This was a great example of what government did correctly during a downturn. But of course, it isn't discussed nowadays, and therefore economic commentators are none the wiser. Modern commentators think they are smarter and have better economics theories than their counterparts 100 years ago. This is a timeline of what happened back then:
1913 - Creation of Fed. Fed was NOT allowed to own government bonds because of fear of monetization of debt (i.e. QE in today's colourful but deceptive term).
1917 - US finally entered WW1. Government needed to spend. The Federal Reserve Act was amended to allow monetization of debt. This was also when the DEBT CEILING came into existence. People feared that government will take on too much debt (of course, the ceiling is meaningless, because Congress keeps increasing it every time they approach it).
1918 - End of WW1. Fed stops printing money. But by then, inflation was rampant. All the magic money created previously had also gone into the GDP and stock markets -- making people feel rich.
1920 - Because there is no more cheap money, US GDP crashed by 17%. US unemployment sky-rocketed to 12%. Stock market crashed by 40% . Wholesale prices dropped by 37%.
NOTE: Still think the Fed can stop printing money without crashing the economy? No way. There's no exit, like they would have you believe (I''ve discussed this mathematically before).
Update 2013: The Fed said that they need not exit (i.e. sell bonds). There you go. They just admitted they have no exit.
1920 - The then Secretary of Commerce, Herbert Hoover said: "Oh no! This is terrible. The government gotta intervene! We need to STIMULATE!" (he probably didn't use this term. But yeah it's the same thing that he was referring to).
Instead of following what many now call the "Keynesian-style stimulus", these happened:
-President Warren Harding: SLASHED government spending by ALMOST 50%.
-Federal Reserve: Did absolutely NOTHING. No stimulus. No easing.
-FREE MARKET CAPITALISM was allowed a chance to prove itself.
RESULTS:
-Within 1 year, unemployment was cut in half, from 12% to 6.7%.
-In 2 years, it fell to only 2.4% !!
-Stock market fully recovered everything it lost!
Extension:
-1927 - Small contraction in economy. Fed tries to prevent it by printing money. Fed also printed to help the UK, because there was a run on the sterling pounds (same story, UK overspent and intervened in their economy). Stock market took off.
-1928 - Fed started to raise rates, realising its mistake.
-1929 - Stock bubble burst in Oct 29 (known as Black Tuesday). But now Herbert Hoover had become president. Now he finally had his chance. He intervened and stimulated. (George Bush is the modern equivalent of Herbert Hoover, who intervened when the dot.com bubble burst in 2000-2001).
- 1933 - President Franklin D. Roosevelt came into office. He had won his elections campaigning against the RECKLESS spending and interventions of Herbert Hoover. He promised CHANGE. But what did he do once in office? He took Hoover's exact same policies and expanded on it, calling it the New Deal. (Barrack Obama is the modern equivalent of Roosevelt. Obama railed against the reckless spending of Bush, and promised change. But once in office, he took Bush's policies to unprecedented levels).
The small recession that started in 1929 turned into the Great Depression, because of all these interventionist policies. US unemployment rate rose to 25%. International trade fell 50%. Modern commentators claimed that the Great Depression started because the politicians did nothing, which is so FALSE.
1913 - Creation of Fed. Fed was NOT allowed to own government bonds because of fear of monetization of debt (i.e. QE in today's colourful but deceptive term).
1917 - US finally entered WW1. Government needed to spend. The Federal Reserve Act was amended to allow monetization of debt. This was also when the DEBT CEILING came into existence. People feared that government will take on too much debt (of course, the ceiling is meaningless, because Congress keeps increasing it every time they approach it).
1918 - End of WW1. Fed stops printing money. But by then, inflation was rampant. All the magic money created previously had also gone into the GDP and stock markets -- making people feel rich.
1920 - Because there is no more cheap money, US GDP crashed by 17%. US unemployment sky-rocketed to 12%. Stock market crashed by 40% . Wholesale prices dropped by 37%.
NOTE: Still think the Fed can stop printing money without crashing the economy? No way. There's no exit, like they would have you believe (I''ve discussed this mathematically before).
Update 2013: The Fed said that they need not exit (i.e. sell bonds). There you go. They just admitted they have no exit.
1920 - The then Secretary of Commerce, Herbert Hoover said: "Oh no! This is terrible. The government gotta intervene! We need to STIMULATE!" (he probably didn't use this term. But yeah it's the same thing that he was referring to).
Instead of following what many now call the "Keynesian-style stimulus", these happened:
-President Warren Harding: SLASHED government spending by ALMOST 50%.
-Federal Reserve: Did absolutely NOTHING. No stimulus. No easing.
-FREE MARKET CAPITALISM was allowed a chance to prove itself.
RESULTS:
-Within 1 year, unemployment was cut in half, from 12% to 6.7%.
-In 2 years, it fell to only 2.4% !!
-Stock market fully recovered everything it lost!
Extension:
-1927 - Small contraction in economy. Fed tries to prevent it by printing money. Fed also printed to help the UK, because there was a run on the sterling pounds (same story, UK overspent and intervened in their economy). Stock market took off.
-1928 - Fed started to raise rates, realising its mistake.
-1929 - Stock bubble burst in Oct 29 (known as Black Tuesday). But now Herbert Hoover had become president. Now he finally had his chance. He intervened and stimulated. (George Bush is the modern equivalent of Herbert Hoover, who intervened when the dot.com bubble burst in 2000-2001).
- 1933 - President Franklin D. Roosevelt came into office. He had won his elections campaigning against the RECKLESS spending and interventions of Herbert Hoover. He promised CHANGE. But what did he do once in office? He took Hoover's exact same policies and expanded on it, calling it the New Deal. (Barrack Obama is the modern equivalent of Roosevelt. Obama railed against the reckless spending of Bush, and promised change. But once in office, he took Bush's policies to unprecedented levels).
The small recession that started in 1929 turned into the Great Depression, because of all these interventionist policies. US unemployment rate rose to 25%. International trade fell 50%. Modern commentators claimed that the Great Depression started because the politicians did nothing, which is so FALSE.
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