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Understanding Money


Business Cycles:
Why Someone Needs to Be In Charge

In a minute, we'll talk about our modern monetary system and I'll answer the questions I posed at the end of the last section: "How can money that is not redeemable have value?" and "Who creates new money?" Before I do, however, I'd like to lay the groundwork for our discussion by posing a more basic question: "Is anyone in charge?"

It is the nature of the economy that it is always changing. Over a long period of time, economic changes come in cycles in which a period of expansion is followed by a period of contraction. During an expansion, production, income, employment and trade all increase, causing the economy to grow. Life gets better and better. During a contraction, life becomes more difficult. Production, income, employment and trade go down and the economy shrinks.

Such cycles are long, taking many months or even years, and the duration of the expansions and contractions varies considerably. In economic terms, a single up-and-down fluctuation — one expansion followed by a contraction — is called a BUSINESS CYCLE. All countries and economic regions go through such cycles. For instance, in the last 150 years, the United States economy has gone through 33 business cycles.

During the period of contraction, the decline in general economic activity causes widespread problems. When this happens, we say that the economy is in a RECESSION. Thus, the U.S. has had 33 recessions in the last 150 years.

As a general rule, a recession lasts from 6 to 12 months, although this is not always the case. The most severe recession took place from August 1929 to March 1933, a total of 43 months. This recession was so extreme that it created the Depression, a long period of economic suffering. The Depression started in November 1929, with the collapse of the U.S. stock market and grew to affect most of the world, including Europe and Canada. Although the actual recession ended in 1933, it took a long time for the world economy to recover. In fact, the Depression itself did not really end until the late 1930s, when massive government spending (to prepare for World War II) infused a huge amount of money into the global economy.

Because business cycles are part of the system, it is natural to wonder if there is anything we can do to avoid the recessions. If this is not possible, can we at least do something to make the recessions as short and mild as possible?

One solution, of course, is to have a war (after all, World War II did end the Depression). Unfortunately, wars only boost the economy temporarily. Although all the government spending does invigorate the economy, most of the money is spent on activities that are fundamentally destructive (such as building weapons) rather than constructive (such as building houses and schools). In virtually all cases, the government will borrow large amounts of money to pay for the war. When the war ends, so does the temporary spending, at which time the huge debt brings about a general economic contraction that invariably leads to a severe recession.

So, although wars can end a recession, in the long run, they have always proven to be devastating to a country's economy. The larger the war, the more economic suffering it ultimately brings.

Clearly we need a better way to invigorate a depressed economy and smooth out business cycles. In today's world, we do have a better solution, one that is based on three ideals:

  • Controlling the money supply wisely.
  • Creating a truly global economy.
  • Keeping the world peaceful.

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