By now you should understand what caused the stock market crash of 1929. Austrian Business Cycle Theory (ABCT) - the Federal Reserve had created an artificial and unsustainable bubble which would eventually have to crash. You have 2 choices: never stop inflating the money supply and run the risk of hyperinflation higher and higher until it becomes inevitable, or you stop inflating the money supply, at which point the artificially created and unsustainable boom period or bubble comes down. The coming down effect is viewed as a crash. This is again because people are unable to clearly trace the effects of policies enacted in the past and only react to what is happening to them at this moment. It is not really a crash, depression, or a recession, but rather a healthy and necessary liquidation of unsound misguided investments. It is a process that is akin to taking medicine. It may not be pleasant tasting or enjoyable but it should be embraced not desperately avoided at all costs.
After the stock market crash of 1929 the market would have rebalanced itself shortly thereafter in the next 1-2 years. Unfortunately the policies of Hoover (massive government intervention) and then followed by FDR (even greater intervention) and his New Deal government spending, wage rate manipulation, creation of federal programs, and the literal destruction of food and crops to keep supply low and profits high for farmers, "farmer-relief programs" while US citizens were on the brink of starvation, had the effect of worsening to a great degree the severity of the Great Depression and extending its lifespan by an estimated 12-15 years longer. In April 1939 a full decade after the stock market collapse and FDR's mighty government interventionist and spending policy the New Deal had 8 years to take effect, FDR's closest adviser and the current US Secretary of Treasury, Henry Morgenthau gave the following quote:
"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong.... somebody else can have my job. I want to see people get enough to eat. We have never made good on our promises... I say after eight years of this Administration we have just as much unemployment as when we started... And an enormous debt to boot!"
So now you should understand the second fallacy that is passed off as economic history and fact, that FDR's New Deal saved us from the Great Depression, and of course this is the reasoning behind doing the exact same thing today with Obama's Administration.
The third fallacy which I have always known is wrong as I understand the broken window fallacy, is that despite all this failing we eventually are pulled out of the Great Depression by World War II some nearly 20 years later in the mid to late 1940s.
This is completely false. I threw a rock through your store window. The window repairman now has employment and 20 dollars more money he can spend on other goods and services as a result of my action. My actions resulted in economic improvement! This is also false. For what one needs to look at is the 20 dollars you lost on the window. You didn’t demand or desire a new window. You needed one. Let us not confuse demand with need. You were quite content with the window you had and the 20 dollars in your pocket you were planning to spend on a new suit! Now I break your window. You pay 20 dollars for the new window, and are made whole. Except now you have one less suit and are that much poorer as a result. Let us look further at what else happens, but is so often neglected as it is not immediately visible to the naked eye. The tailor whom which you were going to purchase your suit from, now has lost your business and the 20 dollars he would have made. So all the benefits the window repairman gained are simply the ones the tailor has lost out on. You, where before my destructive act, would have had both a window and a suit, now simply have a window. The economy as well as the victim of this act of destruction are poorer as a whole. A fairly simple and easy to understand concept, that seems to get twisted around when it comes to massive destruction, namely War.
Oftentimes we rely on government-provided statistics to tell us about the conditions of life and the health of the economy in the past, however in some cases these statistics can be misleading and in most cases they rarely tell the full story. Because if one were to look at the statistics it sure does look like the World War pulls us out of our depression. We now see how misleading these statistics really are. Let's focus first on Unemployment, then moving to GDP. Unemployment falls during war. Why? Well there were 100 men out of work, then there was a draft for 150 men. Now not only is there no unemployment we need workers so badly we are hiring women for the first time ever in factories! Great economy America! Those 100 workers however are not working in the army by choice. It is not their preferred avenue of employment. They also are not getting a meaningful wage for their work. They also are experiencing an increasingly higher possibility of sudden death, maiming, disfigurement, or mental and psychological injury and trauma, than they would have if they got a job selling hot dogs. They are also not providing the American economy with a good or service. Such as making suits or selling hot dogs, they are instead killing foreigners, this does not make our economy richer. Yet if we look at the stats, what a prosperous nation we are during this wartime, with barely any unemployment at all!
Statistic number 2, GDP, the gross domestic product. Our GDP rises during the war as well. Low unemployment, high GDP, wacky Rob is wrong again what a prosperous nation we have become. What is the GDP? Total spending by consumers, businesses, foreigners, and the government. Hint: I left the best for last there. Immediately we should see a serious problem with this statistic. So government spending skyrockets during the war, meaning our debt is skyrocketing as well, since it's the only way the government can increase their spending, and our GDP skyrockets right along with it! Well so what, spending is spending, as a Keynesian whom has returned from his intellectual decapitation in 1972 as an annoying zombie might say, why is government spending so bad? Well quite simply because government spending is much less likely to find the best product for the best price. I direct you to MTV's super sweet 16 tv show, where spoiled rich girls will frequently make less than prudent investments and buy some purse no matter what the price or how effective it is, simply because she has access to an infinite supply of funds. So here we quickly see that 1 billion in government spending can not be equally compared to being as beneficial to the economy as 1 billion in private spending, which further casts the impact of an increasing GDP stat into more and more dubious light.
So now we see that despite the popular belief to the contrary, the entry into the world's second war, did not give us economic prosperity. We can also see that the old adage, "those whom do not know history are doomed to repeat it" could not be more applicable than to our current situation as we are literally going through the motions all over again just as we did 80 years ago...
[This post was inspired by reading Dr. Robert Murphy's phenomenal new book, "The Politically Incorrect Guide to the Great Depression and the New Deal"]