DEPRESSION, RECESSION & CORRECTION

Depression, Recession & Correction

Depression, Recession & Correction

Introduction

Because the Great Depression is the single most important macroeconomic event of the twentieth century, it has received the attention of many economists. With all this attention, a consensus should have emerged on what caused the Depression; it has yet to emerge.

Milton Friedman and Anna Jacobson Schwartz (1963) have advanced one widely accepted view. They argue that the Great Depression was primarily caused by terrible mistakes in monetary policy that permitted the money supply to fall by about 40 percent between 1929 and 1933.For them, the Great Depression stemmed from poor government policy, and the proper lesson to learn is that the government should be fettered by fairly detailed rules of conduct.

The other widely held view attributes the Great Depression to private decisions that led to insufficient aggregate demand .Government may have exacerbated the effects by resorting to trade wars, cutting government spending, raising taxes, and keeping interest rates too high. Nevertheless, even if the government had avoided all pitfalls, the Great Depression would have been severe. What was necessary to prevent it was positive action-- devaluing the dollar, raising government spending and public employment, and lowering taxes and interest rates. See Charles Kindleberger(1973) for an example of such a view and Peter Temin(1976) for some supporting empirical evidence.

A Great Recession

More attempts were made weak policies or temporary suspension of budgetary restrictions, but failed to slow down fast enough rate of inflation, the more we heard that what the country needed was a good policy tightening Strict credit risk to bring a recession. Means even suggest imposing strict monetary measures absolutely no credit expansion. If we succeed really to stop any increase in money supply, the economy would soon enter a spin, and inflation may stop suddenly (Posen, 2010).

The problems that accompany this mechanical solution should be obvious. The human cost would be extremely high, perhaps even unacceptable. We can learn from the experience of West Germany and Switzerland. Both countries have imposed strict monetary constraints to stop their economies. In other words, these countries have deliberately created recessions. In 1978, for example, industrial employment in West Germany was 12% lower than it was in 1972! In Switzerland, it was 10% lower. Accordingly, these two nations have had in the late 70's inflation rates that were probably the lowest in the world (Dow, 1998).

Why not follow their example? Yes one may look up to these giants; however unemployment in Switzerland and West Germany was almost entirely supported by foreign workers, i.e. immigrant workers who were simply sent home, Yugoslavia, Italy, Spain and Turkey. Reduced to an economy like ours, Switzerland alone would have returned to their homes ten million workers. Where we would send ten million Americans? In fact, reductions similar to those practiced in Switzerland would create the U.S. unemployment of around 30% (English, 2003, 45-98). Regardless of the true female social inflict such a policy; unemployment is very unfair fight ...