Sunday, July 12, 2009

In Answer to My Coz DP

Dr Wright
In the high school where I work I noticed pictures on the wall in a class room of moments in history. One picture says the American Revolution ended at Yorktown (somewhat untrue) and there was another that stated the Great Depression ended with FDR's social programs but I have read that World War II had an impact on the recovery, since you have wrote of the causes of it and other problems later in history could you comment on the recovery from the depression?.... signed (your cousin) DP


World War II rapidly brought the economy to full employment and beyond. It did not, repeat did not, bring the U.S. economy out of the Depression. FDR's social programs didn't either. What did the trick was loosening the gold standard (1 oz. gold to $35 from $20), which allowed the Fed to reflate the money supply, which lowered REAL (inflation adjusted) wages and interest rates, both of which had become far too high due to the deflation associated with the infamous bank panics and the stock market crash and subsequent decline in aggregate demand. 2H 1933 through 1936 were periods of strong growth (increases in per capita GDP). Unemployment decreased as well but more slowly. (As our beloved president recently noted, employment is a lagging indicator.) The unemployment rate would have been back near its normal low level by 1939, and certainly by 1941, even without the war had it not been for the so-called Roosevelt Recession of 1937-38, when FDR tried to balance the budget, in retrospect prematurely, and the Fed capriciously raised banks' reserve requirements for reasons only a central banker could "understand."

For more info., see a cute little volume I edited called Bailouts: Public Money, Private Profits due out from Columbia UP/SSRC shortly. It's only like 12 bucks on Amazon and my part of it is sort of a prequel to my Fubarnomics due out from Prometheus early next year.


Anonymous said...

Dr Wright
I would like to thank you for your quick response to at least two questions I have asked of you however I don't want to be to much of a burden in questions but I have many, for instance is it true that FDR's spending prolonged the Depression? Did Reagen's tax cuts actually give us the big boom in the 90's? do you think we should get away from our nationalist to a more federalist government? do you think the Packers are going to the Super Bowl? and there will be others as I check in on your blog every once in a while ..... signed Coz

Robert E. Wright said...

I doubt that FDR's spending PER SE prolonged the Depression. Creation of uncertainty regarding future policies may have, though, by slowing the growth of business investment. I also doubt that Reagan's tax cuts had much to do with the 1990s. That is an awfully long lag. I also doubt that the Packers will be going to the Super Bowl in 2010 but I'm not ready to bet on that one!