History supports mainstream economics

So, Pat Miketinac believes that all problems are caused by governments and central banks creating money. He cites as evidence the fact that Austrian School economists foresaw the end of the housing bubble.

Come on! Everybody knew that housing would crash. That's the nature of speculative bubbles. I once read a 2003 speech by former Fed Chairman Paul Volcker in which he predicted a housing crash and financial crisis "within five years."

Mr. Miketinac also claims that the Great Depression was caused by fiat money. In other words, he is claiming that expanding the money supply caused the Depression.

It's important to understand that Mr. Miketinac is arguing the viewpoint of a small group of economists, as interpreted by fans of the Texas politician Ron Paul. He is, shall we say, outside the mainstream of economists.

To play this game at home, you need the historical CPI table from www.bls.gov and the historical GDP table from www.bea.gov. (Note that the Depression started in late 1929.)

On the CPI chart, note that price levels fell from 1926 through 1935. The dollar was going up in value, not down as Miketinac claims. If Miketinac were right, there should have been inflation, not deflation. Most economists, including non-Keynesians like Milton Friedman, Irving Fisher and our current Fed Chairman Ben Bernanke, believe that money supply contraction, not expansion, worsened the Depression.

The Depression was at its worst in March 1933, when unemployment peaked at 25 percent. President Franklin D. Roosevelt was inaugurated on March 4. In April, he took the U.S. off the gold standard. Until then, U.S. money had been gold coins or debt instruments backed by gold dollar per dollar. After April 1933, the U.S. dollar was backed by gold in the sense that the U.S. pledged to sell gold (to foreigners) at a set price per ounce.

What happened after Roosevelt doubled the money supply? The economy started to grow. By 1936 the economy, as measured by GDP, was back to 1929 levels. Of course, Roosevelt's New Deal consisted of many government spending programs, including direct hiring of the unemployed. But "fiat money" certainly didn't slow the economy down. And economic growth followed government spending.

You can see this on the GDP chart: Look what happened in 1937, when FDR started to phase out the New Deal. Or, what happened after 1945, when World War II spending ended. Or, in 1948, when the Cold War started. Basically: Government spending up, GDP up. Spending down, GDP down.

It appears to me that, Ron Paul to the contrary, history supports mainstream economics.

Dallas Dunlap

Brooksville