Depressions

Doesn’t capitalism cause depressions?

No. The nationwide cycle of “booms” followed by “busts” is the result of the only agency that has the power to act on a nationwide scale: the government.

A depression is a nationwide decline in production that is the result of capital mal-investments into unprofitable industries.

These capital mal-investments can occur on such a large nationwide scale only by the government over-riding the checks and balances provided by the market, i.e., making money “cheap” (having banks lower the rate of interest below market levels) by “expanding the money supply.” This “cheap” money results in over-investment into industries that would appear unprofitable if the government did not intervene in the money supply.

Once these mal-investments are discovered, the result is a bust (depression) as the market begins the process of recovering from these mal-investments of capital.

To prevent nationwide depressions the government needs to keep its hands off the money supply, by establishing a free-market for money (free banking).

What caused the Stock Market Crash of 1929?

Black Tuesday took place on October 29, 1929, was a depression with increasing unemployment (but still under 10%). During the stock market crash of 1929 unemployment peaked at 9 percent, and then drifted downwards until it reached 6.3% in June 1930.

What was the cause of the Stock Market Crash of 1929? The FED’s inflationary policies (increasing the money supply) resulted in a speculative boom which ended in a bust (Stock Market Crash) once the inflation ended.

What caused the Great Depression of the 1930s?

The Great Depression was a prolonged depression from 1930’s until the early 1940s, with unemployment levels of up to 25%, with mass bank and business failures.

What was the cause of the Great Depression of the 1930’s? Anti-capitalist economists and historians claim the crash was the trigger of the Great Depression of the 1930s.

In fact, the government’s Great Intervention into the economy was the cause of the Great Depression of the 1930s. The recession of 1929/1930 became prolonged by the government’s “great intervention”— from the Smoot-Hawley Tariffs to “The New Deal”– that prevented the market from restoring normalcy. Observe that in the 1920 and 1987 Stock Market crashes there was no Great Depression, but minor recessions, because there was no Great Intervention.

What was the New Deal?

The New Deal was an attempt by Franklin Delano Roosevelt to use the crisis surrounding the recession following the Stock Market Crash of 1929 as an excuse to intervene in the economy.

Interventions of the New Deal included: the National Industrial Recovery Act (1933) which controlled industrial prices and wages; the Agricultural Adjustment Act (1933) to control agricultural prices and output (paying farmers not to produce); the National Labor Relations Act (1935) to control wage prices by forcing employers to negotiate with government empowered unions; the Glass-Steagall Act which created the FDIC, federally insuring deposits; and many others.

FDR also made thousands of executive orders which created further uncertainty and disruption of the economy. Uncertainty led to people to hold onto their money (“hoarding”) as opposed to investing it as they were waiting to see what the government would do next.

How does central banking promote booms and busts, moral hazard and financial instability?

This talk by George Selgin explores the fiscal origins of currency monopolies and the adverse consequences stemming from their establishment, including their tendency to promote booms and busts. The talk also reviews the origins of the doctrine that they should serve as “lenders of last resort“and explains why last-resort lending tends in practice to generate moral hazard problems that lead to still greater financial instability. Some time is devoted to the particular case of the U.S. Federal Reserve System.