Nearly a century after the fact, the Great Depression remains THE object lesson for virtually every branch of economics. To monetarists the fact that the US money supply fell by nearly a third in the 1930s illustrates the need for a central bank to maintain steady money growth. To Keynesians the Depression’s depth and duration proved that capitalist systems are inherently unstable and need a big, powerful government to manage them. World War II, in this framework, saved the US economy from permanent 25% unemployment.
To Austrians, meanwhile, the Depression demonstrated that 1) the best way to prevent a bust is to avoid the preceding boom, which is another way of saying that the size and composition of the national balance sheet is the key to everything, and 2) the best way to get through a bust is to let market forces liquidate the bad debt as quickly as possible.
A September 14 DollarCollapse column took the Austrians’ side in the debate and illustrated the point with the following chart, which depicts the massive deleveraging of the 1930s.
This post was published at DollarCollapse on September 16, 2014.
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