Re: An ignorant man's question about the great depression

piero_ds wrote:

I have a question about the Great Depression. I know that during
Germany's depression, the Reichsmark was in a freefall, "collapsed from
8.9 per US$1 in 1918 to 4.2 trillion per US$1 by November 1923".

I remember seeing pictures of people pushing wheelbarrows of money to
the bakery.

Was it the same in the US during the 30's? Or was it that simply people
didn't have money? What happened to the price of goods?

Nope. Inflation in Germany was caused by the government printing money.
Arguably, if Germany didn't had to pay compensations for WWI, the impact
would been less dramatic as it did. Faced with payments to exterior and
being quite a globalized world on those times, when US economy crashed the
German exports to US stopped to and gov. started to print money to honour
internal obligations.

At that time, US had the dollar backed in gold. This prevent any form of
inflation to happen but can help to create worst outcomes, as it did.
Into a downsizing economy if you have a bullion currency, it actually make
sense just to hoard the money. Rich people this just that, in order to
protect their money against market slowdown, as soon as the next report
that the company didn't met the expectations came, they cashed the shares
and hoarded money. That helped to generate the crash and also generated
deflation.

Money are like any other commodity, if they become scarce on the market
their value (priced in other commodities) grow. If you have a fiat currency
(as Germany) the gov. can just print money to compensate for that. This
create surplus on the market and the value of money fall. If the gov.
overdo-it to honor to much payments you get hyperinflation as in Germany.

With a bullion backed currency, the gov. just can't print more money.
Hoarding them reduce supply and the scarcity drive the value of money
higher. This may look good at first, but it is very very damaging for an
economy (worst that hyperinflation).
Why, because by hoarding money you pump up their value (aka your wealth).
Whenever there is a downturn, rich will hoard currency, taking away the
money supply needed by the economy to rebound. A recession will then be
prolonged indefinitely resulting in a depression.

The deflation not just pump down the prices for products, but also the
prices for labor. Worst than that, since into a recession the unemployment
grow, the prices for labor will fall sharply than the prices for goods.
This will take away more of the consumers disposable income, collapsing the
demand even further. This will prompt business owners to hoard more and the
cycle repeats itself.

Only harsh political reforms can kickstart an economy in depression, the
market never will. As mater of fact a depression is a quintessence of a
whole system collapse. Market is dead into a depression.



.

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