Barring the Great Depression (in which interventionist methods were used), certainly nothing before 1913 was quite so economically damaging as, say, stagflation.
....you do realize that the Great Depression occurred after 1913, right? Just sayin.
You do realize that I said "Barring the Great Depression", right?
You do realize that by saying "nothing before 1913", you automatically exclude the Great Depression, so it's completely unnecessary to mention, right? Grammar -- it's what's for breakfast.
I mistyped that, I meant 1945. My bad.
Honestly, if you look at most economic failures in US history, they're caused when the Fed (or before the Fed's creation, the US government through the Bank of the United States) shrinks the money supply and raises interest rates. We've never had a period of hyperinflation like Weimar Germany, in part because the wealthy have always exerted considerable pressure in this country to KILL INFLATION WITH FIRE. Why? Because inflation is the enemy of accrued wealth. Deflation is the enemy of a functioning economy, but if you can afford to sit tight on your money, you'll make out like a bandit when the economy recovers.
Yet the wealthy were (and still are) instrumental in supporting the Federal Reserve system. Why is that?
Remember, the very first people to receive new money aren't affected by the price inflation that comes with the inflation of the monetary supply. Hence the concept of "negative interest rates". The very first people who receive the new money, coincidentally enough, are the exceptionally rich, who in turn would rather not have deflation. Money supply decreases wouldn't be as harmful were there not false expectations created by easy lending in the first place. Deflation isn't necessarily a bad thing.
Thank you for proving my point. The Fed (which is the primary tool for fighting inflation in the United States) is supported by the wealthy, because it fights inflation. Businesses love it when the Fed cuts rates, because low rates and an easy money supply make growth easier (although they also make risky financial speculation easier as well). But wealthy individuals benefit when the Fed raises rates and chokes off inflation, because the real value of their accumulated wealth is secured. In a deflationary cycle, their real value of their wealth is *increased* without any effort on their part. Now, if their wealth derives from some ongoing business activity, then yes -- they don't want deflation. But for those whose wealth is already made and don't work to produce additional wealth (I'm looking at you, Mr. Mitt "Unemployed" Romney), then a tight money supply is golden.
Now hold on. Did you just say the Fed FIGHTS inflation?
Inflation was next to non-existent prior to the Fed barring the period immediately following the American Revolution and during the Civil War. Actually, you'd be hard pressed to find examples of serious inflation without some kind of central bank intervention.
Furthermore, the (idle) rich generally don't literally save all of their money; they invest it in stocks and so on. Inflation makes these these assets generally rise a bit above the actual inflation rate, giving them a net benefit, and that's assuming they have no direct connection to the banking industry.
Stimulus brings back some measure of the previous prosperity of the boom, but it's doesn't actually solve the problem in of itself. Instead, it creates further imbalances by strengthening the illusion of excess resources/saving where there are none.
See, the problem in the first place is that artificially low rates and an expansion of credit makes entrepreneurs think people have saved more resources than they actually have, meaning they should focus on long term projects as opposed to saving and consolidation. However, those resources don't actually exist, so eventually there comes a point during the boom when they realize that the saved resources are insufficient for all the long term projects, which they are forced to abandon at a loss. If stimulus spending is pursued at this point, some of the entrepreneurs are better off because they get to finish their projects, but the economy as a whole is worse off as resources are diverted to inefficient uses and the same problem is present, meaning the economy will be worse off in the long run. The classic analogy is of an architect who believes he has more bricks than he actually has; naturally, he designs a bigger house, but the later into the project he discovers his brick deficiency the more of it he has to scrap altogether.
Now with the ditch diggers, resources were taken from productive or potentially productive ventures to allow for them to dig ditches. What we see is an increase in employment and GDP; what we don't is all the things that COULD have been made with what was instead used to dig ditches (/build tanks/bomb countries/etc).
There is a very simple empirical test for this theory. If your story is right then increasing the money supply during a depression would be exactly as inflationary as increasing it in normal times. If my story is right then increasing the money supply during a depression would be far, far less inflationary then expanding it in normal times.
The logic is simple. You treat the economy as logically reacting to a decline in real wealth. If that were true then the price level would behave normally when the money supply is expanded.
Well now, that one's easy. Actually, that's what killed classical Keynesianism for two decades.
Now, the "money supply" requires that the money is actually being exchanged in the economy. If the money is being hoarded despite vast amounts of money creation, something that is distinctly more likely during hard times, then inflation obviously won't occur, as is the case in Japan right now.
And the output that the ditch diggers could have made would have been sitting around scratching their balls because they were unemployed. Your model isn't very useful at explaining unemployment if it starts by assuming unemployment.
The ditch diggers would have found other, more worthwhile sources of employment, if at lower wages (an essential part of the correction, actually). The shovels would have been used to dig things consumers desired, or else not been made at all, the metal would have been used for something people wanted, the land would have been used more productively, etc etc etc
Certainly, some measure of unemployment is present, especially in the presence of unemployment benefits and the minimum wage, but the ultimate result is renewed growth later regardless from resource consolidation.
And for their logic "there was no contraction of the money supply!" - the money supply was increasing at a MUCH slower rate than growth; that's a contraction by any sensible economic definition - less money per unit of production.
Wait, wait, wait, let me get this straight.
So the money supply was going up, but growth was going up faster, and by rather significant margins too. This resulted in overall price deflation. And you're saying that this means that it was a recession/depression.
I am pretty sure that in that statement he was arguing against the quote's claim of how "the alleged 'monetary contraction' never took place, the money supply increasing by 2.7 percent per year in this period", not directly about the goodness/badness of that deflation.
Okay. Yet he's also trying to argue that the period was actually a recession/depression. If there was net growth above 2.6% during the period where it hit hardest, then that's a rather silly claim. The definition of "monetary contraction" is only even debatably incorrect if the period was primarily characterized by growth, which completely undermines the rest of the argument.