Red Chief wrote:Well. How came the Great Depression? You told me about business cycles but gave no remedy how go throught a crisis which is natural part of the business cycle.
On the other hand I'd like to support your finding. The first trade union appeares in the US only in 1911. Even after that the labour in US wasn't unionised a long time. So labour force was very flexible but it didn't help to avoid the Great Depression.
The Great Depression was caused by the circumstances created before the Crash in the stockmarket, starting in the US during the early twenties. Also, regulation was increasingly burdensome on the private sector, which led to price agreements between the big corporations.
At the end of the 19th Century and the beginning of the 20th century, the influential Marx philosophy led politicians to protect consumers from the corporations, like the dominating railroads and their hegemony. In 1887 the Interstate Commerce Act was passed, regulation that was meant to protect consumers by increasing competition, but more competition would also have another effect that the regulation didn't control, which was price agreements and rebates. Not effective regulation as you can read below:
The Interstate Commerce Act was passed as a result of public concern with the growing power and wealth of corporations, particularly railroads, during the late nineteenth century. Railroads had become the principal form of transportation for both people and goods, and the prices they charged and the practices they adopted greatly influenced individuals and businesses. In some cases, the railroads abused their power as a result of too little competition, as when they charged scandalously high fares in places where they exerted monopoly control. Railroads also grouped together to form trusts that fixed rates at artificially high levels.
Too much competition also caused problems, as when railroads granted rebates to large businesses in order to secure exclusive access to their patronage. Such a rebate prevented other railroads from serving those businesses. Larger railroads sometimes lowered prices so much that they drove other carriers out of business, after which they raised prices dramatically. Also, railroads often charged more for short hauls than for long hauls, a scheme that effectively discriminated against smaller businesses. These schemes resulted in bankruptcy for many rail carriers and their customers.
As you can see, the corporations always find ways to go around regulation. The more regulation fails, the more is introduced to cover the loopholes, making business very expensive. Therefore, not all regulation is effective regulation. Thats one example.
Also influential was the collaboration of the JP Morgans and the Rockefellers of the early twentieth century, who wanted access to easy credit for business opportunities. By effectively lobbying politicians in Congress, they managed to create approval for an independant bankers association that resulted in the independant Federal Reserve Bank, the FED, leaving Congress out of the decision making of monetary policy in the US. The FED was created in 1913. Since then, inflation is becoming more widespread.
Over nearly 100 years of its existence, inflation has eroded 95 percent of the initial purchasing power of the US dollar. However, the purpose of the FED was to maintain price stability and full employment. In reality, markets and thus prices became increasingly more volatile by creation of debt.
This is what Austrian Economist see from a familiar influence of intellectuals (like Marx) in society.
Marx is responsible for almost all white collar crimes. The politician responded first with the Interstate Commerce Act regulating commerce, to prevent what Marx said would happen that was not realistic. Next came the Sherman Anti-Trust Act that also sought to prevent the consolidation of business reducing the number of employers. This came to be followed by the Income Tax in 1909, that was politically justified by Marxism targeting the evil "rich" who threatened capitalism. All of this legislation was enacted and. the huge costs to the taxpayer that is now the average man, was all -created based upon Marxism. Sometimes, we just forget.
Economic ideas do move nations. Sad economic philosophies have cost millions of lives, destroyed families, and suffered generations to be deprived of liberties. As you listen to both Republicans and to the Democrats, you will notice, they all have prejudged Wall Street (2008) blaming them and once again resorting to Marxism based philosophy. They are anointing all those who work in the financial industry as the "evil doers" that have caused the collapse.
While in fact it is sad and abundant regulation that drives business to unethical standards. Effective regulation is a process that requires a deductive mindset, to really understand what regulation will do the a sector and to the human mindset of managers in bypassing such regulations in an industry. Not all is what it seems and politicians can be very naieve in accepting a philosophy that pleases their (sometimes irrational) constituents. The FED lowers the cost by fixing interest rates too low and creates a sector that seeks returns while disturbing the natural business cycle. (2008)
Back to 1930's: T
he Great depression was a clear result of the FED, lowering requirements for credit expansion and this led to the private sector borrowing, both individuals and private corporations, resulting in a loose money credit boom. When the populus found out that bankers had not been covering all their money by gold, they came to collect it in bankruns. There are stories about bankers being pulled on the streets, getting hanged.
The lack of confidence resulted in a chain of events in the international business cycle:
1. Debt liquidation and distress selling
2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business, precipitating bankruptcies
5. A fall in profits
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence
8. Hoarding of money
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates
This combined with proctectionist policies and Keynesian stimulus measures to revive aggregate demand by increasing government spending (public) made the private sector starving from capital that was needed to keep output going at lower prices. Instead, the government sucked up the savings liquidity by issuing bonds to pay for huge public projects like the Hoover Dam and the New Deal projects during the Roosevelt adminstration, effectively prolonging the depression by
shifting the demand pattern of consumers.
If the government demand for domesting savings (for stimulus measures) were absent, the goods prices would have declined also, but manufacturing output would be in place as consumers would be able to buy those goods for less. This would be a more transient correction of the economy. Instead, demand dropped precipitately and output (GDP) dropped 60 percent resulting in 25 percent unemployment in the US. Some nations even 33 percent. In Germany, this led to the rise of national socialism and Hitler.
The Austrian economists and philosophers like Ludwig von Mises were convinced that government intervention in the private sector was disturbing in the recovery process and would postpone the economic recovery.
In conclusion, the real cause of the Great Depression was the role of the Federal Reserve and the bankers that created the credit boom of the 1920's. The bank leverage and lack of confidence resulted in a fire sale of assets creating a downward spiral, combined with ineffective regulation and protectionism in some countries that halted international trade. The Keynesian stimulus measures that followed to keep employment up, were detrimental to recovery, because the demand pattern shifted so sharply that the private sector was unable to adapt to the new and lower demand pattern that the stimulus works induced. Output collapsed and did not recover until the second world war.
