[ExI] banks and crash

gts gts_2000 at yahoo.com
Mon Oct 13 17:07:19 UTC 2008


> Actually, Stathis is correct... (See Milton Friedman... 

Ah, another Friedman disciple! 

I don't know if you read my post to Stathis in the thread that spawned this one, but current events have inspired me to question all my cherished assumptions about economics, including even the Friedman orthodoxy. 

I realize this amounts to heresy to some, but I question not only the Monetarist theory about the causes of the Great Depression (GD) but also the Monetarist theory about the causes of the recovery. 

Most economists consider the GD to have ended with WWII. In the depression years prior to WWII, unemployment never dropped below the sickly level of ~14%. During the war, unemployment dropped to about 1% and GDP took off like a rocket. 

So I ask: what exactly happened during the war years to end the GD?

Keynesians offer what seems like a reasonable explanation: massive deficit spending on the war machine increased aggregate demand.

If the Monetarists also have a reasonable answer then I don't understand it. Money supply bottomed in 1933 and trended higher to at least 1941. If expansion of the money supply should end a depression they why did the GD not end in 1934? Why so many years of pain?

Also, why did GDP surge so *radically* during of the war if not because of the similarly *radical* growth in deficit spending? 

I realize that appearances can deceive, but it appears on the surface that massive deficit spending during WWII caused massive growth in GDP and massive growth in employment, exactly as Keynes predicted. I have not seen similar statistics about any massive increase in the money supply during WWII, assuming they exist.

I have a pet theory that might explain this discrepancy, which I might share with you after I see your reply.

A side note: today Paul Krugman, a prominent Neo-Keynesian, won the Nobel Prize in Economics. It would seem that rumors of Keynes' death have been greatly exaggerated. 


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