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Lessons of the 1930s

Dec 13th 2011, 18:45 by R.A. | WASHINGTON

THE economic rough patch of the past few years inevitably inspires comparisons to and reconsiderations of last century's big economic calamity. This week, in fact, The Economist features a briefing examining some as yet unheeded lessons of the Depression. Economist Joe Stiglitz describes a different view of the Depression in Vanity Fair, which purports to overthrow the current macroeconomic understanding of the troubles of the 1930s. The Depression, he says, can be chalked up to decline in America's agricultural sector:

For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

Having seen Mr Stiglitz's writing on the latest downturn, I knew he took a view of the crisis as attributable to long-term structural transformations in the economy, namely, the decline of manufacturing employment. I hadn't realised he'd broadened this view into a new theory of depressions. Unfortunately, I can't seem to locate the research that he indicates underlies this story; perhaps it isn't yet published. I'd like to see it, however, because as this thesis stands it looks remarkably weak.

To begin with, Mr Stiglitz's dismissal of the role of monetary policy is almost comically underexplained:

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.

Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s.

The initial 12-month economic decline in 2008 was as bad as that in 1929. In the earlier period, however, central banks tightened policy while in the recent recession they opened the monetary spigots. When all was said and done, world industrial output dropped 13% this time around compared to nearly 40% in the 1930s, and unemployment peaked at just over 10% this time, compared with over 25% in the 1930s. The most logical conclusion to draw from the two events wouldn't seem to be that monetary policy was useless, but that it was critical—and more easing still might well have reduced the impact of the recent recession further.

There is a rather tricky problem of timing in Mr Stiglitz's story. Other industrial economies had already gone through a massive decline in agricultural unemployment prior to the Depression without suffering much in the way of ill effects. In 1930, Britain's farms accounted for just 6% of national employment. Yet it sank into Depression along with the rest of the world, and it didn't begin its recovery until it left gold and depreciated the pound in 1931. World agricultural prices began sinking almost immediately after the first world war—between 1919 and 1924 the price of wheat tumbled by some 50%—and yet the American economy managed to carry on until 1929 without serious trouble. (Moreover, productivity gains in agriculture were subdued in the 1920s; prices fell as production disrupted by the war came back online.)

Mr Stiglitz claims that not until the massive increase in government expenditure of the second world war did America provide the economy with the funding it needed to transition from an agricultural to manufacturing economy. And indeed, since BEA records began in 1929 America's fastest three-year growth performance was that from 1941 to 1943. The second fastest, however, was that from 1934 to 1936. In 1936, the American economy grew at a 13.1% annual pace. The three best years for real private investment growth are, in order, 1946, 1935, and 1934. Any theory that purports to explain blistering growth in the 1940s should also be able to explain the blistering growth that began in 1933. A money-focused explanation does; Mr Stiglitz's does not.

His postwar timing is no better. Manufacturing employment as a share of total employment peaked in the 1940s. From 1960 to 1990, it dropped by almost half. If the transition away from manufacturing is to blame for America's ills, why didn't this deep recession occur two decades ago?

Most strikingly of all, Mr Stiglitz attributes much of the suffering of the Depression to...deflation:

Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.

This could have been written by Scott Sumner. A surprise shortfall in nominal incomes led to deteriorating economic conditions and a credit crunch which made things worse. The problem was falling prices, and the solution was a commitment to raise prices to their pre-Depression trend. Leaving gold was just the thing to accomplish this, and sure enough the American economy took off in 1933.

I find his whole argument unfortunate, because I do think there are important structural changes occuring in the American economy that are contributing to a slowdown in real growth potential and to stagnating incomes and rising income inequality. I think he's right that the growth of the financial sector deserves a critical look. But rather than explore the implications of those problems, Mr Stiglitz wants us to reconsider a problem that macroeconomics has effectively solved. I don't get it.

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Richard Michael Abraham

Richard Michael Abraham – Wish My Housing Report Could Be Positive – The 25% Doctrine

The U.S. Housing market never experienced a cyclical decline. So often I hear, “prices will go up, it’s just a cycle we’re experiencing.” I’ve been hearing these comments from others since the 2008 financial crisis. A cycle did not occur. A housing hemorrhage took place.

The U.S. Government would like all Americans to forget that 75% of the once eligible U.S. home buyers were decimated by the financial crisis whether by loss of their wealth affect, net worth or credit.

Yes, by 2009, those with cash came out to buy distressed residential homes and properties, and at foreclosure prices even saw some appreciation gains or investment rental positive cash flow.

By 2011-2012, this investment strategy grew further and as the election year is well underway, each day, we hear about green shoots in the U.S. economy. Indeed, we’ve seen a stock market (DOW) mysteriously almost reach its 14,000 highs.

And so, it would seem to be a simple strategy to use cash to buy real estate at bargain prices.

Now, while 25% of the buying U.S. public may be in a position to undertake this strategy, and quality, well located housing is selling (at low prices), it is imprudent to remember that the foundation for housing price support levels really will be determined by the 75% of U.S. consumers who are unable to take part in the home buying.

Without cash, you can’t buy foreclosed properties. Without excellent credit, you cannot obtain mortgage financing.

And so, the absent swell underneath, the surge of buyers from the 75% who are out of the housing market, translates to a hollow housing recover.

Making bets on the basis of what 25% of the U.S. buying public is doing successfully, (while the other 75% languish) is akin to buying a barrel of apples because the apple at the top looks fresh.

The underbelly of the U.S. Housing market cannot be fresh and sustainable when 75% of the customary U.S. homebuyers are shut out.

Personally, in my travels and research across America, I can tell you it’s hard to find a quality home that doesn’t sell long before it’s listed. The few quality homes, at low prices, sell fast to the 25% of U.S. buyers and investors in the market.

But for every quality home snapped up, I venture to estimate there’s 1,000 inferior homes that cannot be sold and more will be coming on the market, and the army of 75% of the “former” U.S. buying public” cannot come to the rescue because they’ve not yet recovered from the 2008 crisis.

And so, though I wish I could be more positive, and it’s in my best interest to spread positive housing news, since truth means more to me in my writings, and teachings of the Certification Real Estate Development Course, my research and instincts tell me that until the 75% of the U.S. traditional home buyers are made well financially, any housing recovery will be superficial and unsustainable.

And yet, I see no measures to make these Americans financially well again. And thus, I say, “Buyers Beware.”

Warmest,

Richard Michael Abraham
Founder
The REDI Foundation
Certification Real Estate Development Course
http://www.redii.org

Ken E Zen

While I agree with your conclusions as they relate to the economic comparisons, have we made the same more simple comparison to Government policy and philosophy. President Roosevelt Carried forth a State Capitalist philosophy as has this current president. Would we not consider this as well either as a positive or negative?
What do you think happens if we continue this State Capitalistic approach. Would you venture to predict the economic condition of the middle class in four years of Strong Central Government control?
Will there be a strong private sector for the middle class or only Government employment refuge?

godblessu

Towards to USA, it is a great idea to publish a large number of currency, due to dollar is the world currency; therefore, the country all over the world have to absorb the flowing surplus currency, then the inflation rate will be higher and higher. Undoubtablly, at last the country will be collapse in a row.

To conclude, USA should stop the motivate policy, if it keep going, 1930s crisis won't be far

CNS1

The proximate "cause" of a recession - excessive investment in canals, farm land, housing etc. is not the cause of the deep damage to the economy of the resulting recession/depression. As President Hoover accurately described, it is the general, irrational withering of confidence as people electively stop buying, investing, borrowing, etc. Hoover himself instituted "to big to fail" measures and took government spending from surplus to deficit between 1929 and 1933, but on far too modest a scale to restore confidence. Even President Roosevelt was too much a captive of balanced budgets to stay the course, and indeed it was deficit spending by Britain and France as they armed for WW2 that contributed to U.S. recovery in 1938-1939. Roosevelt's measures related to Gold were irrelevant as people's unwillingbess to spend made paper currency prevented paper currency from declining in value.

JNMIR

There seems to me to be two elements at play. One was the debt which the banks allowed to happen with very little regard to the ability to pay. I wonder what policies were used in this respect during the 1930's.
Manufacturing jobs have been moving east for many years now with the take up in financial services masking it somewhat. The unfortunate aspect of this is that success in the financial world is based on the very sandy foundation of confidence which can disappear so quickly. The transition from agriculture to manufacture was successful because jobs were born in the new environment. This will not be the same for the current transition as the low confidence will not allow success enough to pay back the debt. It will therefore be a slow process reducing this debt through inflation.

KCCM

As R.A. points out, the monetary response to the 'Great Recession" has been, in many ways, strikingly successful. Trillions were transferred to public balance sheets rather than disappearing entirely from those of the private banks. The difficultly was always going to be reviving growth enough on the 'far side' to transfer those trillions back...

-Kole-

This: "The initial 12-month economic decline in 2008 was as bad as that in 1929. In the earlier period, however, central banks tightened policy while in the recent recession they opened the monetary spigots. When all was said and done, world industrial output dropped 13% this time around compared to nearly 40% in the 1930s, and unemployment peaked at just over 10% this time, compared with over 25% in the 1930s. The most logical conclusion to draw from the two events wouldn't seem to be that monetary policy was useless, but that it was critical" is a joke. Anyone who thinks that such direct comparisons can be made between the Great Depression and today's crisis has no place trying to argue the causes of either one. While I don't think that the Great Depression can solely be attributed to declining employment and income in the Agricultural sector, I do think that the transition has huge costs that should not be dismissed. Also saying that the depression "should" have started earlier because employment and prices started to fall already after WWI is again an oversimplification of a complex problem. Many of the farm-workers found their way into the manufacturing industry so we shouldn't expect the consequences to appear immediately.

fundamentalist

Check out these responses to Stiglitz's senior moment:

"You just can't do macro like that. It all goes wrong from the very beginning. The fall in the price of gizmos, for a given quantity of gizmos sold, and for given prices of non-gizmos, reduces the real incomes of gizmo producers, but increases the real incomes of non-gizmo producers by an equal amount. If the price of gizmos falls by $1 each, and one million gizmos get sold each year, gizmo producers have $1 million less income, but non-gizmo producers now have an extra $1 million to spare which they can spend on something else."

from http://econlog.econlib.org/archives/2011/12/joseph_stiglitz_1.html

Reasonable Views

I have to side with the author, R.A. This "Great Stagnation" largely goes unnoticed by the media, who prefer to report on the chances of a "double dip," apparently unaware that job creation, wages, asset prices, labor force participation and other measures of prosperity have retreated to levels not seen in a decade or more.

Currently, the U.S. sits with 25 million (one sixth) of the workforce unemployed or underemployed and more cash than ever ($2.12 trillion) sitting unused in corporate bank accounts. So many resources sitting idle while economic growth stagnates - it does boggle the mind. This circumstance leads me to conclude, in sympathy with Mr. Stiglitz, that there is a structural cause. However, I'm not persuaded by his explanation. http://reasonableviews.com/2011/12/09/fields_lie_fallow/

Car10s

Rather than presenting a different view to that sustained by Mr. Stiglitz, R.A. turns economy into an ad hominen blast off against he who dares to think differently

mainvision

Interesting that the author has found issue with some of the technical aspects of Stiglitz's theory, but has not found it useful to comment on his ideas about banks:

"The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: “Don’t put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don’t force them to use the money to lend. Such conditions will upset our delicate markets.” In the end, bank managers looked out for themselves and did what they are accustomed to doing."

And his conclusions: "...If we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery. Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around."

I would find it much more interesting discussing what was achieved by throwing colossal amounts of money at the banks first by the Bush administration, no questions asked, reinforced later by the Obama administration. Same for European banks, namely Ireland and Britain. If a fraction of that money had been invested in the "real world", we may have had fewer bonuses for bankers and a much better economic situation. It may be time to start discussing how to jump start the "real world" and stop fretting endlessly, like David Cameron did only a few days ago, about saving the City of London and the financial institutions. The City does not intend and cannot do anything for the economy, other than speculate on the euro or betting on anything that can bring money to the shareholders - the casino economy. Robert Peston's report on the BBC "The Party's Over: How the West Went Bust" asks some interesting questions. It's time to look for answers. Perhaps it's time to use money to create jobs, invest in infrastructure, schools and health, rather than throwing good money after bad at the unproductive financial sector which, in the best case, will only look after itself as we go to hell in a bucket.

Pacer in reply to mainvision

mainvision - The trouble is that the banks have no real wealth to liberate for the use of main street. What little real wealth passes through their hands is skimmed off in the form of bonuses and protected cell investments offered only to a club of the same feather.

If there is a means for the banks to disgorge some value looking forward, the means I keep coming back to is massive discharge of debt through bankruptcy. The great uncertainty that is holding back productive business might just be that all the fruit of their equity and sweat and genius will just escheat to the overhyped claims that banks have laid on future productivity. Government debts and taxes are perhaps just the conduit - these sovereigns have been reduced to the loansharks' bill collection 'muscle.' Just a thought.

fundamentalist in reply to mainvision

Stiglitz: "What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending."

That statement just advertises his ignorance. Banks were not speculating. The made bad loans to people who couldn't afford them because Congress ordered them to through the community reinvestment act. Then Congress made it lucrative for banks to obey the act by creating Fannie and Freddie to buy mortgage loans from the banks.

Many banks bought the derivatives created by F&F, called mortgage backed securities, backed by the mortgages the banks had sold them because the Fed insisted that they buy either government bonds or the MBSs. The Fed gave them no options other than the MBSs and government debt. Of course, they could have bought Greek and Italian debt instead of the MBSs.

The bailout money went to replenish bank reserves in order to keep the regulators from shutting down insolvent banks and the fed having to pay out billions in FDIC insurance. Banks can't loan out reserves that are not in excess of the reserve requirement under Basel I and II.

The same regulators who insisted that banks by MBSs are now refusing to let banks lend money unless the borrower has better credit than the federal government. In addition, the Fed has kept interest rates so low that the risk/reward ratio for lending to businesses makes that unattractive.

The problem with Nobel Prize winning economists is that they stopped learning anything new decades ago, but they belief they know everything about everything.

mainvision in reply to fundamentalist

Thanks for your enlightening explanation. I did not realise that Stiglitz was so ignorant, but now I know. Could you also enlighten me on whether Congress was, at the time, composed of Martians or of duly elected representatives? People at AIG must have been Martians, however, because they obviously did not understand the products they were selling and the risks involved - I could recommend an interesting extended story in the Washington Post on the subject. While on the subject, now that the Congress is controlled by fully illuminated tea partiers, with the advantage of hindsight, why nothing is being done to correct the situation and avoid such insane risks in the future?

fundamentalist in reply to mainvision

Speaking of martians, which planet do you live on? Tea Partiers are a small minority in the Republican party, which makes them a smaller minority in Congress.

Congress won't do anything about its stupid policies from the past because the media has convinced gullible people that the greedy bankers caused the crisis, end of story. And most people won't look beyond what the ignorant mainstream media, especially WaPo tells them.

Kevin Sutton in reply to fundamentalist

An Act passed in 1977 did not force anyone to do something completely new 23-30 years after it was passed.

F&F were not the majority or even a proportionately large part of the sub prime mortgage industry in the latter half of the decade.
Banks were/are not FORCED to buy derivatives from F&F, and F&F certainly were not the sole (or even majority) issuer of subprime debt. ...Nor can someone call that 'lending'. I don't understand how you can claim that banks are lending and not speculating when you're acknowledging that they're buying derivatives.

Blaming a the Community Reinvestment Act for improperly graded debt packages, (Fitch, S&P, etc...) the creation and rebundling of debt packages at all, (all banks and mortgages lenders) and for the size of risk adopted by the industry is complete nonsense. I'm dying hear how they're all somehow related, or why it took decades for the bubble supposedly created by the Act to even exist.

Banks were speculating. That's what buying and trading in collateralized debt obligation packages and derivatives is called. No law forced them to buying and trade so much bad debt or for that debt to be rated as far better than it was. The Community Reinvestment Act explanation is just a bugbear.

fundamentalist in reply to Kevin Sutton

Kevin, I don’t think that the act or the actions of F&F were the main causes of the crisis. That honor belongs to the Fed. I am merely defending bankers against the charge of reckless speculation.

Congress did not set on its butt after 1977 and do nothing. It didn’t get the results it wanted so it passed many smaller bills trying to push banks into more lending to the poor. The creation of Fannie and Freddie were part of the process. And they pushed regulators to enforce the law more.

No one has said that subprime were the majority, but they don’t have to be. When people realized that the percentage of subprime loans was much higher than in the past and therefore higher than expected, the value of the derivatives fell. But I agree that subprime loans weren’t the major problem. The collapse in housing prices was the main cause of the value of MBS’s falling.

Yes, regulators forced banks to by MBS’s. Regulations limited what banks could buy to AAA and AA rated securities. That means government debt or MBS’s. Those were their only choices. Apparently there wasn’t enough government debt during the early 2000’s to meet the demand. They were not speculating because the regulators chose three ratings agencies and gave them a monopoly on rating securities and forced banks to use their ratings. Those federally protected ratings agencies gave AAA and AA ratings to MBS’s. You can’t get any safer than that.

Banking regulations forced banks into MBS’s and forced banks to make bad loans to poor people. Still, none of that would have mattered as much had the Fed not flooded the country with cheap credit. Had interest rates been higher, Fannie and Freddie could not have borrowed as much as they did. Without that borrowing they could not have bought as many mortgages as they did. Without that buying banks would not have made as many bad loans.

Doug Pascover

I'm looking forward to the full briefing which, according to the Money Talks episode this week, R.A. wrote. Exciting.

Very interesting, Fundy.

Pacer

Another key challenge for comparisons is faulty measurements.

GDP trends are measured in real terms--meaning that the stated inflation is subtracted from nominal. The authorities today measure inflation in the 1.5-3% range, whereas pre-1980 measures peg it at 10-15% (since at least the mid-2000s by the way). Subtract the larger pre-1980s inflation numbers from the assumed rate of GDP growth/contraction over the last decade and one might conclude that this 'great recession' has the 'great depression' beat already.

What we lack for photogenic soup lines and hoovervilles we make up for with SNAP and other transfer payments paid for in debt (debt that wasn't so freely available in the 1930s) and foreclosees-in-possession. The difference today is that negative net worth doesn't mean zero purchasing power individually or at the national level. And it's too soon to tell if that's a good thing.

synergikon in reply to Pacer

Pacer, I would have to agree that we don't know yet whether our increasingly debt-oriented financial structures are overall a "good" thing, though they certainly seem to be good for large banking institutions, hedge funds, and the winning side of Wall Street.
But to raise a few relevant philosophical points: the kind of knowing which you speak of is not actually that relevant for deciding whether or not to reject on some level the debt-orientation our society has embraced. Helpful in a formal economic argument, certainly, helpful from a strictly evidence-oriented and academic perspective, definitely. If we needed to write a dissertation on the total pros and cons of the new ways we approach and use debt as a culture and a board of professors was going to review it, we might need to gather more evidence to produce a definitive sort of knowledge. But we already know enough in terms of the total effects and side-effects of our embracing debt as a natural and even necessary part of civil life to make a judgement. The evidence needed to decide whether we as a society ought to reject, embrace, or modify in general our debt-orientation is here. What we lack is a coherent and systematic conception of "the good" or "the good life" - that which we need to have in mind when assessing the evidence and deciding whether or not our debt-orientation is helping us as a society move towards creating and maintaining the framework required for the majority of us to have reasonable access to that "good life".

Sandwichman

The problem with monetary or fiscal cures for a structural problem is that the cure is temporary but the problem is ongoing. In the long run, we're all dead but before that our children have grown up in a different world than the one we grew up in. I suspect that Ryan Avent commits a version of the Dorning Rasbotham theodicy here. He makes a number of highly questionable but unstated assumptions that, if true, render Stiglitz's argument "unfortunate." If not true, they're simply a digression. I agree that Stiglitz's analysis and prescription are flawed. But not in the way that Avent thinks.

fundamentalist

The Coordination Problem blog has a good article on this at http://www.coordinationproblem.org/2011/12/thinking-about-the-great-depr....

My great-grandfather lost 720 acres of farm/ranch land in the 1920’s because of the ag crisis. That was his original allotment when the government broke of the tribes and allotted tribal lands to individual tribal members. My great-grandfather was Choctah.

Productivity increases contributed to the ag problem, but the most important cause was the government’s encouragement of farmers to increase production for WWI. Farmers like my great-grandfather took out loans to expand production to help with the war effort and the aftermath. But farming in Europe bounced back much faster than expected and produced a glut of ag products. Farmers tried to produce their way out of the problem but that only made things worse.

The best theory of any depression is the Austrian business cycle theory. See “Boombustology” for a good description.

But all other theories are accurate, too, even Stiglitz’s. They’re just right at different times during the cycle. The ABCT provides the best skeleton theory of cycles while the others flesh it out at different points.

Connect The Dots

The Good News is the 2008 Financial Catastrophe is not a Recession.
The Bad News is it is a Depression.

Even in 1930s, the economists and lay people did not have the vocabulary to call the event a 'Great Depression'...They called it 'Falling on Hard Times.'

It is only about 6 years later in retrospect that a university economist researching the data revealed the true nature and labeled it the "Great Depression".

If this pattern holds, it will be about 5 years(around 2013) before some of the brighter members of our intelligentsia points out the fact hidden in plain sight.

tjic

> unemployment peaked at just over 10% this time, compared with over 25% in the 1930s.

You're comparing apples to oranges. In the 21st century a LARGE percent of the unemployment is being masked as "disability" where people who's main disability is their unwillingness to accept work at rates that fairly compensate them for their (minimal) skills go on the government dole with vague, amorphous complaints.

I'd enjoy seeing a more thorough investigation of what the non-workforce participation rates are then and now.

Morani ya Simba

A problem that is very acute in economics and is found in all complex systems studied, is that of ascribing causality to a change in behavior. Suppose you have an array of variables, a through z, that are all coupled by non-linear equations. When one, say variable i, changes, the variables that are functions of i, change too and will again change i more at some point. It is extremely hard, especially in real life where you never have perfect information, to say which variable was perturbed first. This ends up diluting the concept of causality somewhat, even in a strictly deterministic system (which national economies are not).

A further complication, when comparing the 1930s and today, is that Asian economies, which are fairly large, were affected far less, providing a possible source of credit and consumption. The former has benefited American stimulus (because the government did not have to borrow money from the citizens but could borrow it abroad and avoid taking money out of the economy) and the latter has benefited Germany. This is quite an important difference because in the 1930's Europe and America, which constituted some 85% of world economy at least, were both hit, making it impossible for one to pull the other through.

flow5

The loss of faith in the private commercial banks had become so pervasive by the end of 1932, banks were being forced to liquidate by the thousands. People everywhere were attempting to convert their demand and time deposits into currency. Thousands of towns and cities throughout the country were attempting to finance their daily commerce without a single operating bank. And by March, 1933, just before Roosevelt’s “banking holiday” there were even entire states without a single operating bank.

So Friedman's contention that the FED should have expanded the money supply is without merit. It was technically impossible.

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