For many years, economists thought this "secondary recession" was inherent in the nature of the business cycle. Today, however, economists generally believe that the only thing that caused the 1937-38 downturn was disastrously bad government policy.
Economists, Keynesians, please, what happened in 1936? The fascist uprising in Europe, in Spain, Germany and Italy. How did you expect the former Secretary of the Navy to react? He put us through a government reorganization to support a military build up and war material exports to Europe. Any such retooling of government goods requires a period of deflation.
Why do we contract during a retool of the economy? Because we discard current production schedules, find the maximum subgraph in the distribution network, then expand from there under the new production regime.
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