II. Understanding the connection between depression and recession…
In the previous post we discussed the difference between a depression and a recession, and we asserted that a depression and a recession are two very different creatures — the first being a contraction in real economic activity, and the second merely a contraction of monetary activity.
Since 1933, a depression is typically visible only when we take the price of gold into account when we measure US gross domestic product. A recession can be seen simply in the dollar denominated raw data. It is pretty simple to show that depressions and recessions are very different animals — in fact, the reluctance of the National Bureau of Economic Research to offer a definition of a depression indicates to us that they are deliberately trying to conceal something of great importance to you and your family.
But, if we were to leave it at that — if we simply declared that a depression and a recession are two entirely different animals — we would be failing in our task. What is more important is to show the connection between these two very different economic events. We have to show why depressions and recessions, despite being very different, are, nevertheless, closely connected to each other. And to this task we now turn.
So what are the arguments for a connection between depressions and recessions?
The first is historical. As we have shown, what the wiki labels the recession of 1929 to 1933 was also the Great Depression. The two were identical in duration and severity. It doesn’t take a lot of mental energy to realize the two were identical because the dollar was fixed to gold in the ratio of $20.67 to one ounce of gold. When the economy contracted in gold terms, quite naturally it contracted to the same extent in dollar terms.
The second argument is that both the dollar and gold measure the same thing: gross domestic product. No matter the extent of divergence between two since 1933 the fact that they are only two diverging measures of the same thing presupposes some relationship between the two measures.
On the other hand, the fact that this single thing being measured — gross domestic product — has two different expressions of its quantity presupposes that, despite it being only a single thing, it nevertheless is riven internally.
To use an analogy: If someone said one thing in a public gathering but the opposite thing in private conversation with Wall Street fatcats, we would think that person flawed and corrupted.
The third argument goes the nature of this relationship. Despite the fact that the dollar and gold measure the same thing — gross domestic product — the two measures of this single thing appear to move away from each other over time. This is to say the divergence between prices of the things composing the gross domestic product and the value of those same things as measured in gold have a tendency to widen over time.
We can conclude from this that at a definite point in history– the Great Depression — gross domestic product became so internally riven that the dollar had to be decoupled from gold. From this point forward, GDP has always had two measures — its dollar measure and its gold measure. And, the gulf between these two measures have been widening ever since.
The NBER knows this folks, as does Washington and the Federal Reserve Bank.
What is so fascinating about this is that the divergence between the gold and dollar measures of GDP was not confined to the United States — during the Great Depression every industrial nation went off the gold standard as well. In fact, according to the wiki, each nation more or less began its recovery from the depression only once its national currency was moved off the gold standard:
Economic studies have indicated that just as the downturn was spread worldwide by the rigidities of the Gold Standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that did most to make recovery possible. What policies countries followed after casting off the gold standard, and what results followed varied widely.
Every major currency left the gold standard during the Great Depression. Great Britain was the first to do so. Facing speculative attacks on the pound and depleting gold reserves, in September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets.
Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy and the U.S., remained on the gold standard into 1932 or 1933, while a few countries in the so-called “gold bloc”, led by France and including Poland, Belgium and Switzerland, stayed on the standard until 1935–1936.
According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country’s severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies.
So, what we are talking about here is not a problem peculiar to the dollar and gold. It extends to every national currency, and, therefore, to the measure of the gross domestic product of every national economy in gold and the national currency of the country concerned. It is, in other words, a global phenomenon.
Employment, output and international trade only began to recover once each acquired two different measures — a gold measure and a national currency measure — that is, only when the currency price of employment, output and trade began to move away from its gold price.
Whatever took place in the Great Depression had such a monumental impact on the economy that money itself was burst apart.
We focus on employment, output and international trade because all three of these collapsed in the Great Depression, yet, since 1933, each now only fall during recessions, i.e., only when there is a spike in the bankruptcies, credit crises, banking failures, sovereign defaults and currency devaluations associated with recessions.
Since, employment, output and international trade are not merely monetary phenomenon, but instead are very real palpable things, the fact that they are responsive to recessions and not depressions implies the existence of some other thing which is at once both real and monetary – and which assumed two different forms around the time of the Great Depression.
At this point, of course, we cannot know what this other thing is, but we can surmise that it is evident in the fact the dollar measures of employment, output, and foreign trade each necessarily diverged from their measurement by gold. Since national currencies were devalued against gold, or removed entirely from the gold standard, and this devaluation preceded recoveries from the Great Depression in each of the country studied, we must begin by understanding the link between devaluation and depression.