Generally textbooks blame a decrease in government spending. What say you?
This is my take: Dangerous Lessons of 1937,
If it was not tight credit or low government spending, then what caused the 1937 downturn? Three main factors stand out:
- An inflow of gold from Europe and an artificial increase in the dollar-gold exchange ratio caused inflation.
- Meanwhile, government’s union and wage policies maintained high real wages in the face of stagnating productivity.
- Finally, heavy government regulation made the stock market extremely volatile and susceptible to otherwise minor changes.
I meant to ask you earlier about that article.
You say that volume rose and then you say that it tightened. Confused.
I could be wrong but I read that as the volume continued to rise after the reserve policy change, until the stock market crashed at which point it then began to contract. In other words I think the claim is that Friedman had cause and effect mixed up.
But that is just my interpretation of the passage.
Government intervention caused the second depression and made the first one much worse than a 50% drop in equity prices would create. The Smoot-Hawley Tariff enacted by “President Free Market” Hoover destroyed the international trading system. He (Hoover) used force to get businesses to keep prices high. Then (God-Hero, who campaigned on less government, lower taxes and lower deficits) FDR continued by creating cartels and expanding the power of unions. The principal of the two was nearly the same: Keep prices high, Businesses generate monopoly profits, Businesses higher people. Of course Mises would say that you missed the two most important people in this process: Consumers who buy stuff and Entrepreneurs who invest into the future.
Credit definitely contracted, but monetarists claim that it happened as a result in the increase in the reserve ratio. Credit continued to expand immediately after the reserve ratio was increased, but contracted only after the stock market collapsed.
How would the new regulations fit into the recession?
Why wouldn’t the decrease in government spending by the culprit?
(I’m playing Devil’s advocate - I taught this to my students but am not 100% certain on the specifics and want to be ready for their questions next time around).
For the most part, the relevant regulations were those related to the stock market. The illegalization of inside trading and regime uncertainty thinned the markets, creating a stock market with a relatively small pool of investors. Naturally, the less investors the more volatile changes in price will be. So, when the stock market crashed in 1937 it caused a freezing of investment and ended the '35-36 boom.
There was hardly a decrease in spending; only an increase in tax revenue.