Wednesday, September 18, 2013
  1930 as a verb

I've been unconvinced by the usual explanations of the 1930s Depression, but I don't have a good alternative explanation yet. Just thinking out loud here, trying to apply the ideas of economics as a verb or Islamic economics........

A clear statement of the usual story from a nicely written article by Matt Yglesias:
The embedded meaning here: The Depression occurred because the Federal Reserve of the time had allowed widespread bank failures to sharply reduce the amount of money circulating in the country. This shortage of currency led to falling prices, which became a vicious cycle. With prices headed downward, everyone wanted to defer business investments and major purchases as far into the future as possible. That only increased the excess demand for money and intensified the cycle of deflation. The lesson was clear—at all costs, prevent a spiral of bank failures, currency shortage, and falling prices. Get that done, and the system will return to equilibrium.
I don't buy it.

First, the trouble started long before 1930. Like most other world problems, it really started in or around WW1. Farmers were encouraged by speculators to overproduce, and many people went into farming who didn't know what they were doing. They borrowed to buy unsuitable land, grew one bad crop, then abandoned the land after denuding it. Result was the Dust Bowl, which ruined even good farms, and lots of bankruptcies in farming areas. The false farmland blew away, leaving only the real land. In areas that weren't covered with dust, careful farmers continued to grow good crops with the usual ups and downs of farming.

Similar overborrowing, speculation and overproduction happened in housing and other areas of business during the '20s.

The problem wasn't deflation in the sense described by Yglesias; it wasn't a lack of real value, but a sudden and drastic removal of false value. Ordinary people had become accustomed to the wealth effect, a sense of ever-increasing prosperity, and didn't realize they were dealing in counterfeit. When the counterfeit blew away, leaving only the real value, people who had borrowed were in serious trouble with the banks. They couldn't pay back the false dollars they had borrowed because the false foundation of the false dollars had disappeared with the stock crash. Of course the banks didn't care if the dollars were real or false; bankers only know numbers.

And the problem certainly wasn't a lack of investment. I'm familiar with the auto and radio industries. Both put tremendous effort and money into developing new products during the '30s, and it helped to some extent. Careful companies like Nash hadn't engaged in borrowing and speculation, so they were able to invest from savings. Others found ways to borrow. Marginal companies failed, but not because of a value shortage. Some failed because they had been supplying overpriced luxury cars to overextended borrowers, some were just weak operations who would have failed anyway.

The parallel to the 1990-2008 false value expansion is clear, but the NONparallel of official response may not be obvious.

FDR did four big things.

(1) He allowed false value to collapse back to real value. He allowed investors to fail and closed bad banks. He stopped the production of false value.

(2) He enacted severe regulations to prevent false value makers from resuming their counterfeiting.

(3) He helped ordinary people, repeat ORDINARY FUCKING PEOPLE, get through the collapse with public jobs.

(4) The public jobs served a specific purpose. Admittedly some were pure makework ("We Piss Around" was often a valid insult!) but most were building a foundation for a restoration of real production. Hydro dams and electric lines, sewer systems, road systems, schools, libraries, public buildings, farm improvements, training for farmers. Without those infrastructure elements, America would not have been able to expand real production after the '30s.

In short, he stopped current counterfeiting, prevented future counterfeiting, and used public money to improve the future real productivity of the country. WPA wages were real value.



Bushobama and their Brit counterparts have done the EXACT OPPOSITE at every step. They did nothing to stop counterfeiting, they are pouring infinite amounts of newly counterfeited dollars into expanding bad banks and expanding the counterfeiters, and they are not investing in new infrastructure. By continuing 'free trade' policies and EPA enviroterrorism, they are strongly discouraging real production by real companies.

If we learned from the start to distinguish real value from false value, we'd be harder to fool. If schools followed the Real Manual Training model, or some valid modern equivalent, kids would know real value in their bones and muscles. They couldn't be distracted by mere numbers.

= = = = =

Followup here.

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Polistra was named after the original townsite of Manhattan (the one in Kansas). When I was growing up in Manhattan, I spent a lot of time exploring by foot, bike, and car. I discovered the ruins of an old mill along Wildcat Creek, and decided (inaccurately) that it was the remains of the original site of Polistra. Accurate or not, I've always liked the name, with its echoes of Poland (an under-appreciated friend of freedom) and stars. ==== The title icon is explained here. ==== Switchover: This 2007 entry marks a sharp change in worldview from neocon to pure populist. ===== The long illustrated story of Polistra's Dream is a time-travel fable, attempting to answer the dangerous revision of New Deal history propagated by Amity Shlaes. The Dream has 8 episodes, linked in a chain from the first. This entry explains the Shlaes connection.

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