'..avoiding a “secondary depression,” or for preventing the severity of one..' - Jesús Huerta de Soto

<blockquote>'..the current situation actually involves a repeat of the duel between Hayek and Keynes during the 1930s.'

- '..Like monetarists, Keynes held no capital theory .. the role time plays..' - Jesús Huerta de Soto</blockquote>


'..to broadly liberalize markets and resist the temptation of credit expansion policies. Any policy which tends to keep wages high and make markets rigid should be abandoned. These policies would only make the readjustment process longer and more painful..'

<blockquote>'..the only effective policy for avoiding a “secondary depression,” or for preventing the severity of one, is to broadly liberalize markets and resist the temptation of credit expansion policies. Any policy which tends to keep wages high and make markets rigid should be abandoned. These policies would only make the readjustment process longer and more painful, even to the point of making it politically unbearable.<font size="-1">51</font>

What should be done if, under certain circumstances, it appears politically “impossible” to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession. Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments:
<blockquote>it has, of course, never been denied that employment can be rapidly increased, and a position of “full employment”achieved in the shortest possible time by means of monetary expansion. . . . All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperate situations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space.<font size="-1">52</font></blockquote>
- Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Third Edition, 2012), page(s) 453 & 454.


<font size="-1">Notes

51 Wilhelm Röpke, the chief “secondary depression” theorist, in his hesitant and at times contradictory treatment of the topic, acknowledges that in any case, in the absence of outside intervention or rigidity, spontaneous market forces prevent a “secondary depression” from hitting and developing. Even when the rigidity of labor markets and the implementation of protectionist policies causes such a depression and it develops, the market ultimately, invariably and spontaneously establishes a “floor” to the cumulative process of depression. See Röpke, Crises and Cycles, pp. 128–29.</font>

<font size="-1">52 Hayek, Profits, Interest and Investment, footnote 1 on pp. 63–64. Hayek later amplified his ideas on the subject, indicating that in the thirties he was opposed to Germany’s expansionary policy and even wrote an article that he never actually published. He sent the article to Professor Röpke with a personal note in which he stated the following:</font>
<blockquote><font size="-1">Apart from political considerations I feel you ought not—not yet at least—to start expanding credit. But if the political situation is so serious that continuing unemployment would lead to a political revolution, please do not publish my article. That is a political consideration, however, the merits of which I cannot judge from outside Germany but which you will be able to judge.</font></blockquote>
<font size="-1">Hayek concludes:</font>
<blockquote><font size="-1">Röpke’s reaction was not to publish the article, because he was convinced that at that time the political danger of increasing unemployment was so great that he would risk the danger of causing further misdirections by more inflation in the hope of postponing the crisis; at that particular moment, this seemed to him politically necessary and I consequently withdrew my article. (F.A. Hayek, “The Campaign Against Keynesian Inflation,” chapter 13 of New Studies in Philosophy,Politics, Economics and the History of Ideas, p. 211)</font></blockquote>
<font size="-1">At any rate desperate measures such as this can only procure a brief respite, while postponing the resolution of problems, which become much more serious over time. Indeed despite Röpke’s consequentialist decision, the situation in Germany continued to deteriorate and it was impossible to prevent Hitler’s accession to power in 1933.</font></blockquote>


Context '..to prevent [similarly like] Hitler’s accession to power..'

<blockquote>'..fostering societies where people can live more humane lives..'

'..to defeat all those ideological forces that are operating in favor of credit expansion.' - Ludwig von Mises

'A historian who doesn't understand economics ... The economist who knows no history...' - Murray N. Rothbard</blockquote>