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FDR's policies prolonged Depression by 7 years, UCLA economists calculate

Guy Incognito

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I think it's completely wrong. It's typical of an economist to be so myopic as to think that FDR somehow dragged out the depression. Maybe he did halt an economic recovery with the New Deal. But the reason why FDR is remembered as a great president is not because he simply got us out of the Great Depression but that he did it at the same time as he guided us to victory in World War II and produced an era of unprecedented growth and prosperity in this country. FDR didn't just end the Great Depression, he ended cyclical depressions altogether. Well, until Reagonomics came along, anyway.
 

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NIRA, NLRA, the Agricultural Adjustment Act, and the Soil Conservation and Domestic Allotment Act all contributed to prolonging the depression by limiting output. They were bad policies.
 
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phattonez

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I think it's completely wrong. It's typical of an economist to be so myopic as to think that FDR somehow dragged out the depression. Maybe he did halt an economic recovery with the New Deal. But the reason why FDR is remembered as a great president is not because he simply got us out of the Great Depression but that he did it at the same time as he guided us to victory in World War II and produced an era of unprecedented growth and prosperity in this country. FDR didn't just end the Great Depression, he ended cyclical depressions altogether. Well, until Reagonomics came along, anyway.

So what do you think of Warren G. Harding?
 

Mensch

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I think it's completely wrong. It's typical of an economist to be so myopic as to think that FDR somehow dragged out the depression. Maybe he did halt an economic recovery with the New Deal. But the reason why FDR is remembered as a great president is not because he simply got us out of the Great Depression but that he did it at the same time as he guided us to victory in World War II and produced an era of unprecedented growth and prosperity in this country. FDR didn't just end the Great Depression, he ended cyclical depressions altogether. Well, until Reagonomics came along, anyway.

Dude, read a book. No one in their right mind, even the most heartened democrats, would argue that FDR got us out of the Great Depression. What is debatable is whether or not he kept our heads above water. This recent study indicates the exact opposite.
 

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I think it's completely wrong. It's typical of an economist to be so myopic as to think that FDR somehow dragged out the depression. Maybe he did halt an economic recovery with the New Deal. But the reason why FDR is remembered as a great president is not because he simply got us out of the Great Depression but that he did it at the same time as he guided us to victory in World War II and produced an era of unprecedented growth and prosperity in this country. FDR didn't just end the Great Depression, he ended cyclical depressions altogether. Well, until Reagonomics came along, anyway.

I know we're getting off topic a bit, but I'm not sure FDR deserves a lot of credit for "guiding us to victory in WW II". Once we were officially in the war, there wasn't any strong opposition that FDR had to face down and our wealth of resources and manpower combined with the fact that our industrial base was kept safe from the ravages of war by two enormous oceans made victory almost inevitable once we joined the Allies. Pretty much any reasonably competent commander in chief could've overseen a US victory in WW II. And as far as FDR goes, one area of his wartime leadership that is very open to criticism is his handling of Stalin.

As for the unprecedented prosperity and power we enjoyed immediately after the war, again that was more due to the circumstance that we were the only Great Power who's territory wasn't ravaged by the most destructive conflict in human history.
 

drz-400

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Dude, read a book. No one in their right mind, even the most heartened democrats, would argue that FDR got us out of the Great Depression. What is debatable is whether or not he kept our heads above water. This recent study indicates the exact opposite.

The financial reforms had immediate and very positive benefits. Some of the new deal, which is highlighted in your article, was counter-productive. Things like the FDIC and devaluation of the dollar were very important to ending the depression though.
 

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When central planners attempt to devalue the dollar based on what, themselves, think is appropriate, it always comes with unintended consequences. The FDIC could be argued to have restored a certain amount of certainty back to the consumer. But how long will it last once the system runs bankrupt (the FDIC has billions in unfunded mandates)? Also, we can see by the recent bank crisis that the FDIC is not full-proof. The Great Depression lasted for roughly fifteen years, and the FDIC existed for twelve of those years. On the other hand, the bank-runs were relatively short-lived and were always self-corrected. Most of them in our history only lasted for a few short months, despite the nonexistance of FDIC.

I would argue that these elements were not the key ingredients for recovery. The following article has some useful points on the subject:

What Ended the Great Depression? | The Freeman | Ideas On Liberty
 

PeteEU

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This report supposedly "proves" a long held attempt by the US right to rewrite history and discredit FDR. That makes me highly sceptical.

But again, it seems very selective.. for one it was right wing policies that started the Great Depression in the first place, so why should those same policies get the world out of that hole faster? Wonder if this report and similar even addresses this... doubt it.
 

cpwill

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I think it's completely wrong. It's typical of an economist to be so myopic as to think that FDR somehow dragged out the depression. Maybe he did halt an economic recovery with the New Deal. But the reason why FDR is remembered as a great president is not because he simply got us out of the Great Depression but that he did it at the same time as he guided us to victory in World War II

Great Depression: 1931-1941
WWII: 1942-1945

Roosevelt certainly did not "get us out of the Great Depression"; the backtracking of his policies that were forced on him by the demands of WWII did that; and even then we weren't "in a period of growth"; we were living off of rationing.

Roosevelt had no idea what he was doing; his presidency is still screwing us over today.

and produced an era of unprecedented growth and prosperity in this country. FDR didn't just end the Great Depression, he ended cyclical depressions altogether. Well, until Reagonomics came along, anyway.

:lol: yeah, because we've had no growth since 1982.

oh wait.

averaged growth rates of the S&P 500 from 1945 - 1981 (accounting for inflation and combined annual growth rates): 5.94%
same number for 1982 - the end of 2009: 7.98%

we grow about 2% faster now that tax rates are down. as for coming out of massive market corrections:

America’s greatest depression fighter was Warren Gamaliel Harding. An Ohio senator when he was elected president in 1920, he followed Woodrow Wilson who got America into World War I, contributed to the deaths of 116,708 Americans, built up huge federal bureaucracies, imprisoned dissenters and incurred $25 billion of debt, for which he has been much praised by historians.

Harding inherited the mess, in particular the post-World War I depression – almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933, that FDR inherited and prolonged. Richard K. Vedder and Lowell E. Gallaway, in their book Out of Work (1993), noted that the magnitude of the 1920 depression "exceeded that for the Great Depression of the following decade for several quarters." The estimated gross national product plunged 24% from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million in 1920 to 4.9 million in 1921...

Harding’s Budget and Accounting Act of 1921 provided a unified federal budget for the first time in American history. The act established (1) the Bureau of the Budget with a budget director responsible to the president, and (2) the General Accounting Office to help cut wasteful spending.

In the fall of 1921, Harding’s Secretary of Commerce Herbert Hoover prompted him to call a Conference on Unemployment. Hoover wanted government intervention in the economy, which as president he was to pursue when he faced the Great Depression a decade later, but Harding would have none of it. Good thing, since Hoover’s policies were to prolong the Great Depression. Harding said, "There will be depression after inflation, just as surely as the tides ebb and flow." Harding insisted that relief measures were a local responsibility...

Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes were cut from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding’s policies started a trend. The low point for federal taxes was reached in 1924. For federal spending, in 1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930.

Conspicuously absent was business-bashing that became a hallmark of FDR’s speeches. Absent, too, were New Deal–type big government programs to make it more expensive for employers to hire people, to force prices above market levels, to promote cartels and monopolies. Frederick Lewis Allen wrote, "Business itself was regarded with a new veneration. Once it had been considered less dignified and distinguished than the learned professions, but now people thought they praised a clergyman highly when they called him a good business man."

With Harding’s tax cuts, spending cuts and relatively non-interventionist economic policy, the gross national product rebounded to $74.1 billion in 1922. The number of unemployed fell to 2.8 million – a reported 6.7% of the labor force – in 1922. So, just a year and a half after Harding became president, the Roaring 20s were underway. The unemployment rate continued to decline, reaching a low of 1.8% in 1926 – an extraordinary feat. Since then, the unemployment rate has been lower only once in wartime (1944), and never in peacetime.

"The seven years from the autumn of 1922 to the autumn of 1929," wrote Vedder and Gallaway, "were arguably the brightest period in the economic history of the United States. Virtually all the measures of economic well-being suggested that the economy had reached new heights in terms of prosperity and the achievement of improvements in human welfare. Real gross national product increased every year, consumer prices were stable (as measured by the consumer price index), real wages rose as a consequence of productivity advance, stock prices tripled. Automobile production in 1929 was almost precisely double the level of 1922. It was in the twenties that Americans bought their first car, their first radio, made their first long-distance telephone call, took their first out-of-state vacation. This was the decade when America entered ‘the age of mass consumption.’"...
 

cpwill

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This report supposedly "proves" a long held attempt by the US right to rewrite history and discredit FDR. That makes me highly sceptical.

But again, it seems very selective.. for one it was right wing policies that started the Great Depression in the first place, so why should those same policies get the world out of that hole faster? Wonder if this report and similar even addresses this... doubt it.

it was certainly not conservative policies that kicked off the Great Depression; Hoover was every bit an interventionist that George Bush and FDR were; and the Tarriff war was a horrible idea.
 

Mensch

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This report supposedly "proves" a long held attempt by the US right to rewrite history and discredit FDR. That makes me highly sceptical.

But again, it seems very selective.. for one it was right wing policies that started the Great Depression in the first place, so why should those same policies get the world out of that hole faster? Wonder if this report and similar even addresses this... doubt it.

Oh, the wonderful world of simple. Economic conditions are based solely on a left-right administration. Now we know what will secure a prosperous economy forever, just restrict the right from ever holding public office.
 

oldreliable67

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This report supposedly "proves" a long held attempt by the US right to rewrite history and discredit FDR. That makes me highly sceptical.

But again, it seems very selective.. for one it was right wing policies that started the Great Depression in the first place, so why should those same policies get the world out of that hole faster? Wonder if this report and similar even addresses this... doubt it.

Does this sound like a 'right-wing' policy?

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Entering into collective bargaining agreements with labor has always seemed rather a liberal party position to me. This act certainly was successful in expanding organized labor's reach. I suppose one could point to the anti-trust exclusion feature of the act and argue that makes it conservative, but on balance, the NIRA strikes me as being much more of a liberal approach than 'right-wing.' Just my impression. YMMV.
 

Kernel Sanders

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I'm no economist, but this part raised some red flags for me

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect.

They're using the obviously inflated numbers present just before the crash as a baseline? Seems to me that they're taking pre-Depression numbers, eliminating the depression, extending their trends, and blaming the difference on FDR rather than the Depression. Am I missing something or is this as stupid as it seems?
 

drz-400

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When central planners attempt to devalue the dollar based on what, themselves, think is appropriate, it always comes with unintended consequences.
The great depression last 4 and a half years. The recovery started in 1933. FDIC and the devaluation of the dollar both cleared the way for recovery.

The dollar had fixed exchange rate. It was obvious what needed to happen. Not only that, maintaining a gold standard hindered the ability of the central bank to expand the money supply. Not only did devaluing the dollar allow the central bank to become more expansionist, it also allowed a large amount of gold reserves to flow into the united states.

The FDIC could be argued to have restored a certain amount of certainty back to the consumer. But how long will it last once the system runs bankrupt (the FDIC has billions in unfunded mandates)? Also, we can see by the recent bank crisis that the FDIC is not full-proof. The Great Depression lasted for roughly fifteen years, and the FDIC existed for twelve of those years. On the other hand, the bank-runs were relatively short-lived and were always self-corrected. Most of them in our history only lasted for a few short months, despite the nonexistance of FDIC.

The bank runs did not subside until after the emergency banking act was passed, which essentially created a 100% deposit insurance. Later in 1933 this was formalized into FDIC in the banking act of 1933. The banks that were FDIC insured did not suffer from a large scale bank run in the recent crisis. Market institutions that used money markets for short-term funding rather than deposits faced a liquidity crisis in the recent recession. Once the fed gave such institutions access to the discount window, the crisis was essentially ended, for at least those that were solvent.

I would argue that these elements were not the key ingredients for recovery. The following article has some useful points on the subject:

What Ended the Great Depression? | The Freeman | Ideas On Liberty

Lowering taxes in 1945 did not end the great depression, since the great depression had already ended 12 years earlier. During the war years, unemployment was already far below the natural rate.
 

oldreliable67

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I'm no economist, but this part raised some red flags for me

They're using the obviously inflated numbers present just before the crash as a baseline? Seems to me that they're taking pre-Depression numbers, eliminating the depression, extending their trends, and blaming the difference on FDR rather than the Depression. Am I missing something or is this as stupid as it seems?

Perhaps a little more calc's involved than in mere extrapolation. Their method of 'adjusting for productivity' is the key to their results. Of course, we would have to read the entire paper in its original form to discern that methodology. [edit: curiosity got the better of me, so I went to get a copy the paper, only to find out that it is one of those for which one has to pay $10. Never mind. Not that interested! Though I did learn from other comments that their scope focused on what they refer to as 'cartelization' of labor agreements, which is a slightly different impression than the one I got from the OP.]

Moreover, in 1929, the data with which to do that was problematic at best. The major components of the National Income and Product Accounts (NIPA) were collected, of course, but the standard error of the estimates were quite large during that period. Data collection remained relatively sparse until WWII, when the need to monitor production and output for the war effort prompted large improvements in scope and methodology.

It would be interesting to read a peer review of this paper; I wonder how other academics interested in the topic have critiqued it.
 
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Kernel Sanders

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Perhaps a little more calc's involved than in mere extrapolation. Their method of 'adjusting for productivity' is the key to their results. Of course, we would have to read the entire paper in its original form to discern that methodology.

This part keeps those red flags up

By adjusting for annual increases in productivity,

Still sounds to me like they're ignoring the depression part of the Depression
 

drz-400

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This part keeps those red flags up



Still sounds to me like they're ignoring the depression part of the Depression

Productivity was pro-cyclical during the great depression. Meaning that during the recession (29-33) productivity was falling while during recovery, productivity was increasing. Recovery would be the period after 1933.

The popular Keynesian explanation for this is labor hoarding. This means that companies hold on to excess employees, rather than laying them off during recession for various reasons.

For this to make sense, its also important to know that during recessions, nominal wages tend to remain elevated, while inflation declines. This means real wages increase. This is known as "sticky wages." The failure of nominal wages to adjust is thought to be one large reason why a business cycle causes a decline in productivity (if firms hoard labor) and an increase in unemployment, since rising real wages will depress output. During the recovery of the great depression, real wages remained elevated. The author is attributing this "stickyness" to the new deal policy, NIRA.

What is confusing is why productivity did increase as much as it did during recovery, despite the fact that real wages remained high. Ben Bernanke, for example, has stated that this could possibly be explained by the efficiency wage hypothesis, which says that higher wages and better treatment of labor will increase their productivity. This study, while I have not read the actual paper, says it accounts for this increase in productivity and still finds that wages were higher than they would have been without the new deal, which would slow the mechanism of recovery, falling real wages.
 
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phattonez

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The great depression last 4 and a half years. The recovery started in 1933. FDIC and the devaluation of the dollar both cleared the way for recovery.

Except for the "recession within the Depression." The horrid economic conditions did not end until just about when the war ended.

The dollar had fixed exchange rate. It was obvious what needed to happen. Not only that, maintaining a gold standard hindered the ability of the central bank to expand the money supply. Not only did devaluing the dollar allow the central bank to become more expansionist, it also allowed a large amount of gold reserves to flow into the united states.

And it further undermined confidence in the dollar.

The bank runs did not subside until after the emergency banking act was passed, which essentially created a 100% deposit insurance. Later in 1933 this was formalized into FDIC in the banking act of 1933. The banks that were FDIC insured did not suffer from a large scale bank run in the recent crisis. Market institutions that used money markets for short-term funding rather than deposits faced a liquidity crisis in the recent recession. Once the fed gave such institutions access to the discount window, the crisis was essentially ended, for at least those that were solvent.

FDIC created problems that were sure to manifest in the future though as it allowed banks to become more irresponsible.

Lowering taxes in 1945 did not end the great depression, since the great depression had already ended 12 years earlier. During the war years, unemployment was already far below the natural rate.

Standard of living did not really start to rise again until WWII ended and everything got back to normal.
 

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Except for the "recession within the Depression." The horrid economic conditions did not end until just about when the war ended.

Well, do you disagree that the economy began to recover after 1933? I'm sorry, it makes no sense to say, look FDIC was around for 12 years during the great depression, when all 12 of those years were during the recovery. The creation of federal deposit insurance and the move away from the gold standard both marked the beginning of recovery in the US.

And it further undermined confidence in the dollar.

BS. The US experienced significant gold inflow after 1933, drawing gold away from countries still on the gold standard. This was the norm of the era. Investors were more confident in already depreciated currencies.

FDIC created problems that were sure to manifest in the future though as it allowed banks to become more irresponsible.

Did it stop the financial turmoil present in the early 30's? It most certainly did, its not even argueable. The bank runs virtually came to an end after the banking holiday in 1933.

Standard of living did not really start to rise again until WWII ended and everything got back to normal.

And this proves that a tax cut in 1945 got us out of the depression? Give me a break.
 

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Well, do you disagree that the economy began to recover after 1933? I'm sorry, it makes no sense to say, look FDIC was around for 12 years during the great depression, when all 12 of those years were during the recovery. The creation of federal deposit insurance and the move away from the gold standard both marked the beginning of recovery in the US.

It did not recover, it merely stabilized at a very bad place.

BS. The US experienced significant gold inflow after 1933, drawing gold away from countries still on the gold standard. This was the norm of the era. Investors were more confident in already depreciated currencies.

Was the US the only country to get away from the gold standard at the time? Remember that Britain had been away from the gold standard for a while.

Did it stop the financial turmoil present in the early 30's? It most certainly did, its not even argueable. The bank runs virtually came to an end after the banking holiday in 1933.

After years of heavy meddling in the economy by Hoover that itself contributed to bank runs. With the Harding approach it all would have ended much earlier.

And this proves that a tax cut in 1945 got us out of the depression? Give me a break.

I didn't claim that a tax cut got us out of the Depression. Lifting heavy regulations was more important.
 

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It did not recover, it merely stabilized at a very bad place.

Yes, I would say that Ben Bernanke said it best:

FDIC and leaving the gold standard "cleared the way for recovery."

Was the US the only country to get away from the gold standard at the time? Remember that Britain had been away from the gold standard for a while.

Yep, and the UK also experienced large gold inflows after devaluation.


After years of heavy meddling in the economy by Hoover that itself contributed to bank runs. With the Harding approach it all would have ended much earlier.

But obviously FDIC did stabilize the financial sector.

I didn't claim that a tax cut got us out of the Depression. Lifting heavy regulations was more important.

Ok, well the tax was what elajgalt was arguing with his link.
 
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Yes, I would say that Ben Bernanke said it best:

FDIC and leaving the gold standard "cleared the way for recovery."



Yep, and the UK also experienced large gold inflows after devaluation.




But obviously FDIC did stabilize the financial sector.



Ok, well the tax was what elajgalt was arguing with his link.

First of all, the article mentioned that the Great Depression was put on hold so that we could fight a war. We merely traded debt for unemployment. The cuts to almost all New Deal programs, coupled with the tax cuts, took us in the right direction. Technically, recovery began as you say, in 1936. But the start of the Depression is generally believed to be 1929. Also, the massive tax hikes in 1937 by the Roosevelt administration and the resulting heavy recession of 37-38 nearly brought us back to the Depression.

How can you say that the FDIC stabilized the financial sector, when hundreds of banks have become insolvent and taken over the FDIC? The largest one in our history (in terms of dollar value) took place when WaMu had a ten-day bank-run in September of 2008. You call that stable?

I think the government's attempt to spend and create jobs and to push people to buy homes and to get into debt all had a major role in this catastrophe, as it does in the recent financial sector. When politicians decide they're going to lend easy money to whoever wants it, and then they buy out the banks that give out these risky loans, we're left with a very unstable market. Our system promotes a lot of irresponsibility on the part of everyone.
 

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First of all, the article mentioned that the Great Depression was put on hold so that we could fight a war. We merely traded debt for unemployment. The cuts to almost all New Deal programs, coupled with the tax cuts, took us in the right direction. Technically, recovery began as you say, in 1936. But the start of the Depression is generally believed to be 1929. Also, the massive tax hikes in 1937 by the Roosevelt administration and the resulting heavy recession of 37-38 nearly brought us back to the Depression.

The depression ran from 29-33. Recovery began afterwards. Another recession in 37-38 happened because the fed turned contractionary and the government cut spending and raised taxes in a still extremely weak economy. I agree that raising taxes was a bad policy in 1937. WW2 lowered unemployment below the natural rate, it was like 2% because of massive wartime spending and an expansionist fed. By virtually no standard was the US in recession or even in recovery after 1940.
How can you say that the FDIC stabilized the financial sector, when hundreds of banks have become insolvent and taken over the FDIC? The largest one in our history (in terms of dollar value) took place when WaMu had a ten-day bank-run in September of 2008. You call that stable?

WTF does Wamu have to do with the great depression? Did the banking holiday and FDIC stabilize the financial sector in 1933? Yes.

I think the government's attempt to spend and create jobs and to push people to buy homes and to get into debt all had a major role in this catastrophe, as it does in the recent financial sector. When politicians decide they're going to lend easy money to whoever wants it, and then they buy out the banks that give out these risky loans, we're left with a very unstable market. Our system promotes a lot of irresponsibility on the part of everyone.

Ok.
 

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Yes, I would say that Ben Bernanke said it best:

FDIC and leaving the gold standard "cleared the way for recovery."

Sure, GDP seemed to rise after 1933.

Depression.PNG


But unemployment never fell below 10% until WWII.

50154f373744ae8603a614495378049c.jpg


Not much of a recovery, then, if you ask me.

Yep, and the UK also experienced large gold inflows after devaluation.

Robert Murphy said:
For example, Germany and the United States both experienced a significant rebound in (the annual average of) industrial output from 1932 to 1933. Krugman wants to credit the abandonment of gold with this feat. Yet France also experienced just as significant a recovery from 1932 to 1933, even though it stayed tied to gold until 1936.

So, although the chart plausibly shows the benefits to Japan and Britain for going off gold in 1931, it certainly doesn't show the benefits to the United States and Germany. Of course, Krugman could say that it was the United States and German recovery that lifted France as well — but that causality doesn't jump out from the chart itself. And Krugman was citing the chart as independent evidence of the stupidity of the gold standard.

Finally, let's look a little more carefully at the case of the United States. A critic of the gold standard looks at the chart above and concludes, "Sticking with gold drove the economy into the toilet, but once FDR freed the dollar from the peg in March 1933, it was smooth sailing."

But no, that's not what the chart above shows.

. . .

So, with that historical information in hand, look again at Eichengreen's allegedly damning chart. Yes, the United States enjoyed a sharp recovery in 1933 relative to 1932 output. But it also enjoyed significant growth in 1935 and 1936, well after the dollar had been tied again to gold (at a lower parity). It's not obvious at all that it was the gold standard driving the movements of US industrial output during 1929–1937.

Growth apparently was the result of devaluation between 1932 and 1933, but this does not explain the growth between 1935 and 1936 since there was no devluation in that time period.

Figure1.png


Figure2.png


But obviously FDIC did stabilize the financial sector.

But it would have stabilized anyway, and this just created a huge moral hazard for the future.

Ok, well the tax was what elajgalt was arguing with his link.

I'm not going to argue that cutting taxes hurt, either.
 
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