Video Transcript: Contrasting Views of the Great Depression | Robert P. Murphy
Okay. Why don't we go ahead and get started? If you guys could take your seats, please. While you're doing that, let me just ask: Have most of you seen the the karaoke poster downstairs? Okay. I just want to clarify: they totally photoshopped that. That's not my signature. Just so you guys know. Okay. What we're talking about in this lecture is contrasting views of the Great Depression. So what I'm going to do is, as the name suggests, go through and give you the general synopsis, the explanation of why did the depression happen, and then why did it linger so long? Because there's actually two prongs to that story. That why was there this great economic catastrophe that most people attribute to the or the start of it as being the the 29 stock market crash, but then beyond that, why is it there was depending on how you time it at least a decade of just absolute misery economically that everybody would recognize as the worst event in world history, at least in modern times, as far as economies go. And so, why did that happen? You know, and so there's the prescription or the description of what happened, and then of course the recommendations is to say what should governments have done in the wake of that calamity, or going forward, what should we do now to make sure something like that doesn't happen. So as you can imagine, there's very different analyzes, you know, diagnoses of what happened, and then prescriptions for how should they have fixed it, and how do we make sure that doesn't happen again in our time. And so in this lecture, I'm just going to give you the major approaches to this topic from various schools of thought. And as you'll, the reason for this, why do we still care about the Great Depression? Well, we could have given this lecture even before the financial crisis, and it would have been relevant because that's. I mean, I even remember for myself and my own evolution from going from just being a a standard libertarian to being a more you know radical free market person. One of the things holding me back was I say okay yeah I realize there shouldn't be a minimum wage I can see that there shouldn't be a post office and stuff like that but I still was thinking ah but the one thing that was I couldn't explain and if people brought it up I didn't know what to tell them was didn't we have laissez faire in the 1920s or at least much closer to a purely free market and didn't it blow up in our face, and then surely the government wasn't as interventionist back then as it is now, and the Great Depression was awful. And so, how do you free market people explain that? So that was something I didn't know how to deal with. I had my principles, and I knew what I thought was correct, but just empirically, I didn't know how to handle that. So that's partly why it's important for you to at least be have a general familiarity with some of this stuff. So as we'll see, the more you study it, I think the more reassured you can be that oh, actually these general principles that I have do make sense, and that we don't need to be embarrassed by the Great Depression. Actually, when you know how to look at the data properly, you can see that the Great Depression fits the Austrian analysis to a T. Okay, so first of all, let me just give what I will call the
bad teachers account. I basically just want an excuse to put that picture up there to make sure you're awake. For foreign people, there was a movie of this title. That's why I have her up there. So what I mean by here is this is the standard thing that you certainly learn in the United States that I learned growing up, and perhaps even other countries. I can't speak from firsthand experience, but this is the standard analysis of what happened. Why did we have the Great Depression? And so they'll say, okay, in the 1920s we had relative laissez-faire. You didn't have a large federal government. People had a much more narrow, circumscribed view of the proper function of government back then, and so for in particular, the stock market was highly unregulated, and you had what's called margin trading, and so that meant people could borrow and speculate on stocks, and the problem, and so they became very leveraged, and so as the stock market's going up, that's great because you know people are seeing money being made in the stock market, and so they would go and trade on their margin account, and so they would borrow and then go buy stocks. The problem with that was once the market started dipping, it was like a snowball effect because then you know the brokers would say, "Oh, wait a minute, this person doesn't actually have much money in the account of his of his own money. He was trading on margin, and so if stock prices drop just a little bit, that wipes out you know the skin in the game that he had. And so there would be what's called a margin call, saying, "Hey, you got to either put up more money or sell and you know close down the position you have. And so if people didn't really have that much to begin with and they were very levered. Then when stocks started dipping, they had to sell to unload the position, and so then that was just a downward spiral. So you know you get the idea that they're saying because of this this deregul or this unregulation that it allowed a situation where you had an asset bubble and then it just. People built it up. Built it up as a self-fulfilling prophecy. People were buying stocks because everyone thought stocks were going up, and that made stocks go up even more. And then, for whatever reason, once it started tapering off, then there was just a mass stampede for the exits. Okay, so it's the same type of phenomenon that happened in the housing market more recently. It's the same principle. All right, so that's something that I remember being taught in my history classes to what caused the Great Depression or what was one of the contributing factors as to why did the stock market boom and then bust. And then they say, okay, so that explains where the the crash came from. It was because of this. There was no prudent regulations on the markets, and people were just motivated by greed, he didn't have the government as umpire coming in and and eradicating or eliminating risky practices. So that's how the bubble happened, and then there was a crash, and then why did the crash turn into what we now call the Great Depression? Why did the economy just linger for years and years and years in this misery? And the standard story you would hear is, oh, it's because the government didn't do
anything. Herbert Hoover was a strict constitutionalist. He didn't think it was the federal government's role to help fix the economy, and so he sat back and did nothing. And then, depending on the particular spin you will hear, you'll hear one of two explanations. Again, what I'm going over right now is the what most Americans are taught in school, and what I'm you're going to see shortly. I think is completely erroneous explanation, but this is what most Americans were taught. So you say, okay, so that's why we had the crash. That's why the economy was mired in depression. So what fixed it? What solved it? And you'll hear one of two things. Some people will stress that oh, the election of FDR. So Herbert Hoover was the Republican who was in office. He only served one term from he was elected. He won in the 28 election and then lost in the 32 election. And then FDR won in 32 and was inaugurated in early 1933, and that's when he brought in what's called the New Deal. So I'm assuming most of you have heard of that, but that was a wide range of activist government interventions in the economy, and it was billed as you know giving a New Deal to the American, and so that you know is in contrast to the the old failed approach or arrangement between citizens and their government under Herbert Hoover. That that was the the idea, that phrase. Okay, so they'll say that fixed it. Or if you're talking to someone who's kind of conservative and doesn't like FDR, they will say no. What got us out of the depression was World War II. Okay, now before I forget, let me just point this out. What's ironic about that rhetorical move coming from people who don't like FDR, you know, people who are conservative Republicans, and so they they understand the danger in allowing it to appear as if it were the New Deal that saved the economy. Is they'll say no, no, it was World War II. But the problem is they're contradicting themselves. Like they're they're admitting then that it's big government spending that got us out of the depression, right? So they're really not launching a salvo against Keynesian economics, even though they might think they're doing that. In fact, guys like Paul Krugman will say, "Yeah, ultimately, what got us out of the depression is those spending on World War II. Okay, so that's the standard account that most people will will give you, regardless of their political ideology, if they're just random Americans, as opposed to people who have studied this carefully or who you know are read Mises.org daily. Okay, let me go over Paul Krugman's account. Now he is very representative of the Keynesian mindset. Okay, so the things he has been stressing, and again, the reason I even know what does Paul Krugman think about the Great Depression is because in 2009, 2010, this stuff was very relevant. That Krugman and guys like that were pointing to the lessons of the 1930s to say we need the Obama administration to run huge deficits, and then when Republicans in Congress were trying to say, "Hey, okay, now that we have recovery, which officially happened in the summer of 2009, that you know the U.S. economy was considered now to be in official recovery, they were saying, "Let's you know cut spending or let's let's shrink these deficits
a little bit because these are unsustainable. And so you had people like Krugman, Christina Romer and others saying, "Whoa, whoa, whoa! That's not at all what we want to do. Because if we study history, we see that Herbert Hoover was alarmed by the budget deficit in his day and tried to balance the budget in '32, and we all know that led to literally the worst year in history in terms of U.S. economic performance. And then FDR in '37 also implemented what Krugman would call a contractionary policy. And again, if you look at the official statistics, the U.S. went back into official recession at that point. That there, it had been technically in a recovery in the inner, you know, in the mid 30s, and then it sank back into outright depression again in 37, 38.
And so, according to Krugman and people like that, duh, it's because they tightened up and they tried to enact more contractionary measures. So clearly, they're going to say the lesson from history, from anybody who's not an ideologue, is to conclude trying to balance the budget in the midst of an economic downturn is a stupid idea. Okay, and so they can't understand why would anybody want to cut spending in our time when clearly it led to disaster back in the '30s? So why does he say that it's incumbent upon the fiscal authority to solve these problems? He said, "Well, back then they ran into the double-fold problem that conventional monetary policy was hindered by the liquidity trap and a gold standard. Now, let me just stop for a minute and make sure you understand, just so you don't get caught flat-footed. Strictly speaking, the new Keynesian position, even people who advocate big budget deficits when there's a recession, strictly speaking, if they're accurate and consistent with their models, they can only say that when interest rates have been pushed down to zero or short-term interest rates. Okay, so even Krugman officially, and I say that because I doubt in practice he would ever actually be against running a bigger budget deficit, but at least officially, his position is, according to their models that they use, is to say, yeah, we we agree. Normally, if the economy's in a downturn and unemployment's too high, the first thing that happens is the Federal Reserve should cut interest rates, or the central bank should cut interest rates. And you don't need to run a budget deficit; that would be wasting resources. We agree, politicians can't allocate resources the way people in the market can. Blah blah blah. You just lower interest rates to stimulate aggregate demand to restore full employment. But if your economy is so bad, so that that conventional mechanism goes to the limit, namely pushing the policy interest rate down to 0% nominal rates, so you can't push it down anymore, at least under normal circumstances, then that's where you need the the government to then run a budget deficit to boost aggregate demand through fiscal measures, right? So there's the monetary versus fiscal, and I'm just making sure you understand that's the official Keynesian position. And so if you say, "Oh, you guys are just always for the government spending more money, they will bristle and say, "No, we don't. You're not reading us carefully. We're saying because
there's a liquidity trap, that's when the government needs to run fiscal stimulus or enact fiscal stimulus. Okay, so back in the '30s, he's going to say that was the problem that nominal interest rates had been pushed very low, and so the the Federal Reserve was pushing on a string. That was a a term that they would use, and and the other big thing he said is back then they had a gold standard, and so the Fed, even if it wanted to be more expansionary, did have that additional check in place, you know. And thank goodness nowadays we don't have that archaic limitation on the the wisdom of the Fed to be able to help. Sorry, so that's again Krugman's worldview. Okay, as far as what specifically happened, like where where did this come from? He'd say, "Oh well, yeah, there was this speculative bubble again because of unregulated people in the market, and then when that all crashed, you had what is called a private debt overhang, and so people individually are trying to pay down debt to to get you know to fix their corporations are trying to fix their balance sheets, and then creditors are not spending that money, right? So people who are in debt are restricting their consumption to save more to pay down their debt, but yet the creditor, because the economy is so awful, the people who are the creditors who are receiving those payments aren't increasing their consumption, and so the idea is on net, the community as a whole is spending less, and so even though individually it makes sense for everybody what they're doing, that you that should help that household become better financially. If everybody starts doing that, or lots of people start doing that, then you get the paradox of thrift. All right, if the community collectively tries to save more, ultimately that pushes down income so much that people save less than they meant to originally. All right, so that's the standard Keynesian story. Oh, and then as to what actually got us out of it, he says it was because of the huge deficits that the U.S. federal government ran, and he said, but what what got them to do it politically? In other words, FDR was too timid in the '30s because either you know his own advisors were too timid, or because he had Republican opposition, or just the American public wasn't ready to to embrace this medicine that you know the Keynesian economists knew they needed. But of course, there were other problems with it, and other. But the one good thing to come out of the Japanese bombing Pearl Harbor was that at least it gave the U.S. politicians the backbone to start running deficits big enough to fix the economy. All right, so that's the that's his explanation, and that's also the tie-in. I don't have it here for you, but have you guys seen Krugman's famous thing about calling for an alien invasion? Some of you have. Okay, so there. Again, just the the tying with this again strictly. If you want to be really fair, and we all want to be fair, Krugman wasn't calling for an actual alien invasion. Rather, he was saying, if only we thought erroneously aliens were going to invade, that's what would fix the economy. Okay, so just you know, you don't want to misrepresent the guy. And so again, it's the same thing here. So strictly speaking, it's not that he's glad for World War II and all the
death and destruction. It's he's glad there was something that caused the U.S. government to run such huge budget deficits because they would not have had the political will to do that, to you know plant trees or to build bridges or something. But they were the American public was willing to tolerate huge deficits to defeat, you know, the Nazis and the Japanese Empire. So that's Krugman's position. Okay, what about Milton Friedman and Anna Schwartz? Okay, so this is what would be called the monetarist position that would be associated with the Chicago School. So here it's it's a little bit nuanced, so I'll go ahead and and tell you what it is, but then I'll I'll warn you about something. Okay, so first of all, I told you when I was younger and I was studying this stuff and I was getting into free market economics, and I just stumbled upon Milton Friedman's explanation of the Great Depression, that was part of what made me agree that okay, this you know embracing free market economics isn't crazy because now the Great Depression does seem to be not a market phenomenon because you've got this giant Milton Friedman explaining that oh it was really the Federal Reserve's fault. Okay, so there is that element, and so you will see a lot of people, like people who read National Review and guys associated, like with the Heritage Foundation or whatever. They will latch on to Milton Friedman's diagnosis of what went wrong in the 1930s because it fits their overall worldview. That oh yeah, it was government mismanagement. You know, the bureaucrats made stupid decisions, and you know that's that's what screwed up the market. But you got to be careful because, and guys like Krugman have have busted Friedman or Friedmanites on this point, is to say, well, wait a minute. What Friedman's actual objection was, at least in this instance, was he was saying the Fed didn't inflate enough. Okay, so specifically, just to make sure you guys understand the historical context, what happened is there's different ways of assessing how much what the money supply is or the quantity of money, and so the monetary base is what the Fed and other central banks in other countries directly controls. It's like the actual currency in circulation, and then the reserves that commercial banks have with the central bank, whereas broader aggregates, things like you might have heard these terms like M1 and M2, that also can include the the checking account deposits that the public holds with the commercial banks. All right, and so the central bank can't directly control that when there is what's called fractional reserve banking. All right, so I don't want to get bogged down in this too much, but you kind of have to understand this point. So the idea is, if when you in a fractional reserve system, if you have $100 bill, a piece of paper, a green piece of paper, that's that's clearly money, that's $100. If you go to a commercial bank and deposit it, and then they make loans pyramided on top of that, let's say now there's $1,000 not in green pieces of paper, but in people's checking account balances. That's ultimately being backed up by that $100 that's in the vault. Okay, so I give the bank $100, my deposit, my checking account balance goes up by 100. So if I go to the ATM and
check it, the number is $100 bigger than it was, right? Because I gave $100 to the bank, it better go up by 100. I'm going to think they stole it from me. Okay, but as you know, the banks don't just have all the checking account balances
backed up 100% by green pieces of paper in the vault. That it's only fractionally backed up. So what that means is, at any time, the money in the vault is supporting much more in terms of the customers' checking account balances, what they're walking around town thinking they have at the bank, and so measures like m1 and m2 will capture that broader concept. So the problem is, what happens if there's a panic and lots of people run to the bank because they they're worried that their bank is going to go under. What are you going to do? You're not just going to be content to say, "Oh, I have $1,000 on deposit with this bank down the street, because if the bank folds and you go to try to take the money out, it might say it's not there because the bank went under. Or you write a check and the merchant might say, "We talk about that bank just went out of business yesterday. So of course, naturally, what do people do? They run to the bank and try to get their money out? Okay, so the the problem from a macro perspective with this phenomenon is that that meant in the early 30s certain measures of money like M1 and M2 shrank by about a third because it's not that the Federal Reserve had an. Active policy of trying to contract the quantity of money, but because the public was taking their money out of the commercial banks, okay, and so it's the opposite of what I said. That if if you took $100 out of the bank, in your mind you didn't change the quantity of money. You just went from having $100 with the bank to having it in your wallet. But now, if that $100 is no longer in their vault, that could mean that's like up to $1,000, let's say, in customer deposits that they no longer legally are allowed to maintain, and so they would have to like as people paid off loans, the bank couldn't renew the loan, or they couldn't lend it out to somebody else. They would just have to let the total volume of loans shrink. Okay, so what what I'm saying is, if people collectively are trying to take their money out of the banks to hold it in the form of paper currency rather than on deposit. Collectively, that forces like m2 to shrink. All right, and so that means now there's a third less money in the economy in a very legitimate sense, and so prices tend to fall. And you did see it. You know there was significant price deflation from like 1929 to 1933. Okay, so Friedman and Schwartz, what they were saying is the Fed should have been much more activist to counteract this trend. That the Fed should not have just sat back on its heels. That they should have done more open market operations to pump more reserves in to counteract the public's desire to go withdraw this money and hold it in the form of actual currency, and the Fed didn't do that. All right, so it's so again, it's saying the the Fed just sitting back, letting the market do what people naturally were going to do under that circumstance, led to disaster. And so Friedman, I perhaps ironically, is saying the Fed should have inflated more to offset what people were doing left to their own devices. So that's
the sense in which you want to be careful if you're going to try to construe this as saying, "Oh, this is saying the government intervention caused the the problem. Okay. Another main point that Friedman and Schwartz made about this period, and you have to understand when their book. So this account that I'm talking about came out and was called a Monetary History of the United States, and so when this came out, Roger, do you know when that when that came out was in the 50s? You don't know, okay. So does anybody know? Okay, I think it was in the 50s that this book came out. A monetary history, or yeah, monetary history of the United States. It overturned what the conventional Keynesian analysis had been. So I want you to understand, this was a revolutionary doctrine because the Keynesians, remember, thought that the Fed was impotent, and so they weren't mad at the Fed for not inflating enough, they were saying it couldn't have. It was pushing on a string, right? Nominal interest rates had been pushed down to basically zero, and so you know there's nothing the Fed could have done. That's why you needed the the government to be running budget deficits. That was the standard Keynesian story, and they thought there was what you know loose money in the 30s because interest rates were so low that had been the standard Keynesian account in the 30s and 40s. So when they came along again, I don't remember the date off the top of my head. I think it was in the mid 50s with their book, 1963. Okay, well they were working on it in the 50s. That's what I meant. So, all right. So that's that that overturned what the standard Keynesian analysis had been, right? So their theory was revolutionary at the time, and also again, you can see why politically certain people would have liked it because it it was it was saying, oh no, we didn't need huge budget deficits, you know, we we didn't need that as long if the Fed had just been not falling asleep at the wheel, then it would have been able to steer the economy, and so there was no need for the federal government to come in and spend a bunch of money on public works. Okay, so you can see politically how this fit in and why certain people liked it, but I'm just giving you the technical analysis. Okay, but so part and parcel of that was Friedman was saying, look, the fact that there were low interest rates didn't mean that there was easy money, or that there was loose monetary policy, it's because since the quantity of money was shrinking and prices were falling, people were expecting the purchasing power of money to increase, and so in that environment, the the purchasing power component of the gross interest rate would also be lower. Okay, so in other words, if you wanted to lend money, and you wanted to get because of time preference a rate of interest of 2% a real rate of interest of 2% but you expected prices in general to fall by 1% then you might be content to just lend out at a nominal rate of interest of 1% right? Because you're going to get the 1% nominally, but then everything's going to get 1% cheaper. So in real terms, you're getting that 2% return that you want. Okay, so that's the point they were making that you can't just look at nominal interest rates and the fact they're fairly
low, and conclude, oh well, the central bank's pushing down interest rates. What more can it do? They're saying, well, no, actually, the low interest rates are a symptom of the fact that money is too tight in this environment. If that sounds contrived, you go the other way. Mises points out that the Keynesians were also wrong in their analysis of the German interwar Germany because they were looking at there were large interest rates were very high, and so they nominal interest rates, and so a lot of people were concluding, like Joan Robinson and people, I think were were saying, oh well, obviously the German central bank is is not contributing to this hyperinflation because look at how high interest rates are, and as well, no, the way you have tight money is you raise interest rates, but the point was, well, no, in an environment where prices are rising rapidly, just because the market rate of interest is high by historical standards in an absolute sense, it actually might be very low. You know, once you consider in the context of the price inflation, people are anticipating, and so actually, you could have a very loose monetary policy with interest rates being very low in real terms, even though again the nominal interest rate might be high compared to what it normally is. Okay, so that's the point they were making, and so this is what modern day what are called market monetarists are saying. Ben Bernanke has had a tight policy. Don't be fooled by the fact that interest rates are really low. They're saying that that's the same mistake that the Keynesians made in the 30s. Okay, so that's that's why I'm emphasizing this because people nowadays are using it to say to argue that the Fed needs to do more now, just like Friedman thought the Fed needed to do more in the early '30s. Okay, Murray Rothbard's account. That was the best photo I could find of him. Okay, so his story takes the takes the Austrian business cycle theory that you guys have heard. I think Roger gave the the talk today on that, and just applied it historically to the 1920s and early 30s. All right, and so at the end of this lecture, I'll get I'll give you some reading suggestions if you want to look up on any more these strands that I'm developing, so his story just a warning: most of Rothbard's book is about the 20s and the Hoover administration. He doesn't even get into FDR at all because what Rothbard is trying to explain is the unsustainable boom as to why we do we have to have that bust. So again, I'm sure you guys heard this, but it bears repeating. In the Austrian approach, when you're trying to explain the business cycle, the issue is not, geez, what does the government need to do once there's a downturn and unemployment's really high? What does the government need to do to fix the economy? No, the real task for the statesman, somebody like Mises or Hayek would say, is what wise policies do you want to have in place to avoid having an unsustainable boom? That the boom is the bad time. The boom is when mistakes are made, malinvestments are made, and then ironically, it's the bust where things are getting rearranged to where they ought to be. Right. So during the bust period, what we call a recession or a depression, if it's really bad, that's actually where
entrepreneurs come to their senses, and they actually have reality strike, and then they start adjusting the allocation of resources to best fulfill consumer preferences. In light of the fact that, oh man, we've been just living beyond our means for several years now during this unsustainable boom. Okay, so that's a complete departure from the way a lot of economists look at this stuff, and it's it's fine. I mean, it's really amazing how some of these guys really do say, "I'm not. We're not setting up a straw man here. That look, it doesn't matter why the housing bubble happened. The important thing right now in 2010 or 2009 is to boost aggregate demand, and then later we can figure out what went wrong in the in the you know 2000s. But right now the important thing is to get people back to work. Right again, people were saying that just saying it doesn't matter. And you would say, well, wait a minute. What if the things that you're doing to put people back to work just sow the seeds for another unsustainable boom, which is of course, what the Austrians say did happen. All right, so it's so here Rothbard's focus is to explain. So the book is America's Great Depression, and so what he does is go through and just try to document and apply Austrian business cycle theory to the specific circumstances of the U.S. in the 1920s and explain why it was an unsustainable bubble. Show how the quantity of money grew at a large rate, and that's what fed the stock market bubble, and then ultimately led to the crash. Okay, so I didn't mention this in Friedman's account. Part of the story is to say during the 20s, he he would agree that yeah the Fed had something to do with the stock market boom, but he goes the other way with it, and he says in the 20s there were various times when the market started to tank, and then that's when the Fed would come in and and do a burst of of inflation, monetary inflation, and then pick things back up, and so Friedman's explanation is to say the reason. 29 crash happened. There were some historical factors. Benjamin Strong was the guy who had been at the helm, and then he died. And oh, there was a power vacuum, and there, you know, he gives a lot of interesting trivia about the personalities involved. But the Friedman Friedmanite explanation is that, for various reasons, the Fed failed to come to the rescue and keep the boom going, or keep the rising asset prices going. I don't know if you would call it a boom in 1929, and that's why there was a crash. Okay, and so the idea being, if only they had just kept injecting extra monetary stimulus whenever things started to downturn, there would have just been perpetual expansion. There would have been no need for there to be any correction at all, and it was only this completely unnecessary Fed tightening that then led to the crash, and then the outrageous unwillingness of the Fed to inflate to counteract the monetary deflation that then led to the Great Depression. Okay, so that's Friedman's story. So Rothbard, it's the complete opposite. Rothbard saying no, it was expansionary Fed policy in the 20s that started pushing up this unsustainable bubble. And yeah, if you want to say why did it crash, it's because the Fed stopped pumping it up. But the answer to that is not
to say oh, so if only the Fed had just kept pumping it up forever and ever, we never would have had a crash. It just would have made the crash that much worse. Okay, and then so be careful here. Let me stress. So it says Hoover engaged in unprecedented interventions to turn the necessary depression, a small D, into the Great Depression. Okay, so let me. So again, this is Rothbard's account. So there's two things going on here, and I'm saying this to make people understand. Strictly speaking, if somebody says, "Oh, so you Austrians think, or Murray Rothbard thinks that the Fed caused the Great Depression, strictly speaking, they answered as no. The standard Rothbardian Massesian account would be the Federal Reserve caused the asset bubble in the late 20s, which then you could say meant there had to be a stock market crash, and it happened to be 29, and for sure that happened. You could even say the Fed's expansionary policy required that there would be a severe depression with a small D in the early 30s, but no, the Federal Reserve per se didn't require a decade of agony. What the decade of agony came from the fact that the federal government then responding to that crisis then implemented all sorts of incredible interventions that distorted the economy, and so that's what made things so awful for so long. Okay, so it's a two-prong thing. By the same token, in our time, I wouldn't. If somebody says, "Oh, so you saying that Alan Greenspan and then Ben Bernanke caused the the Great Recession, and that's why the economy is so bad right now? Again, I would say, strictly speaking, no. It's Alan Greenspan, and then Bernanke caused the housing bubble, and so that's why there had to be a crash, and that's why yeah things were awful. And in the fall of 2008, there would have been a really bad global recession, and lots of banks would have gone under, and so forth. But had the government just stayed back and done nothing, and just let things sort out, or even better, cut taxes and deregulated, and did all sorts of things like that. Went back on gold or let people just issue private currencies, right? I can I can dream. We've been talking about Martians. I can talk about that, right? If they if they did that, well then yeah, it would have been awful for whatever six months. But then the economy would have hit rock bottom, and then there would have been sustainable growth after that. So certainly, six years or five years later, we would not still be sitting around with people unemployed and saying, "Man, why is this economy so sluggish? No, that wouldn't have happened. Right? It was all the incredible things that first the Bush administration and then the Obama administration did to just prolong the agony. Okay, so that's the the Rothbard account. Okay, now one of you had asked me a few days ago. Came up to me and said, "Hey, I'm reading Rothbard's America's Great Depression, and I don't understand this this issue about overproduction. Can you answer it? And I said, "For you, I'm going to do it in the lecture. And then and then I checked and I said, "You're going to the lecture, right? I didn't want to. You know that would have been awkward, but he fortunately he said he was okay. So this, let me just
mention this. So what Rothbard does early on in this book, America's Great Depression, is he reviews some of the standard explanations for why there was the Great Depression, and he and he just goes over why they're silly. Okay, so these are arguments that people often would trot out just in general to explain a downturn, and so one in particular was to say there's a general glut or there's a general overproduction, and so prima facie that sort of has a logic to it because what you observe, particularly back then in in earlier when there was still relatively hard money, as opposed to like when. Was a hyperinflation, and then so you'd have an awful economy with prices exploding. But historically, recessions or downturns or depressions or panics and busts were associated with falling prices. Right, so the booms associated with rising prices, and then the prices would fall, and that's why the purchasing power of money was over long stretches of time fairly constant. And so it was understandable that, like, from a business owner's perspective, what was a recession? It's all people aren't spending enough. We produce too much stuff. I got too much stuff on my shelves. I wish I hadn't bought so much. I wish I hadn't bulked up my inventory so much. I overproduced because clearly my customers can't afford to buy all this stuff, and now I got to slash prices to move this merchandise out of here, right? So that's the individual business person's perspective, perhaps, if if he's struggling during what is a downturn. And so it was understandable some people then extrapolated and said, "Oh, so what happens in a macro level when there is a bust is that the economy during the boom got so productive, you know. We got our late workers got better. Maybe we had new technological discoveries. We invested so much in capital and so forth, and our factories just started cranking out so much stuff that we produced too much stuff. And now collectively, our people can't afford to buy it all. And so that's why the whole thing has to crash and prices have to fall. And we got to scale back our operations because we're just producing too much stuff, all right. So Rothbard points out, well, no, that's that's crazy. He's saying there are there always is scarcity, at least you know this side of paradise, and so it's not the case that we have been able to satiate human desires or wants in terms of material items. There are always goods at any given time that oh we could use more units of this particular good or we can always come up with things saying oh if only we had more resources we had the technological know-how we could make more of such and such and that would make somebody happier compared to right now right so there's always economic scarcity and so he's saying what what happens in a in a bust period, is that entrepreneurs realized they invested in the wrong lines. So yes, certain lines of production expanded too quickly, and then they didn't have the complementary factors to to bring it to the finish line. Right. So let me just give you an exaggerated example. If all of a sudden we used a bunch of resources to crank out 1000s of new hammers, but we didn't build any more nails. You can see how that wouldn't work, right? That you'd get into that a few
years. Things might look good. That the the factory cranking out the hammers would think, oh, times are good. But collectively, if there's not nails to go with it, those hammers are kind of useless, right? Even though looked at in isolation. Oh, it's good to have more hammers. You see how there'd have to be a balance there, and so that's sort of a metaphor for, you know, an unsustainable expansion in the Austrian sense. That it's just not compatible intertemporally. That the plans don't line up, and you end up with you have too much of some types of capital goods and not enough of others, and the whole thing doesn't mesh. And so that's why the system needs to kind of reset and recalibrate. Okay, so that's but but you can see the problem there. You wouldn't say oh the issue with with building too many hammers. It's not that oh there was overproduction. No, that that's not the issue. It's that we put too many resources into hammers and not enough into nails. We should have produced fewer hammers and more nails, and then we would have been fine, right? It's not that the economy. It's not that we ran out of houses we wanted to build. It's that you know having too many hammers and not the corresponding nails or the corresponding carpenters or what have you. That that's it was an expansion too much in one particular line. Okay, Robert P. Murphy's account. That's my bad side. All right. So here, by the way, you're gonna see. So I did Rothbard, and then I'm gonna do mine, and I'm gonna do Bob Higgs. I Bob Higgs and I are totally consistent with the Rothbarding when we're just stressing different aspects, or we're touching upon things that Rothbard didn't get into in his in his books, right? So don't construe it as that we're disagreeing with Rothbard. Whereas what the three of us are saying, Rothbard, myself, and Haigs definitely contradicts just about everything Krugman says, and then certain portions of what the Friedman account was. Okay, so something that I did in my book, and again at the end, I'll show you a slide and give you further reading on this stuff. So I did a book, the Politically Incorrect Guide to the Great Depression and the New Deal. It came at the publisher came to me in late 2008 after Obama had won the election because people were comparing him to FDR and saying, "Oh, Obama's the next FDR, and they were comparing George Bush to Herbert Hoover, okay. And actually, what's funny is they actually that made sense that comparison, but not for the reasons they thought. They thought George Bush was like Herbert Hoover because they were both do nothing guys who respected the free market, whereas I said no, he's like Hoover because they both intervened and didn't mind their own business. Okay, so what one thing that I did. I said, okay, the both the Keynesians and the monetarists. Remember, the monetarism is is associated with Milton Friedman. They are they have their different explanations, but they're ultimately blaming the unwillingness of the authorities to act with sufficient vigor. Okay, so as we'll see in a minute, budget deficits did go up under Herbert Hoover, and they did go up under FDR, especially compared to the historical peacetime norm. But the Keynesian
argument is to say, "Oh, but it wasn't enough; it was too little, too late. And the same thing with Friedman, the Federal Reserve did try to stimulate. It's not that they actively contracted, but their point is always too little, too late. And so I said, okay, let's go look at the 1920 and 21 depression. So that's a real thing. Many of you probably never heard of it because it was over within two years, as the name probably suggests to you, right? And it wasn't a big deal. And boom, and it led to the Roaring 20s. And so historically, people forget about it. But if you go and look under either of those criteria for that depression, you'll see the government did the opposite. So they slashed spending tremendously, something like by 60% or something over the course of a few years, right? Government spending was slashed that much. That might seem inconceivable to you. Well, it's because it was right after World War I, all right. And so the government had been U.S. government had been spending an unprecedented amount, and then they slashed the budget quite significantly after peace was was won. Okay, so under the the Keynesian account, you would think then not just that they failed to increase spending sufficiently, but that they were actively cutting spending significantly. That well, gee, how come that didn't give us? How come the 1920s weren't the Great Depression? And by the same token, I don't have the slides here to show you. I've got it in my book if you want to go look at that. What the Fed did in the 1920 and 21 Depression was they jacked interest rates up to what was then a record high, and they collapsed. You know various measures of what the Fed could control, and and yet and and price also price deflation in a 12 month period was far worse in the 20 21 depression than in any 12 month period during the 1930 s. Okay, so whatever the explanation was as to what the government did wrong in the early 30 s that then set us up for a decade of depression was all the more so done in the early 20s, and yet far from the 20s being worse than the 30s, not only were the 20s not bad economically, we call them the Roaring 20s. All right, that's actually historians point to that as one of the best periods in U.S. history, where you know there was electrification and people were getting washing machines for the first time and stuff like that. Okay, so it's it would be harder for it to for the data to be worse for the Friedmanites or the the Keynesians. So what they do, just if you're curious, the way they handle that is to say, well, things were different. That was a different kind of depression. That that the depression of 1920-21 wasn't because of a financial panic. It was just because the the Fed raised interest rates to quell the price inflation, and so that was just a standard, you know, adjustment. There wasn't this banking crisis the way there was in the 30s, right? So that's the way they deal with. They don't deny the the basic numbers. They just say, well, you know, it's a different situation. Okay. Okay. As far as people arguing that the New Deal or FDR got us out of the depression. I just I'll show you in a second the the historical data and say what would things have to look like if FDR kept us in the depression, right? Because we know he he came into office in early '33, and by
anybody's account, we were still in the depression eight years later, and so what would you know what would he have to do to for us to think that oh no he made things worse, okay? Because the fact that you know, in other words, would the depression have to still be with us? Would we still this day have to be in it? Right. So the the mere fact that the depression at some point finally ended doesn't mean FDR solved it, right? The various criteria you could go through, you'd say, okay, well, did the depression end more quickly under FDR than previous depressions that ended historically, and the answer is no, not at all. You say, oh, or you know, did at least things keep getting better under him gradually? No, not at all. Or did did at least the depression improve in the U.S. compared to say Canada? No, it didn't. All right. So in the book, I go through various ways to just show if you just entertain the notion that actually the New Deal made things worse, it just jumps out at you as yeah, that's a much more compelling explanation. One thing I don't think I have it on this slide that I pointed out a problem with the standard story to say oh the reason that we the the stock market crash of '29 didn't just lead to a quick panic and bust, and then a year of awfulness, and then back to normal. The way historically depressions usually, with a small D, usually happen in U.S. history. That yeah, there was a bad crash, people got thrown out of work, but then a year later, 18 months later, things were recovering. To explain that by saying, oh, it's because Herbert Hoover was unwilling to do what he needed to do. That makes no sense, right? Because by everyone's account, Herbert Hoover was at worst as non interventionist as all his predecessors, right? It wasn't like Calvin Coolidge or Harding or anybody else had a New Deal and then Hoover got rid of it. See what I'm saying? Like Hoover just even if it were true that Hoover did nothing, well, he so did all his predecessors in this in this context, right? So that makes no sense. It's a bit like saying, "Why did that plane crash? Oh, because of gravity, right? And well, yeah, you could say that makes sense. But the the question is, but gravity applies to all the other planes too. So you're not really giving me a good explanation. So the same thing here, on its own terms, even if you don't know anything about economics, the account to blame the Great Depression on Herbert Hoover's inaction just doesn't make any sense. Whereas, if you can argue, oh no, actually, what Herbert Hoover did was the opposite of his predecessors-that he broke tradition and he started doing things that none of his predecessors had done-well, then at least that prima facie would make sense, and that is what Herbert Hoover did, even you know by the objective data and by his own account, if you go read Hoover's memoirs, he proudly says, "Hey, don't blame me for the depression. I tried all kinds of stuff. I did a lot more than any of my predecessors did, right? And the irony didn't hit him of, you know. So he was simultaneously saying, "I don't know why I got hit with the worst depression in history. I was doing a lot of stuff that my predecessors never tried. You see how you know, you want to just okay, okay, Bob Higgs account. Wait for
it. That's not Bob Higgs, in case some of you don't get the joke. Okay, so what he did in his work is he emphasized this phenomenon called regime uncertainty, and so what he put his finger on is he pointed out that it's not just the aggregate measures of of total spending either by the consumers or by the government. If you look at private investment, you can see that that was just awful during the 30s, and it took a long time for private investment to regain the level it had had, like in 29, right? And so, if you think that it's actually private investment that sows the seeds for future economic expansion and and provides for economic growth, well, then that's something. You know, if you're going to look at macro variables, that's really one that you want to be interested in in terms of seeing what's what's the prognosis for the long-term growth prospects in this economy? That if if businesses collectively in the aggregate are just you know they're they're barely replacing their plant and equipment, or they're just letting stuff run down. Like there were periods where there was even negative net investment, meaning the new investment was lower than depreciation. Okay, so stuff was wearing out, and businesses weren't even just maintaining their level of total equipment. They were just letting it shrink down because they thought things were so bad, and so Higgs was trying to explain that. And one of the things he hit upon was this this thing called regime uncertainty. And so what that meant is that it's not enough just to ex post look back at all the things, and I fell into this trap too, until Higgs pointed out. But it's not enough just to look back and say, in fact, what did what happened under the New Deal? Because if you do that, you could say, okay, yeah, there are awful things going on, and they raise taxes, and they do all sorts of ridiculous things. But you might say, but none of that could really explain just why did businessmen clamp up so much? Why didn't they invest at all just because on the margin, you know, tax rates went up such and such? Why would that make it? But the thing is, at the time, they didn't know what was coming, right? This was completely unprecedented to them. And Higgs has a thing that I reproduce in the book, in my book. There was a survey. I don't know who is like by Forbes or something like that of of entrepreneurs at the time saying, "What do you think of the president? Meaning FDR, and a sizeable proportion of them thought he was a dictator, right? And that might seem like, oh, they must have been right wing nut jobs or something. But well, no. Around the world, that's where dictators were coming, you know, were were taking over other Western democracies, and FDR, remember, was serving more than two terms, okay, which was you know violating the precedent that had been it wasn't unconstitutional at the time. I mean, he he had the ability to do that legally, but that was just totally a break with what presidents had done because they didn't want to, you know, Washington famously served two terms and retired because he didn't want the Americans to think he was the king. Okay, whereas FDR apparently had no problem being the king. Right, it's good to be the king. So, so like as I'm saying, doing all these things that we, in other words,
we all know that's what the history books tell us that FDR greatly expanded in the minds of Americans what the federal government's role in the economy would be. Well, then the flip side of that is, if you're a business person who has the government coming in and bossing you around and doing things that, as far as you were concerned, it wasn't allowed to do, and then he's serving multiple terms, and everybody else around the world in terms of major governments is literally a dictator. You can see why that would make you concerned about the future, and you would clam up. All right, so. That was his regime uncertainty. The idea being, you couldn't even if right now, as of the rules of the game in 1936, if you thought, okay, why don't you just run the numbers and now because of you know wage rates are higher because unions are more powerful and da da da da da, why don't you go ahead and and now expand your business? The point is because you don't know the rules might change again. If the rules change drastically from 34 to 36. Well, geez, they might change again next year, so I'm not going to invest now. I'm going to wait till this pans out. And so that a lot of people like that explanation for what's been happening under the Obama administration. You know, if I pity the fool who has a large company and you have to provide health insurance to your employees because the rules keep changing like every month. You you literally don't know what you have to do to comply with the law at this point, and you don't want to do a bunch of stuff because you might think, oh, maybe next year they're going to exempt me. Okay, so of course Higgs says that World War II spending did not end the depression, and I'm going to show you in a minute here just some great points that he made along those lines. So on this, on the face of it, just the idea that war would would fix an economy is just horrifying. Okay, I mean it makes no sense economically, but also just you know in terms of a child could understand that. You say, hey Jimmy, the economies around the world are bad. We need to put people back to work. So how about we build a bunch of bombs and start killing people and blowing stuff up? You know, little Jimmy would say that's a bad idea. That that that's that's not going to fix things. And yet, ironically, there are economists who argue that with a straight face. Okay, so there's that aspect to it. So let me. I'm going to walk you through in a minute and show you some of the arguments he made. Okay, but before I do that, let me just go over here. So this is Hoover versus FDR. He propped up wages and farm prices. So did FDR in the New Deal. Had big tax hikes and deficits. I have I don't have a slide here for you guys, but and this is something that Rothbard pointed out. If you just I reproduce it in my book, the the tax hikes of the Hoover administration in 1932 are outrageous when you when you just see how much they jacked up taxes. Okay, so the point being, a lot of the stuff that we associate with the New Deal actually had its start under the Hoover administration, and that's just not that's not merely me saying that trying to salvage, you know, my free market principles. There was, I have a quote in the book, an official who was in the New
Deal who said later on a quote to the effect of, "Yeah, at the time we we wouldn't have admitted it politically because it would have hurt us, but everything we did in the New Deal actually had its predecessors, you know, or its its precedent in the Hoover administration, that we just amped up all the things that they started.
Okay, so let me just give you a few figures here. This is federal spending by fiscal year. So 28-29, it was here. 29-30, Up, it's going up and up. So you see, federal spending under Herbert Hoover was rising, even though you might have been led to believe that Herbert Hoover was a crazy budget-cutting Austerian, and then you see that surplus or deficit is a share of the economy. You can see 30-31 it went into deficit, and then a huge budget deficit in 31-32. All right, so part of what's happening when Krugman and Christina Romer were saying, "Oh, in '32, Herbert Hoover tried to balance the budget. What they don't tell you is the reason the budget was so much out of balance was that yes, revenues were collapsing because the economy was awful, but also they had increased spending, thinking that that was going to prime the pump, right? So it was not merely that they increased spending, but they did it for it wasn't Keynesian reasons because the general theory hadn't come out yet, but it was for reasons that we would recognize as government supporting the economy. And also, like I say, the the way Hoover tried to balance the budget was primarily through tax hikes, just outrageous tax rate increases and fairly modest spending cuts, and so it's not surprising that that destroyed the economy. Not because oh no, aggregate demand fell, but because you don't raise taxes to help the economy. Okay, famous public works. Everyone know what that is? Hoover Dam. I wish I could tell you that all that was started in 1930 because Herbert Hoover wanted to boost the economy. That's actually not how it happened. I mean, it is the Hoover Dam. It is called it, but it's it was before it wasn't built in response to prime the pump and create jobs during the Great Depression. But nonetheless, it is Hoover Dam. Okay, this might surprise you. This quote: "The president's conference has given industrial leaders a new sense of their responsibilities. Never before have they been called upon to act together, and this is from a labor union. So you're probably thinking, "Oh, this is about FDR, right? No, editor of the American Federationist in January 1930. Right, so this is right after the stock market has crashed. Herbert Hoover is going to do all sorts of things to save the economy and. A major labor union publication is praising Herbert Hoover. Right, so again, this is showing this historical narrative was invented by the Democratic Party, the you know Roosevelt campaign to to paint Herbert Hoover as this do nothing guy. People thought he was great back before he got a chance to ruin everything, and then once the economy was awful, that's when they decided he wasn't their buddy. Okay, here's unemployment figures. So you can see my point: FDR gets elected in late '32, inaugurated early '33, and you can see unemployment is still pretty awful. And then it jumps back up to 19% average in 1938. Okay, so five years later, to have the unemployment rate at 19% That's
not the New Deal getting us out of the depression. All right, that's pretty awful. Okay, so the point is again, just what would the numbers have to look like for people to realize adding on all these regulations to the economy is not the way to implement a speedy recovery? Okay, let me read this one quickly to you guys. We're running out of time. In Sidney Hillman's garment industry, the coat authority employed enforcement police. They roamed through the garment district like stormtroopers. They could enter a man's factory, send them out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat and suit police went through the district at night, battering down doors with axes, looking for men who were committing the crime of sewing together a pair of pants at night. Okay, so when you talk about the NRA and all of the, you know, the measures they took to sort of cartelize business, it wasn't just suggestions emanating from the White House and everybody complied. They enforced this stuff through techniques like this, okay. And so, when you're trying to understand why were business, why was business investment so awful, it was partly because there were literally goons from Washington kicking in your doors and and searching your your place of business. Okay, so last few things here: Did World War II get us out of the depression? Let me summarize two main points that Higgs made, and then you guys can go to dinner. Okay, so the U.S. unemployment rate. Let me put it to you this way: prima facie. It does look like if you just look at macro statistics, it does look like the World War II got us out of the depression, and by us I mean the U.S. back then. So unemployment was up to 25% It came down, then as we saw, it went back up to 18, 19% and then it came way down. What in the early 40s, and that's when the U.S. entered World War II. So it certainly looks like the unemployment problem was solved by World War II. But as Higgs points out, the way that happened is the government drafted men and sent them overseas, right? And it wasn't even one for one, right? In other words, like if they drafted 100,000 people and sent them over, the ranks of the unemployed didn't even fall by 100,000. They would only fall by like 80,000. I'm making that number up, but that's the point. It didn't even fall one for one, so it would have been more efficient just to to just literally grab them and and and move them somewhere. Okay, so that's again the metric of unemployment. If the way you're solving it is just by taking people and shipping them off into a war zone, that's not obviously a good way to measure economic progress. Let me just make one more point here for you guys. This is the GDP. These are the GDP figures. Okay, so again, you can see why if you're just looking at the gross figures for GDP, you might think, oh yeah, it was World War II that fixed it because here's GDP falling. This is 32, 33, the depths of the Great Depression. Then it starts recovering when FDR comes and oh, the New Deal seems to be working. Oh shoot, FDR tried to balance the budget in 37, 38, and then oh thank goodness Japan bombed the U.S. because that gave them the
willingness to spend money, and there you go. Okay, so there's two points that Higgs makes to counteract this. Okay, one point is, as I'm sure many of you know, GDP just counts total spending, including government spending. So if you disaggregate this into private and government spending, it looks like that. So even using their own figures, you can see in the war years, private consumption and investment was lower than it had been even in the depths of the Great Depression, and this is with population increasing and of course, you know, technological innovations, what have you, over that period. So that's astonishing. So that means even on the government's own terms, their own figures, the standard of living in 33 and 34 was worse than it had been at the absolute depths of the Great Depression. Okay, so that so then you you know you can you can see that it's kind of fishy then to say oh look at the great economic recovery caused by the war when actually you could by their own figures, you could see people on the home front were an utter privation. But this is still even overstating how good things were because there were price controls, and I think this is a point that Higgs just on his own and you know developed and and had in the published literature. So here's the what happened in the. Monetary base, you can see it just explodes from 1940 to 1945, and so had the government not instituted price controls, presumably prices would have taken off as well. So these figures back here, these are real GDP figures. So they're supposedly adjusting for changes in the purchasing power, so give example: if the government just doubles the money supply and spending basically doubles, nominal GDP doubles. Oh, but prices all double. Well, then real GDP would be the same, right? Because nominal GDP would be twice as high, but the GDP deflator would be twice as high, and so it all cancel out. So the way they approach this, they shouldn't get caught with this little trick, but if the government is not letting prices go up, then if spending rises because the Fed's inflating and the government spends all kinds of money on war material, and then consumer prices are not allowed to go up by law, that will artificially goose these numbers. And when I when he publishes, I ask Higgs over email. I said, wait a minute. Are you saying they're not, in your judgment, adequately accounting for the effective price controls, or are you saying they don't even deal with that? He says, I'm saying they don't even deal with that. They print these numbers as if they're real GDP, knowing full well there were price controls in place during those war years, as if that that's not a big deal. All right. So that was the his point there. Further reading my book on the Great Depression, Rothbard's classic, Higgs's work on depression, war, and Cold War has that's a good one if you just want to grab one that has a bunch of his points. And then this by Lionel Robbins, it's Austrian esque, and it just gives you it's like