Wall Street Crash: Was Milton Friedman Right?

[verdigris]

Milton Friedman said that the depression that started in 1929 resulted from banks losing their nerve and failing to shore up the US economy.Was he right?

 

[russ_watters]

How shold they have shored-up the economy? The way I learned it is that too-lax rules for margin buying stretched the money supply to the breaking point. One little blip and suddenly the banks were short on cash.

 

[verdigris]

Friedman and others blamed the Federal Reserve and in particular the New York branch which was run by New York banks for failing to provide liquidity to the smaller banks after some major banks had fallen.So businessmen couldn't get loans to invest.

http://en.wikipedia.org/wiki/Great_Depression#U.S._Federal_Reserve_and_money_supply

 

[russ_watters]

Well, it says in the second sentence of that link that Friedman, et al, didn't think the Fed caused the crash but rather could have done more to stop it. I would certainly agree with that, but how much of that is 20/20 hindsight? And does stopping one crash only set you up for a bigger one?

 

[verdigris]

I think the main point of that wikipedia article was that the Great Depression could have been just a recession.What happened in 1929 goes to show that
the need for investment, and hence employment, has to be linked to the money supply.People should only be allowed to buy large amounts of stock if this leads directly to investment in job creation because the stock buyers are reducing the amount of money available for loans that businesses can use to expand their workforce.I can buy stocks hoping the price will rise and I can sell up without having any interest in the well-being of the workforce of a particular company.What if I could only sell when the company has taken on more employees or has stabilised its workforce for a fixed period of time?

 

[russ_watters]

That isn't really how the stock market and money supply work. The Great Depression was a short-term blip that snowballed. What you are describing would be a long-term deflationary money market. Like any other commodity, when money gets to be in short supply, its value increases. The Fed is constantly increasing the amount of money in circulation to keep a slightly inflationary market and the associated stability. As a result, investing does not decrease the money supply enough to cause deflation.

Also, you're kinda missing the main point of stocks for the company selling them: companies sell stock as an alternative to taking out loans for capital expenditure or hiring new workers. So the net effect of a stock offering and taking out a loan is pretty much the same. And the restriction you are talking about doesn't make a whole lot of sense - you are tying together things that don't have anything to do with each other.

Money and jobs are not directly related enough for your theory to work. For service companies, maybe, but for manufacturers, there is very little relation between the value of the company and the number of workers.

 

[verdigris]

RUSS Waters said:
"Money and jobs are not directly related enough for your theory to work"

Perhaps not.But if investors on the stock exchange were only allowed to sell shares when a company is doing well then investors wouldn't be able to abandon companies that have started to underperform, but might do better
if the share price is stabilised.Of course some companies could be getting managed so appallingly that there would have to be a point at which investors are allowed to jump ship.A rule could be introduced which says that
nobody can buy stocks in only companies that are doing really well - for every share someone has in a company that is performing well they must have a share in a company that is doing less well.This would make the stock exchange a moral arena in which investors help companies in general and don't just get to line their own pockets - investors will make less money but maybe this is the way the world should go -everyone else has to work for a living anyway! Also if profits from shares are taxed, and the lower yielding
shares are taxed less than the higher yielding ones, there will be more incentive to invest in the less profitable companies.Overall the stock exchange would become a place in which investors can make a small profit
and help society in general.But all the world's stock exchanges would have to agree to abide by the same rules.