[45] the theory that the increase in reserve requirements led to a contraction of the money supply is much less empirically satisfying. This was not the first time the Federal Reserve had increased reserve ratio requirements; indeed, they had done so in 1922, and that recession was over with fairly quickly.[46] Joseph Salerno suggests that the monetary contraction was a result of the recession, not a factor of, explained by the idea that banks began to retract on their loans due to increased uncertainty after the initial decline in the stock market and because of falling business profits, due to high artificial wages.[47] In light of evidence provided by Benjamin Anderson, it seems as if Salerno’s explanation is more appealing. As aforementioned, the volume of commercial loans increased despite an increase in the reserve ratio requirement, as did the volume of brokers’ loans and the total amount of securities being sold.[48] It was only after the initial crash that total amounts of loan began to contract from the peak established in the middle of 1937.[49]
Regime uncertainty was a big, if not the biggest problem.