| Joel, the April, 2000 issue of the Richebacher Letter explains the Austrian perspective of the Great Depression and refutes the monetarists position. " We have always favored the explanation of the Great Depression tendered by the Austrian theory. Of the various considerations speaking in its favor, one appears to us compelling, and that is the extraordinary speed and breadth of the economy's plunge. Consider that real GDP fell in 1930 abruptly by 9%. Such a virtual collapse can only happen to an economy that is badly out of balance and therefore highly vulnerable. The big contraction in the money supply by 42% to which Milton Friedman attributed the Depression only started in late 1930, not in precedence but in coincidence with the economic collapse. The one big event that had preceded the economic collapse was the start of the stock market crash. Yet the role of the crash in precipitating the economic and financial disaster is highly controversial among American economists. It is estimated that the stock market crash involved a wealth destruction of about $ 85 billion in total. Capital losses in the first wave of the crash in late Oct and early Nov 1929 amounted to about $25 billion. This compares with a decline in the stock of broad money between late 1930 and end -1933 by $13 billion. But for Milton Friedman, the money supply's shrinkage was the one and only decisive mechanism that drove the economy into the protracted and deep depression. And whats more, this monetary shrinkage in his view had no other cause than coincident, bad policies of the Fed. We would never dispute the decisive importance of the following, drastic monetary contraction during those years, but it grossly defies any logic to discard the prior, rapid and huge wealth destruction through the stock market as almost a non-event. In the logic of the Austrian theory, the booming stock market had operated to prolong the boom by unduly boosting wealth related consumer spending. As soon as stock prices collapsed this artificial element in consumer spending evaporated with a prompt and, heavily negative effect on economic growth in 1930. In reality, personal wealth is not the only victim of such a crash. Overall liquidity is the other victim. it is a gross mistake to measure liquidity only by changes in the money stock...Considering the amount involved in this wealth and liquidity destruction, we don't have the slightest doubt that the stock market crash was the most important, immediate cause of the ensuing depression..... " Another major point Dr. Richebacher explores is the fact that credit creation took place overwhelmingly outside the banking system- through the securities and money markets. This issue has twelve pages that IMO utterly destroys the monetarist's explanation of the Great Depression and their implicit assurances that the Fed can prevent a depression. to be sure they can delay as they did in SEA meltdown but at the expense of creating more severe consequences from the inevitable bursting of the bubble. The Richebacher Letter 1217 St. Paul St Baltimore, MD 21202 |
