Thursday, January 29, 2009

The Depression's Recession

There is talk that FDR didn't spend enough money, which resulted in another recession during the Depression.

Not really. Lott presents this:

"In early 1937 the Federal Reserve doubled the required reserve ratios of the banking system with the purpose of immobilizing reserves and preventing future inflation. After some months, this action was followed by declines in the stock of money and real output. Money fell -0.37 percent between 1937 and 1938 while prices fell -0.50 percent, and real output fell -8.23 percent. High-powered money, responding to other forces, rose by 7.95 percent during the same year. Friedman and Schwartz conclude that the correlation between the decline in the stock of money and the decline in economic activity must have resulted from chance or from causation running from money to economic activity."

"Doubling the required reserve" had the same effect that we are seeing today in the banking system: loans are damn hard to get, no matter WHAT you offer in collateral.

It had nothing whatever to do with Federal spending.

One could also argue that the '37/'39 recession was a normal cyclical event; there had been three years of recovery before 1937.

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