April 8, 2010
This was posted on a forum yesterday by site member Ronbo.
Since economic theory refutes any or all of this statement, what exactly do you mean by saying it?"The New Deal's failed recovery was bailed out by World War II: send 12 million men overseas, raise taxes, print money, impose price controls, impose rationing."
Here is my explanation of what happened, 1939-1945.
A depression occurs when resources are widely priced above market. The causes are debated, of course. The Austrian theory of the trade cycle blames central bank policies. The bank lowered the rate of interest by creating fiat money and lending it through the commercial banking system. This produced an illusion: cheap capital. There was no cheap capital. There were below-market interest rates.
The boom raises the demand for input resources: raw materials, labor, capital, and land.
At some point, the central bank reduces the rate of monetary inflation. This leads to higher interest rates. Entrepreneurs discover that resource prices are too high. They cease purchasing these overpriced resources. This includes labor services.
The responses of owners of these resources usually involve one of the following: (1) lower the prices in order to gain buyers; (2) stick with existing prices in the hope that market demand will return at the prices that prevailed before the recession.
When governments pass laws prohibiting price cuts, these laws produce unemployment. Unless the central bank inflates, this unemployment becomes permanent.
This is what happened in the 1930's, all over the world. Governments passed laws supporting trade unions' wage floors (e.g., the Wagner Act), price collusion by producers (e.g., the National Recovery Administration), and tariffs: high sales taxes.
In 1936, the depression had been going on for six years. The academic world, refusing to criticize the governments' interference with downward price flexibility, was ready for Keynes' General Theory of Employment, Interest, and Money. Keynes argued as follows. Because wages are inherently downwardly inflexible -- no mention of government restraints on pricing -- the government must launch various spending schemes to increase aggregate demand. These programs should be financed in part by central bank inflation. His goal was to reduce real wages through the illusion of monetary inflation and price inflation. At the end of Part III of Chapter 2, Keynes wrote this.
Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school.
PRICING: FREE AND UNFREE
If sellers can be persuaded to lower their prices, markets will clear. If they refuse to sell at market-cleating prices, the central bank can increase the money supply, thereby raising the price of consumer goods, thereby lowering wage-earners' real income. The market then clears because of the deception of price inflation.
First the central bank deceives entrepreneurs (the boom); then it deceives workers (the recovery).
So, there are two ways to clear markets of unemployed labor: (1) reduce nominal wages when consumer prices are stable or falling; (2) freeze nominal wages when consumer prices are rising. Classical economists advocated the former. Keynesian economists advocate the latter.
The Great Depression did not go away until World War II provided the justification for mass inflation, price controls, wage controls, rationing by the government, and mass conscription of men, which removed them from the labor markets. This eliminated unemployed labor.
The employment statistics rose in the domestic markets, as low-paid women streamed in, and low-paid troops marched out. Everyone could get a job. All it took was a willingness to work for wages that were paid with far fewer goods and services than had been offered for sale prior to the War. Demand was high, as black markets indicated. Supplies on legal markets were low, as black markets indicated.
The wartime shortages were accepted by the public in the name of pursuing the War's aims, nation by nation. Freedom was suppressed. Trade unions were suppressed.
Within a month of VJ day, American labor unions started striking. This wave of strikes escalated. In short, people stopped working at wartime wage rates. There were more strikes in 1946 than ever before in American history. Price controls were removed in October of 1946. Prices skyrocketed briefly, but then the rate of increase subsided as production came on-stream in 1947.
Without World War II, the U.S. government could no longer persuade people to put up with the controls.
So, I reassert my original statement. "The New Deal's failed recovery was bailed out by World War II: send 12 million men overseas, raise taxes, print money, impose price controls, impose rationing."
When people are willing to accept selling prices that enable them to sell whatever they produce, a depression ends. It can be replaced by economic freedom or by repressed depression: monetary inflation. I described repressed depression in 1969. If you search Google for "repressed depression," you will find my article twice: the first and second links. Here is the original.
CONCLUSION
The New Deal failed to restore conditions in which market prices were allowed to adjust downward. World War II enabled the government substituted repressed depression and then repressed inflation in order to clear markets.
Partially free men would not accept downward price flexibility, 1930-39. So, tens of millions of them could not find work. So, the governments of the West reduced freedom even more, justifying this policy in the name of winning the war. Partially free men became even less free. They cheered.
As a direct result, over 60 million people died.
In September 1945, the cheering stopped.
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