Did FDR Make the Depression Great? - David Gordon - Mises Institute

Did FDR Make the Depression Great? - David Gordon - Mises Institute:

High wages do not cause prosperity, they are rather an indication of prosperity. Ultimately, it doesn't matter how many green pieces of paper employers hand out to workers. Unless workers first physically produced the goods (and services), there will be nothing on the store shelves for them to buy when they attempt to spend their big fat paychecks.

By focusing on aggregate monetary conditions such as "total wage payments," Hoover completely overlooked the fact that real, physical resources had to be rearranged in order to correct the imbalances in the economy. It wasn't that "business" was producing too much, but rather that some sectors were producing too much, while other sectors were producing too little, in light of the economy's supplies of resources, the skills and desires of its workers, and the tastes of its consumers.

The only way to rectify the situation — to transform the economy into a sustainable configuration — was to shuffle workers and resources. Some enterprises had to be shut down immediately, releasing their workers and freeing up the raw materials they would have consumed had they remained in business… But in a market economy, workers are free to choose their occupations, and the owners of raw materials can sell their property to whomever they desire. Yet with that freedom comes the unfortunate necessity of prolonged spells of unemployment and "idle resources," when the workers and raw materials are searching for a new home in the complex economy.

According to this view, if people anticipate falling prices, they will refrain from spending. Because they expect prices to fall, they think that that will do better to consume later. But this drop in consumption causes a further price fall, and the whole cycle repeats. Prices may spiral uncontrollably downward.

Murphy responds in this way:

"One could construct an analogous argument for the computer industry, in which the government passes regulation to slow down improvements in operating systems and processing speed. After all, how can computer manufacturers possibly remain viable if consumers are always waiting for a faster model to become available? … The solution to this paradox, of course, is that consumers do decide to bite the bullet and buy a computer, knowing full well that they would be able to buy the same performance for less money, if they were willing to wait… (There's no point in holding out for lower prices but never actually buying!) (pp. 68–9)"

Many analysts who are terrified of deflation stress that in an environment of falling prices, cash stuffed under the mattress earns a positive return. This observation is certainly true, but nonetheless cash lent out earns an even greater return. Falling prices, then, encourage consumers to devote more of their income to savings, which in turn lowers interest rates and allows businesses to borrow and invest more.

So we see that immediately following the stock market crash, the Fed began flooding the market with liquidity and in fact brought its rates down to record lows…. If the ostensible cause of the Great Depression — the one factor that set it apart from all previous depressions — was the Fed's unwillingness to provide sufficient liquidity, then how could it possibly be that the Fed's record rate cuts proved inadequate to solve "the problem?"