Tyler Cowen, in a New York Times column, offers yet another explanation for the depression within the depression. (HT to Cafe Hayek)
A study of the 1930s by Christina D. Romer, a professor at the University of California, Berkeley (“What Ended the Great Depression?,” Journal of Economic History, 1992), confirmed that expansionary monetary policy was the key to the partial recovery of the 1930s. The worst years of the New Deal were 1937 and 1938, right after the Fed increased reserve requirements for banks, thereby curbing lending and moving the economy back to dangerous deflationary pressures.
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Interesting. I feel that limited lending though it obviously puts a hold on expansion of new business and the major purchases of house holds, may be a good thing. Children do not spend beyond their means, they have no way to do so unless an adult lends them the resources to do so. The public always resists the new when it offers them less to begin with. Perhaps we should begin like this again.
ReplyDeleteYes the Fed may have indeed increased the reserve requirements for banks but that does not mean that people have to go and take all their money out and just spend, spend, and spend. If you know your out of money, slow down!!
ReplyDeleteHopefully we can say the same thing ten or twenty years from now about the economic situation we are currently in. We all need to hope that this is the worst cause if not we are in for it. I think we would almost never come out of it. Things have to get better. They did then and we recovered, lets all hope that we learn that we need to save and spend only what we have not what we borrowed.
ReplyDeleteBy the government limiting the lending of the money does put a strain on the economy by not letting it expand but at the same time the businesses obviously don't have the money to expand otherwise they wouldn't need the loans. Though, by limiting the spending means also imposes self control on the people that obviously don't have any and put themselves in debt. Which is now starting to reappear in this century again. The people of the depression learned that they needed to spend only what they had, not what they could borrow from the economy. We should take that up again in these years.
ReplyDeleteWell you can't blame them for wanting the banks to hold on to more money; with all the bank runs people were making, some banks ran out of money! We face a similar problem today with people trying to live beyond their means. People want new cars and new houses, but they can't afford it! These people dig themselves into debt that they can't pay back and the banks suffer therefore, tax payers have to help dig these people out.
ReplyDeleteThe Great Depression doesn't seem far off from what is happening in this country. Allowing more money to go into the economy does seem to be a way to help a recession; however, how do you decide how much? You don't want to cause serious inflation. Monetary policy and fiscal policy seem to go hand in hand in order to keep a stable, or even better, booming economy. Not only is balancing the two difficult, but the time it takes to implement the change may cause more problems. John Keynes supported the government spending more, and thus, the public would as well. I don't see a shortage of spending by Americans right now - the stores are packed. People are getting money and spending whether they can afford it or not. Survival seems to be more of the theme of the Great Depression, whereas today it seems to be greed.
ReplyDeletePeople spend money they don't have and we all suffer for it including banks so this was basically just a way for the Fed to make us keep money just in case.
ReplyDeleteThe Fed was in fear of another bank failure due to bank runs. Basically the only way to prevent that from happening is to increase the reserve requirement. If the population had an idea of how the banking system worked, then bank runs would not have been a problem and the economy would have recovered a whole lot easier.
ReplyDeleteI hope that we get out of this quickly and that this is the worst of it. We have had a depression before and I believe if things do get worse that we will be able to survive and everything will be ok.
ReplyDeleteI think that the feds should put a limit on spending and not make it so easy for people to get credit cards, houses, etc. unless they can and will be able to repay. Especially with credit cards. My 18 yr old daughter has credit card offers all of the time and I know she would go hog wild and not even realize it until it was to late.
ReplyDeleteIf we are smart and we learn from what has happened in the past, we will make the best choices about this. Someone I'm sure is doing a lot of historical research on the Great Depression and other depressions in history, and they will find us a way out of this, we just have to stand together and be cooperative.
ReplyDeleteI like the idea of banks holding more money. Then just like now people need to be reminded to spend what you have. During the depression everyone wanted more and more, so when they had an oppertunity to get money they took it, spent it, then were back where they started. Today, people are getting loans for houses, cars, using credit cards which is only making them accumulate more dept. Thus, instead of throwing the country back into a depression everyone needs to try to live by a simple rule- don't spend what you don't have.
ReplyDeleteI think the problem a lot of people are facing right now is fear. What I mean by this is the fact that some of us are so afraid that things are going to get worse and worse, and we will one day not be able to afford to get anything, that some are going out and spending their savings on frivolous things. I, on the other hand, am spending as little as possible because things will most likely get worse before they get better and I want to be able to take care of the important things.
ReplyDeleteIf we keep finding reasons as to why the depression occured, then why aren't we doing anything to prevent or fix it? All I have to say is DON'T SPEND MONEY YOU DON'T HAVE.
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