Feb 18, 2009

Bruce Bartlett on the root cause of the Great Depression: sharp contraction of the money supply

As economists Milton Friedman and Anna Schwartz proved to the satisfaction of most economists, the core economic problem in the early 1930s was a contraction of the money supply by a third. This caused the general price level to fall by about 25%.

Deflation caused real wages to rise, forcing employers to lay off workers to reduce labor costs; it forced businesses to go bankrupt because they had to sell goods for less than they cost to produce; it magnified the burden of debts as borrowers had to repay loans in dollars worth more than those they were lent; and it increased real interest rates and the real burden of taxation.

~ Bruce Bartlett, "The Real Lesson of the New Deal," Forbes.com, February 13, 2009

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