Monday, March 28, 2011

Supply side economics Part III

In reality, the cause of the "Great Depression" was a fault of the Federal Reserve Board that let the quantity of American money fall by more than a third of its value between 1929 and 1932; true, there was a problem with the general demand of the economy of the 30s but not as Keynes had viewed it.  The rigidity of the economy brought the prices and salaries falling to a level equal to the quantity of the money, then the depression manifested itself.  The major fault of the economists and political leaders was to accept Keynes' theory as the foundation of an economic program in lieu of applying conditions of an isolated deflationary depression.  After the Second World War until the 1960's, the theory of Keynes had known great success.  But during 1960 to 1970, the economic politics under the influence of Keynes destroyed itself.

In a real sense, the ideologies of Keynes were at their end during the recession of 74-75.  In 1975, the rate of unemployment was at the highest level since the depression of 1929 (8.5%) despite a federal budgetary deficit of $45 billion accompanied with an escalating inflation rate.  According to Keynes' theories, these events were impossible to be realized.  The "Phillips Curve," an essential component of Keynesian theory, indicates an inverse relationship between the rate of inflation and rate of unemployment.  In other words, the higher the rate of inflation is, the lower the rate of unemployment will be.

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