[arete]

Tight money sure didn't lead to the Great Depression. Tight money lead to a collapse of the highly margined stock market, but had nothing to do with the deflationary depression. Easy money and bubble economics creates a subsequent depression. It was the "roaring twenties".

"Observe that economic depressions are not caused by the collapse in the money stock (as suggested by Milton Friedman), but come in response to a shrinking pool of real funding on account of previous of loose money. Consequently, even if the central bank were to be successful in preventing the fall of the money stock, this would not be able to prevent a depression if the pool of real funding is declining. Also, even if loose monetary polices were to succeed in lifting prices and inflationary expectations (as suggested by Paul Krugman), this would not revive the economy as long as real funding is declining."

"Again, note that contrary to popular thinking, depressions are not caused by tight monetary policies, but are rather the result of previous loose monetary policies. On the contrary, a tighter monetary stance arrests the depletion of the pool of real funding and thereby lays the foundations for economic recovery. Furthermore, the tighter stance reveals the damage that was done to the capital structure by previous monetary policies."

Does a Falling Money Stock Cause Economic Depression?

Richard W.

[WOSG]

"Again, note that contrary to popular thinking, depressions are not caused by tight monetary policies, but are rather the result of previous loose monetary policies. On the contrary, a tighter monetary stance arrests the depletion of the pool of real funding and thereby lays the foundations for economic recovery. Furthermore, the tighter stance reveals the damage that was done to the capital structure by previous monetary policies."
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hmmm, that seems to be the other side of the same coin.

Tarriff barriers (Hawley-Smoot) made demand for goods worldwide shrink dramatically. That and punitive policies against Germany led to world-wide recession in 1930. The monetary policies went in exactly the wrong direction (trying to defend the dollar rather than expand demand) with higher taxes and tight money. Result: Depression.

"Observe that economic depressions are not caused by the collapse in the money stock (as suggested by Milton Friedman), but come in response to a shrinking pool of real funding on account of previous of loose money."

The idea that the roaring 20s caused the great depression while ignoring the more proximate causes of poor economic policy is incorrect thinking. The 1920s was a boom, but the bull market was no more significant than the 1980s bull market - we had no depression in the 1990s, but an extended expansion period.

The idea that excessively loose policies is the culprit misses the point: cause-and-effect is multi-variable. A car crash is a sudden deceleration.
Do you blame the driving too fast around the corner, or do you blame the fact you hit a tree?

In the current situation, the Fed was loose, from 1997-2000 due to Asian 'flu' and unfounded year 2K fears. In Feb 2000, the Fed reversed course ... at exactly that time, our sotck market, which had entered 'bubble territory ' since early 1999, peaked and started heading south ... but within a year Fed reversed course again and started loosening.


I'd take nobel prize winner Milton Friedman over an article that thinks 1% interest rates at a time of 5% DEFLATION is 'expansionary' (his pic from 1930). Not so! That is still very high real rate of interest! And the reduction in total money supply was very real.