Inflation and money supply in the great depression
ta
Inflation did not pick up in the Depression despite a massive increase
in federal spending. Rather, there was substantial deflation and a
contraction in the money supply. Weak demand is the driving force for
both money supply and inflation, and as a result, high inflation rates
are not likely the next few years.
The Inflation Data
The table below shows yearly inflation data during the Great
Depression years, with the change in real GDP, annual government
spending as a percentage of GDP, and total federal debt as a
percentage of GDP.
1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
CPI -6.4 -9.3 -10.3 0.8 1.5 3.0 1.4 2.9 -2.9 0.0
GDP -8.6 -6.4 -13.0 -1.3 10.8 8.9 13.0 5.1 -3.4 8.1
Gov % 3.4 4.3 6.9 8.0 10.7 9.2 10.5 8.6 7.7 10.3
Total Debt % 17.8 21.2 33.2 40.0 41.0 39.6 40.3 39.6 43.2
43.9
As the table shows, the sharp ramp-up of government spending from 1930
through 1934 did little to help the economy. Real GDP fell 25% over
that period.
It is also clear that the sharp increase in government spending and
the total deficit outstanding did not spark inflation.
It can be argued that government spending both stabilized the economy
after a period of years, and ended deflation, but there simply was no
significant inflation throughout the 1930s.
The trends in CPI correlate with GDP changes, not government spending.
It is demand that was the driving force for inflation, not government
spending or deficits.
Money Supply
There is an argument that the low inflation in the 1930s was a result
of poor Federal Reserve policy. This argument is based on the fact
that money supply declined during this period. This is in fact true,
as shown in the table below, which lists total level of money supply
(M1) during these years.
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
M1 26.6 25.8 24.1 21.1 19.9 21.9 25.9 29.6 30.9 30.5 34.2
The problem with this argument results from a misunderstanding of
money supply. Money supply is not just the paper currency carried in
wallets. It is primarily demand deposits that can be used for
purchases (checking and NOW accounts).
Money supply growth comes principally from an increase in demand
deposits. This occurs when banks make loans. (See How Does the Fed
Create Money? from the Federal Reserve.)
Banks are only required to keep on hand a fraction of deposits. From
this base, a bank can make leveraged loans. When a loan is made, the
bank literally creates credit in a checking account that can be used
for the purchase of a car, house, etc. This creation of credit in a
checking account is what drives money supply growth. (See The
Principle of Multiple Deposit Creation from the Federal Reserve.)
There are certainly reasons to criticize Federal Reserve actions back
in the 1930s (including tight reserve requirements), but the primary
reason that money supply did not grow during this period was weak
demand. That led to the declines in money supply.
Modern economies do not create money supply by "cranking up the
printing presses." There can be a small amount of that in the U.S.
(and it certainly occurs in some small, irresponsible countries) but
it will not happen in the U.S. to an extent that will increase money
supply if loan growth is low.
If economic trends continue, and banks do not make loans, money supply
growth will not be strong over the next few years.
What It All Means
There is occasional speculation that the only way the U.S. can pay for
the massive government spending is to increase money supply and
inflate away the debt.
The history of the 1930s suggests that this is not a likely outcome.
Weak demand will keep demand for loans down (or banks simply won't
lend), and that in turn will restrain money supply growth.
As in the 1930s, the outlook for inflation the next several years
hinges on demand. And from that perspective, deflation is more of a
concern than inflation.
--Dick Green, Briefing.com"
kevirwin
That was kind of interesting.
They haven't labeled **this** as a depression yet.
Sure seems like one though.
K e v
ZerkonXXXX
a depression is characterized by abnormal increases in unemployment,
restriction of credit, shrinking output and investment, numerous
bankruptcies, reduced amounts of trade and commerce, as well as highly
volatile relative currency value fluctuations, mostly devaluations. Price
deflation or hyperinflation are also common elements of a depression.
http://en.wikipedia.org/wiki/Depression_(economics)
AZDuffman
It seems bad to many people because the last "bad" recession we had
was in 1982. This is not as bad as 1982 when inflation was 10%+ and
the prime rate hit 20%+. However, if you are under 40 you will barely
remember that time if at all.
Plus the democrats hollering howbad the economy is for 7 years
straight does not help.
If they just stabilize banking we will be growing by 2010, unless
Obama is successful in his determination to muck everthing up.
DanB (Previously DB)
>
> If they just stabilize banking we will be growing by 2010...
So, we don't correct the present level of debt and continue expand
credit market debt from here?:
http://lakeweb.com/money/Total%20U.S.%20Debt%20to%20GDP.gif
How does this work?
AZDuffman
Let it fix itself over time. If we can stop Obama from spending us
silly (Newt in 2012!) most of the debt will be private. Smart
corporations will look at their near-death experience and smarten up.
Individuals will look at how bad it got for them and buy a used Chevy
instead of a BMW. GDP growth will lower the same debt as a % of
GDP.
It might be painful and long, but the only way to "correct" the total
debt is pay it off.
However, this will not prevent growth. People will still need to buy
stuff. Companies will still need to buy stuff. Hopefully they will
just spend smarter. And hopefully the GOP takes congress back in '10
and stops the lurch towards socialism.
DanB (Previously DB)
> On Mar 16, 1:52 pm, "DanB (Previously DB)" <a...@some.net> wrote:
>> AZDuffman wrote:
>>
>> >
>> > If they just stabilize banking we will be growing by 2010...
>>
>> So, we don't correct the present level of debt and continue expand
>> credit market debt from here?:
>>
>> http://lakeweb.com/money/Total%20U.S.%20Debt%20to%20GDP.gif
>>
>> How does this work?
>
> Let it fix itself over time. If we can stop Obama from spending us
> silly (Newt in 2012!) most of the debt will be private. Smart
> corporations will look at their near-death experience and smarten up.
> Individuals will look at how bad it got for them and buy a used Chevy
> instead of a BMW. GDP growth will lower the same debt as a % of
> GDP.
I'm not interested in partisan bickering. But, how do you grow GDP
without new debt?
> It might be painful and long, but the only way to "correct" the total
> debt is pay it off.
Well if you look at the chart, the pain will trump the great depresion.
> However, this will not prevent growth.
Growth requires an increase in money velocity. There has been a massive
kill off of the wealth effect, housing, 401k. Where will it come from?
> People will still need to buy
> stuff.
There is a difference between discretionary spending and what we had. At
that, the unemployment numbers continue to rise. The banks are being
bailed out which means they keep the assets on the books from the last
boom. The numbers just don't support your expectation.
> Companies will still need to buy stuff.
Have you seen the utilization numbers!?
<snip more partisan stuff>
Rod Speed
>>> If they just stabilize banking we will be growing by 2010...
>> So, we don't correct the present level of debt and
>> continue expand credit market debt from here?:
>> http://lakeweb.com/money/Total%20U.S.%20Debt%20to%20GDP.gif
>> How does this work?
> Let it fix itself over time.
Thats what Hoover tried the last time. Then the voters gave him the bums rush at the ballot box.
> If we can stop Obama from spending us silly (Newt in 2012!)
Just another of your pathetic little drug crazed fantasys!!
> most of the debt will be private.
Odd, could have SWORN that it was actually
the shrub that produced and immense govt debt.
And Ronnie Raygun in spades before that.
> Smart corporations will look at their near-death experience and smarten up.
Just like AIG has done eh ?
> Individuals will look at how bad it got for them and buy a used Chevy instead of a BMW.
Or keep using what they have instead.
> GDP growth will lower the same debt as a % of GDP.
Just another of your pathetic little drug crazed fantasys!!
> It might be painful and long, but the only way to "correct" the total debt is pay it off.
Thats what Hoover tried the last time. Then the voters gave him the bums rush at the ballot box.
> However, this will not prevent growth.
Odd, could have SWORN it already has.
> People will still need to buy stuff. Companies will still need to buy stuff.
Pity that what they need aint enough to prevent the economy tanking spectacularly.
> Hopefully they will just spend smarter.
Hope springs eternal.
> And hopefully the GOP takes congress back in '10
Just another of your pathetic little drug crazed fantasys!!
> and stops the lurch towards socialism.
Just another of your pathetic little drug crazed fantasys!!
AZDuffman
> AZDuffman wrote
> > If we can stop Obama from spending us silly (Newt in 2012!)
>
> Just another of your pathetic little drug crazed fantasys!!
Very intelligent reply. At least you have pregressed beyond just
saying "lie" and using foul language.
> > most of the debt will be private.
>
> Odd, could have SWORN that it was actually
> the shrub that produced and immense govt debt.
Wars cost money. And there was plenty of government debt before W
came to town.
> And Ronnie Raygun in spades before that.
Reagan increased revenues big-time. COngress just spent faster than
it came in.
> > Smart corporations will look at their near-death experience and smarten up.
>
> Just like AIG has done eh ?
There are plenty of examples. Chrysler in 1980 is a good one. 18
years later sold the company for a fortune. To find them, it helps to
have a time horizon of more than a few months.
> > GDP growth will lower the same debt as a % of GDP.
>
> Just another of your pathetic little drug crazed fantasys!!
I heard you the first time. And you still make no sense.
> > People will still need to buy stuff. Companies will still need to buy stuff.
>
> Pity that what they need aint enough to prevent the economy tanking spectacularly.
Recessions are about re-adjusting the economy and inefficient
businesses going bye-bye. But the economy does not completely stop.
Sooner or later a company in business needs more supplies. And it re-
orders. And the supplier re-orders. Sooner or later you get
growth.
> > And hopefully the GOP takes congress back in '10
>
> Just another of your pathetic little drug crazed fantasys!!
>
> > and stops the lurch towards socialism.
>
> Just another of your pathetic little drug crazed fantasys!!
Oh, yes, I forgot. You want socialism.
Rod Speed
>>> If we can stop Obama from spending us silly (Newt in 2012!)
>> Just another of your pathetic little drug crazed fantasys!!
> Very intelligent reply.
Your shit in spades.
> At least you have pregressed
No such word.
> beyond just saying "lie" and using foul language.
>>> most of the debt will be private.
>> Odd, could have SWORN that it was actually
>> the shrub that produced and immense govt debt.
> Wars cost money.
Even someone as stupid as you should have noticed what he spent
that had nothing to do with any war, after the sub prime fiasco.
> And there was plenty of government debt before W came to town.
Yep, much of it produced by that fool Ronnie Raygun.
>> And Ronnie Raygun in spades before that.
> Reagan increased revenues big-time.
He ALSO increased govt debt in spades.
> COngress just spent faster than it came in.
Corse Ronnie Raygun had absolutely nothing to do with any spending eh ?
>>> Smart corporations will look at their near-death experience and smarten up.
>> Just like AIG has done eh ?
> There are plenty of examples. Chrysler in 1980 is a good one.
Pity about the govt bailout that produced that.
> 18 years later sold the company for a fortune. To find them,
> it helps to have a time horizon of more than a few months.
It also helps to understand that without the govt, it wouldnt have happened.
>>> GDP growth will lower the same debt as a % of GDP.
>> Just another of your pathetic little drug crazed fantasys!!
> I heard you the first time. And you still make no sense.
You're lying, as always.
>>> People will still need to buy stuff. Companies will still need to buy stuff.
>> Pity that what they need aint enough to prevent the economy tanking spectacularly.
> Recessions are about re-adjusting the economy and inefficient businesses going bye-bye.
Wrong again. And recovery from recession is actually about the consumers
deciding that they arent about to be laid off and as a consequence start
spending on more then just the absolute essentials again.
> But the economy does not completely stop.
You quite sure you aint one of those rocket scientist terminal fuckwits ?
> Sooner or later a company in business needs more supplies.
Not if no one is buying what they produce.
> And it re-orders. And the supplier re-orders. Sooner or later you get growth.
Yes, but even someone as stupid as you should have noticed
that that didnt happen for a full 10 years after the 1929 crash.
>>> And hopefully the GOP takes congress back in '10
>> Just another of your pathetic little drug crazed fantasys!!
>>> and stops the lurch towards socialism.
>> Just another of your pathetic little drug crazed fantasys!!
> Oh, yes, I forgot. You want socialism.
You're lying, as always.
And the US has had 'socialism' ever since the pilgrim fathers went
for public education as soon as they had arrived in america anyway.
AZDuffman
You need to seriously tell your psyciatrist to check the dosage on
your meds. Whatever he is giving you ain't doing the job.
Rod Speed
Corse that wouldnt be you doing any name calling, would it, hypocrite ?
AZDuffman
>
> - Show quoted text -
Nope, just a sugestion that you have a rage problem.
Rod Speed
> Nope, just a sugestion that you have a rage problem.
More name calling, hypocrite.