Which industry’s profitability grew as the Great Depression progressed?

February 6th, 2008

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When we think of the Great Depression of the 1930s, we tend to picture a scenario of utter bleakness whereby every industry cannot escape the scourge of complete despair and pessimism. Surprisingly, there were two big industries that prospered inversely to the depression! What are they?

From the most deeply buried Austrian School 1936 classic (originally written in German), Crises & Cycles by Wilhelm R?pk,

Leaving aside the industry of manufacturing books on crises and cycles, there are two big industries likely to prosper inversely to the depression, the armaments industry and the gold-mining industry.

Why are these two industries the primary beneficiaries of the depression? For the armaments industry, Wilhelm R?pk guessed,

It is a remarkable fact that throughout the present depression the shares of the great armaments firms have not only kept their level but soared continuously at a time when almost all other shares were sagging, and it is surely not a too far-fetched idea to suppose that the rising prosperity of this branch of industry owes much to the political repercussions of the general economic and social atmosphere created by the protracted depression, especially in certain countries. What has been achieved recently in the way of economic recovery is, indeed, due, to no small extent, to the boom in all kinds of war materials.

Indeed, the German recovery after 1933 could be attributed to the rise of Hitler and the rearmament of Nazi Germany. This brings us to a terrifying question. As we mentioned before in Recipe for hyperinflation,

There is no way any politician can sell the message that America needs a severe recession (or even a depression) to cleanse the economy from the gross excesses, imbalances, blunders and mal-investments. Thus, it is very likely that they will have to fight deflation till the very bitter end, till the last drop of blood from their last soldier. Since the current structure of ?rules? will be too restrictive in such a war against deflation, there will be popular momentum towards the bending and rolling back of these ?rules.? If they press on relentlessly till the final end, there can only be one outcome: the US dollar will be joining the long list of failed fiat paper money in the annals of human civilization.

Is it possible for a democracy in severe crisis to take the route towards fascism and war as Germany did in the 1930s? Indeed, the US had already taken such a route when it used its military might to invade and occupy Iraq in 2003. Also, if we remember correctly, during the 1990s, one Japanese government minister half-seriously said that short of taking the military route, Japan had already done everything it could to fight deflation. Of course, that remark provoked a ruckus from Japan’s Asian neighbours.

Anyway, we will leave this terrifying question aside for now and look at the gold mining industry. As Wilhelm R?pk said,

So long as there exists at least one country [the US] on a full gold standard, an essential condition of which is freedom to buy gold from or sell gold to the central institution at a fixed price, there is literally an unlimited demand for the commodity at that price. In other words, not only is a minimum price for the product of the industry guaranteed, but there is, besides, no limit to the amount the market will take. Added to this, the effective minimum price, translated into terms of the producing countries’ currencies, has risen substantially in recent years, without a corresponding rise in costs, in consequence of widespread departure from the gold standard.

So, what happens if today, one nation unilaterally takes up the 100% reserve gold standard in the midst of global fiat currency regime?