Sowell Men

Another possible answer to Lilek’s question: wartime deficit spending & monetary policy caused inflation which raised prices above the minimums set by the government. Thus the market was able to function with market-clearing prices and operate properly. FDR was probably well-intentioned but clueless.

One of the new theories put into practice by FDR was that prices must be kept from falling as a way to support the producers so they could keep people employed. Under FDR’s experiment, prices were set well above what would have been market-clearing prices under the reduced demand of the recession, so cash hoarders had no incentive to come off the side lines and start buying again

The traditional theory had been that when demand collapses prices must be allowed to drop as an incentive for consumers to consume. Eventually prices got so so low that people hoarding cash would be tempted to spend again.

In fact, recessions prior to the Fed and Keynesian policies were severe but short. FDR’s fatal mixture of artificially high prices, initially tight monetary policy and high taxation gave us a deep and prolonged recession unlike any before.

Thus, it is not necessarily true that FDR & Braintrust knew what they were doing. Most likely they were sincerely trying to help but were in the thrall of a theory with no empirical support.

Sal (View Comment):

In fact, recessions prior to the Fed and Keynesian policies were severe but short.

The Benjamin Strong Fed goosed the stock market and the economy, giving us The Depression and we have been doing one dumb thing after another ever since. It will end the hard way.