Blog Post #3 The Surprising Malleability and Spontaneity of Economics

Economics is more malleable and spontaneous than Americans realize. Students are taught that
the Great Depression was caused by the stock market crash. That’s oversimplified and incorrect.
Ben Bernanke won the Nobel Prize in Economics in 2022 for pinpointing that it was in rural
America where things started to unravel. When President Hoover signed the Smoot-Hawley tariff
bill against the advice of many economists, it decreased the amount of crops farmers could sell
globally. Needing cash to pay their bills, so many farmers went to their banks to take out their
money that rural banks were forced to close.

Coupled with the rural bank closures, the economy had been strained since WWI. Average
people used credit to buy new products like cars and radios, but they ended up not having enough
money to fully pay. There was no real middle class, so the economy wasn’t anchored by a large
population of people with stable incomes. There were no controls on the stock market, no
Securities and Exchange Commission to keep investors from taking on too much risk, so stock
prices became unnaturally high.

Yet another problem was that the economy was based on the gold standard, which makes it
harder to pump money into the economy. The stock market crash of 1929 caused people to panic
about the economy and pull their gold out of the banks. The leaders of the economy had to do
something, so they raised interest rates so people would keep their funds in the bank. It worked,
but caused the economy to contract. The interest rate hike is what caused the Great Depression,
not the stock market crash. If interest rates weren’t hiked, the Great Depression would only have
been a Great Recession.

This is why FDR took the U.S. off the gold standard and created a four-day bank holiday to
stabilize the banking system. Of course, what FDR soon figured out is that to get out of
depressions or recessions, the government has to pass large stimulus bills which inject money
into different industries and put money in people’s pockets. He should have injected even more.
As Ben Bernanke once said, the main reason the U.S. didn’t get out of the Great Depression
before WWII was because the government didn’t spend enough. These economic discoveries
were spontaneous.

Fast forward to the end of WWII. The industries that were created to supply soldiers and
civilians of the Allied forces no longer had those markets. Huge industries didn’t know what to
do with excess inventory and they stumbled upon the idea of a consumer-based economy. For
example, the aluminum that went to weapons could now go to make Reynolds Foil Wrap. We
were on the march towards a massive consumer economy. Then, during the Cold War,
manufacturing ramped up more. In that period, there was the arms race, the space race and the
farms race. The farms race was a competition where we wanted to show the USSR that
American capitalism was more effective at producing food and other products during a
drawn-out military conflict. Additionally, Americans wanted to show the USSR that capitalism is
the best system. They actually shipped an entire supermarket to the Soviet Union. American
capitalism began to accelerate.

Even now, economics evolves based on what’s happening in current events. Before the
pandemic, there was an economic hypothesis that if the Federal Reserve pumped massive
amounts of liquidity into the market by buying up treasuries, there would be an inflationary
backlash (liquidity is the amount of cash banks have on hand when people ask for their money
back.) But at the beginning of the pandemic the Federal Reserve bought up massive amounts of
treasury bills when the treasury market seized up, yet that prophesied inflation pattern never
came to be. Twisted pandemic supply chains and Putin would cause the inflation instead.
Economics is complicated and ever-evolving. Economists are smart but predicting what will
happen as conditions in the country and the world change is difficult, if not impossible. However,
the long history of economics shows myriad instances of large-scale experimentation. As I write
in this post, there are many precedents for people taking action to change economic
circumstances.

As we can see from the pandemic, inflation gets worse when materials become scarce. It follows
that, as the world runs out of natural resources, inflation will skyrocket. We need to adapt to
environmental circumstances, lead and shape our economy to become more equitable and
sustainable. Economics is inextricably linked to the environment, so let’s take this history of
fluid experimentation and right the wrongs in our economy and our natural world.
 

 

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