AMERICA’S GREAT DEPRESSION
by Murray N. Rothbard
by Murray N. Rothbard
While reading the introduction to this great work by Dr. Rothbard, one thing stood out immediately: Just about everyone at the time of the Depression accepted the idea that “laissez-faire capitalism was to blame.” They believed that “unreconstructed capitalism” prevailed during the 1920s and that the crash in 1929 “showed” that it could “no longer work.” We needed a top-down management of the economy and then if another depression were to occur, socialism would be the answer (1).
Well, the top-down fiscal and monetary management we have suffered through ever since has brought a series of recessions, the worst of which we are now in. And, sure enough, the entire establishment is bleating for one or another degree of socialism.
The “unbridled capitalism” of the last decade is being blamed. One who is knowledgeable does not know whether to laugh or cry; it is very frustrating to one who knows that there is very little (if anything) left of free-market capitalism now, especially during the extremely heavy-handed G.W. Bush years.
It is assumed that the free market causes depressions. Where is the proof? Or even evidence? There isn’t any. We have not had a free market to cause either the Great Depression or this one, which proves that depressions and recessions can occur in the absence of a free market. We do have evidence, as Dr. Rothbard has shown in many works, including the one I have just reviewed, that the more free the market and the more free banking is, the fewer, milder, and shorter recessions will be. In fact, he and Ludwig von Mises have shown compelling evidence that monetary intervention such as money and credit expansion is the cause of depressions and recessions (2).
The aim of this book is to describe and highlight the causes of the 1929 depression. This is not a list of all that happened during the time, but is a trace of cause and effect. We will be looking at 1921 through 1929, the boom period preceding the depression, for causes of it. Then we will be looking at 1929 through 1933 for why it lasted so long.
Dr. Rothbard starts off in Chapter 1, “The Positive Theory of the Cycle,” with another obvious statement: If you are going to study a business cycle, then you must base your study on business cycle theory. Just crunching statistics numbers does not cut it. You need a theory to go on (3). My question: But what if that theory is wrong? Well, let’s see what he says.
The problem is, most students of the business cycle have no theory at all.
Ludwig von Mises pioneered a cycle theory that stems from general economic theory, and Dr. Rothbard makes the claim that this makes it the only theory that provides a correct explanation (4).
Now, a business cycle is not an ordinary business fluctuation. There will be fluctuations in any market. Things change. Entrepreneurs predict consumer wants, sometimes rightly and sometimes wrongly, and consumer wants, like time preferences, change. Also, technological improvements and weather changes occur. We can expect that. I am a very healthy female person and most days I feel really good, but there are some days I feel less good or, rarely, really lousy, and some days I feel absolutely great, on a monthly or non-monthly basis and I don’t think anything of it. These are fluctuations. We do not have the “evenly rotating economy” Dr. Rothbard described in Man, Economy and State for the purpose of illustrating his points. That is why there never has been and never will any “stability.” Conditions change and people change. This is what “fluctuations” are (5).
I used to love ramen noodles and eat them every day. Now, I am sick and tired of them. Egg noodles are now preferred. This is a change in one consumer’s wants. Everyone changes in these small ways. Sometimes, many people suddenly start to like something, such as hula hoops in the summer of 1958. Some entrepreneur is still rolling in dough from that! But, these are fluctuations, the former being almost insignificant, and the latter being very significant at that time. Business cycle theory does not deal with this.
Business cycle theory deals with when there is a general (across the economy) boom or depression. It would not deal with a person’s, even a million people’s switching from ramen to egg noodles. It would deal with supply, demand, and prices all (or mostly) moving up or down. In other words, we are dealing with what is going on across the board. Such movements across the board are transmitted by money. Causes for these changes occur in the monetary sphere (6). We have already discussed changes in the supply of money which change the general price level.
But, the question is, why is this so important to business cycle theory?
It is because of a “cluster of business errors,” Dr. Rothbard explains. It takes time to explain it all. It is too bad that most people simply cannot or will not take the time to study this. They want 30-second sound bites. When it comes to this subject, 30-second sound bites simply do not cut it, but most people simply will not listen any longer than that. They believe they are “well-read” if they read the newspaper. They are infantile, and it is not entirely their fault. The establishment has planned it that way, first by what passes for “education,” and second by keeping the tax and regulatory level so high that a two-parent family might have to have four paychecks (four!) just to keep up!
They do not have any time! How is a four-paycheck family with three children (with layoffs and foreclosure a real possibility, not to mention pensions, IRAs and other savings going up in smoke) going to set aside time to study business-cycle theory? It’s not happening! Even as a single young retiree, I resent the hours taken away just keeping myself alive with mundane tasks that seem to go on forever. A family of five has many times as much to do in addition to bringing home the bacon and frying it in a pan. That is why most people almost have to be nailed down to hear even the simplest libertarian precept.
Meanwhile, back at the ranch, what is this “cluster of business errors”? Everything seems to be going very nicely, and then rather suddenly it is seen that businesses are making poor decisions. Not just a few businesses, but lots of them. Their wrong decisions cause them to incur losses. Entrepreneurs, whose job it is to take risks and try to foresee consumer and producer needs, make profits when they are right and losses when they are wrong. So, the question is, why would almost all of them err at one time? (7)
Right now on the news we have been hearing about all these companies, big and small, some of which are a century old, having made some foolish decisions. We have seen empty storefronts where there have been companies that went out of business because of “foolish” decisions. Also we have seen homeowners being foreclosed because they made the “wrong” decision to buy in the first place.
Why? Is it a contagious disease?
All this is generated by an expansion of bank credit (8). So, how is bank credit expanded?
Dr. Rothbard then begins to talk about interest rates and how they are determined. Generally speaking, on the free market, interest rates are determined by people’s time preferences. If people’s time preferences are high, as they seem to be right now, i.e., if people want what they want when they want it and cannot get to the mall fast enough to spend their money, then they save less. If you spend more, then obviously you save less. Less money in time deposits like CDs means less money for banks to lend, and the law of supply and demand will raise interest rates. Conversely, if time preferences are low and people are frugal and save their money, there will be more available for loans, driving down interest rates. That is on the free market with a 100 percent reserve requirement.
But, what about our market which is far from free and has a very low reserve requirement? The nuts and bolts were explained by Dr. Rothbard in The Mystery of Banking. The banks can inflate on top of saved money. If you and all your friends have CDs at the bank, all rolling over at different times, what are the chances of all of you redeeming these CDs at the same time? Very low, and that is what the bank is banking on. So, for every dollar in those CDs, they can lend several dollars. Business people who are borrowing believe, or act as if they believe, that the money they are borrowing is money people put in the bank. However, a lot more money is being loaned out than was deposited and this takes interest rates artificially low.
So we have a situation now where few dollars are in CDs (people go to the mall instead) and lots are lent out at low interest. Businesspeople take this borrowed money and use it for capital for their businesses. For instance, the bakery needs a new oven and gets one. These expenditures increase the demand for such capital and producer goods, driving prices on them up. This in turn stimulates more investment in capital goods, leaving less investment in consumer goods.
As this new (inflated) money trickles around to wages, etc., unless there has been a shift of some kind, it will be spent in the old consumption-investment proportion as before. Then it will be seen that the change in investment from consumer goods to capital or producer goods was wrong. Capital goods have been overproduced and some of these stand idle (9).
It is during the “boom” that these malinvestment errors are made, and they were made because of the expansion of bank credit. The “crisis” appears when consumers re-establish their true desires by continuing old consumption-investment proportions. The “depression” occurs as the economy is re-adjusting to consumer desires. Wasteful projects are being liquidated. It is sad to see so many people being thrown out of work, but that is the result of poor monetary policies, and the continuation of these policies with the bailouts of banks and favored big businesses will only postpone, and worsen, the consequences. The best that can be done is to make the best possible use of capital that is sitting idle (10). This does not include a government takeover.
So, now we see, however briefly, how bank credit expansion causes depressions. It is most definitely not any lack of consumer spending. And, if government would just get out of the way and allow it, the present recession could end within a year or so, maybe even sooner.
Another feature of a depression might be deflation. This is a real silver lining as prices go down giving consumers a break. We might be seeing a bit of that now in early 2009. Possibly prices are not actually going down, but they are not going up compared with the increase in the money supply. People are being wise and braking their spending which is prompting stores to offer discounts. So, tight-fist Alice here trots out the door to the mall, where I find parking easy and prices reasonable. I go to the Foot Locker for some new cross-training shoes, to Home Depot for miscellaneous repair items, to Sports something-or-other for some new sweatsuits and T-shirts, and to Walmart and Target for underwear and socks, and also for some new pumps, slacks, blouses, and maybe a purse for church and more “pulled-up” occasions.
Well, what can you expect from someone who considers Super 8 a fancy hotel?
I believe that the continued injection of money into the money supply will fuel inflation again, so needed items should be bought now. My old table radio is wearing out and music means a lot to me, so I got a new Bose high-gain table radio with a special high-gain antenna to replace it. Too bad I do not need a new TV, computer, desk, couch or other furniture. Get it anyway? No. There is never any reason to get un-needed items unless you believe you can sell them at a profit later. Storage does cost.
Deflation is a blessing, but it does not always occur during a recession. Deflation is actually a lowering of the money supply which I do not believe is happening unless people are hoarding money. If prices are not rising I think it is mostly due to lowered aggregate demand.
But, Dr. Rothbard says the depression begins when inflation ends (11), and depression (or recession) has definitely begun. So, I don’t pretend to know; I just know that businesses are closing, layoffs and foreclosures (symptoms of deflation) are all over the news but government is still in bailouts using un-backed money (symptoms of inflation, especially when banks are on the receiving end of that money).
Another symptom of depression is the demand for money (12). That also tends to lower prices as people brake their spending and pay off debts. That is smart. Businesses, in the rash of bankruptcies, are cautious. That is smart too. Government’s admonitions to go forth and spend are being wisely ignored. Part of President Obama’s bailout plan includes what I consider a small tax break. Good. I resent the implication that allowing people to keep their own hard-earned money constitutes a bailout, but I never met a tax break I didn’t like, so at least that much is good.
This “hoarding” of money and other items, as politically incorrect as it is, is downright good. It does not harm the recovery. What brings about the recovery is the prices of capital goods falling faster than the prices of consumer goods. The fact that businesses have to pay a lot less for capital goods and can charge a little less for consumer goods means a greater profit margin.
This deflation, coupled with less spending and more saving, will end the depression, barring government interference. You cannot spend yourself rich. But you can prosper if you save.
So, what should the government do? Mr. Libertarian, as Lew Rockwell calls Dr. Rothbard, says it should do nothing. Stay out of the way. Any government action will either have no effect at all or will do harm. Remember what the Roosevelt administration did, what the Nixon administration did, and what the Bush and Obama administrations did and are doing. Harm, harm, and more harm.
The government’s favorite “cures” for a depression are the very things that will delay the recovery. These are preventing or delaying the liquidation with bailouts, furthering inflation with the encouragement of more loans, keeping wages and prices higher, telling people to spend, spend, spend, and, of course government deficit spending (13). This is what was done during the Great Depression and this is what is being done now.
If politicians and bureaucrats have ants in their pants and have to act, what they can do is slash government spending and taxes, but I do not think this is quite what they have in mind. Such action will tend to increase people’s propensity to save (14).
The best way to deal with a depression is to prevent it in the first place. First, the government must prevent inflationary credit expansion from the beginning. This could be done by a system of competitive free banking as described in The Mystery of Banking, and defining a fractional reserve as the fraud it actually is (15).
Of course the establishment will not hear of it! Of course not! After all, they have a lot to lose if they concede that freedom is the way to go. So Dr. Rothbard discusses some Keynesian answers to his and Mises’ proposals.
One Keynesian complaint about Austrian and classical economics is the association between savings and investment. The Keynesians claim that there is no common ground between the two, for “savings” are taken out of the economy, they say, and “investments” are plowed back into it. But, where does investment money come from other than savings? If I invest in $1000 worth of gold today because I am convinced that inflation is nigh, where am I going to get the grand? Either from savings, or from bank credit, but we have already seen the results of bank credit. I could borrow from a friend, but then it is my friend’s savings. Or I could invest the $1000 in future spending by locking it up in a safe. In any case, when a person has money, he decides how much to spend now and how much to spend later and that depends on his time preference (16). If one locks the cash up, one’s demand for money has increased. This is a saving and an investment in the future. Saving is really the same thing as investing.
The Keynesians also claim that interest rates are determined by some “liquidity preference,” which means demand for money. I guess it means they think people squirrel away cash. I think nearly everyone does hide some cash, but not enough to affect anything. In a free market, interest rates are determined by people’s time preferences, the same as is the ratio of consumption to savings. Of course the natural (time-preference) rate of interest is what Dr. Rothbard refers to, which is not necessarily the interest being paid on loans (17).
Next, we get into a section on Keynesianism and wages. During deflation prices fall. As much as we’d all like to see wages hang steady, they are a cost, a price, the price of labor, and have to fall too. And, under normal circumstances, they cannot rise over free-market rates without unemployment. But Keynesians want to prop wages up regardless. They seem to (conveniently) forget that when prices and wages both drop, real wages do not drop. Governments and unions keep wages artificially high, and they advocate inflation to curb unemployment. The inflation brings real wages down, and the unions and the government do not object to that, which proves to me that they really do not care about the wage-earner. What they really want is to line fat-cat pockets, which this does.
Right now we hear of people – you might be one of them – who are out of a job due to massive lay-offs and are sending resumes out by the thousands with no response at all. Many of these people would be glad to forgo benefits and/or accept low wages as anything is better than what they are getting now. But, this is not allowed and I do not hear any talk from the establishment about changing the rules. They have to know this! It is not rocket science, but they care so little about the individual that to really help him is out of the question. And some workers have been fooled into buying into that. They are devoted to their unions, or believe in the system (read believe that Obama will save them) or both (18). To allow wage rates to drop would allow more hiring (19).
One must remember that, when government sets minimum wages, people who really want to work and would accept lower wages are barred. Those who are not willing to work at the lower wage can always decline a job. Nobody is forcing them. What this means is that government is making a decision for you that you have every right to make yourself based on your rational self-interest.
You have the right to negotiate your wage the same as you have the right take a drug or drive without a seatbelt. It is your life; God in His infinite wisdom gave it to you as your sole property. And, no matter how many laws are made, you still have this right as rights are unalienable.
Sometimes something other than a boom precipitates an economic crisis, as Dr. Rothbard begins with in Chapter 3, “Some Alternative Explanations of Depression: A Critique.” These are things like a cutoff of an important import, a sharp increase in taxation, or a sudden distrust in banks. These are all government-precipitated but I would think that other things like weather problems, such as the extra-severe winter this year in eastern parts of the country, would qualify. But I believe Dr. Rothbard in this book is sticking to problems caused by economic policies which explain the deeper causes of the Great Depression and myths about these causes (20).
One of these myths, very easy to see through by anyone who is willing to so much as peek out of the box, is that general “overproduction” is a cause, or the cause of a depression. The problem that we now have is being caused by too many goods and services? How can that be when people’s wants seem to go on forever? Resources are scarce, but one’s wants are plentiful. Even the Keynesians agree with that. As long as there are wants, production is needed to satisfy them.
The establishment bleats, however, the goods are there, but people cannot afford them. The answer is simple. Even the “greediest” businesspeople need to get rid of their merchandise since they need money too. So, whether they like it or not, they have to lower their prices or else keep the merchandise. They either accept low prices or they make no money at all. So, down prices come and more people start buying (21).
The problem here is not that items must be sold at too-low prices. The problem is that the businessperson paid too much to buy or make these items. This is one of that cluster of errors that so many businesspeople made at the same time that Dr. Rothbard already discussed. Production went into unprofitable lines because of the expansion of credit. Any overproduction was in these unprofitable lines that caused underproduction in other lines (22).
Corollary to the idea of “overproduction” is the idea of “underconsumption.” The idea is that production over-ran consumption during the boom. But, then, why did costs rise so much that products are unprofitable at selling prices? See above (23).
Dr. Rothbard next attacks the establishment’s myth of “the acceleration principle.” This is the idea that consumption (which the government seems to be encouraging) will add to production. This seems plausible, but only to the economic theory novice. Actually, the only way to increase production is by saving (investing). We need to think of basics. Remember Crusoe. In order to produce, we need capital. To get capital we need to save. To save, we must curtail consumption. The only other way is expansion of credit, which leads down the path to depression (24).
There are many things wrong with the acceleration principle, but that is the main one.
Only the Austrian school of economic thought (the libertarian school that is associated with Dr. Rothbard, Ludwig von Mises, and Friederich Hayek, and the one I subscribe to) regards an inflationary boom as a “bad” thing. It isn’t that we don’t like prosperity – of course we do. But the inflationary boom necessitates a depression. And, the longer and “boomier” the boom, the longer and worse the depression. We have seen why in these works by Rothbard.
Now, we turn to Part II of the book: “The Inflationary Boom: 1921 - 1929.”
One big mistake that most economic theories make is to use statistics to prove one theory or disprove another. Statistics reflect the operation of numerous causal forces. One of the things that always happens when bank credit is expanded is that interest rates go lower than they would have gone otherwise. But, a statistic will show a certain interest rate only; it will not show what the rate would have been without credit expansion (25).
The same goes for consumer prices during the 1920s. This was a highly inflationary period, but prices remained steady or even dropped. If you go by statistics only, you might think there was no inflation. There was, though, great technological progress during that time, such as electricity, internal combustion engines, telephones, and radio becoming widespread and making it possible to produce more goods faster and less expensively. This had a downward pressure on prices. Had there not been inflation, prices would have dropped much more, and more people would have been able to partake in prosperity. But, statistics do not show that.
So, exactly how much did the money supply increase between 1921 and 1929? The table on P. 88 shows it increased by more than half again (63% he later states). The table (I wish I could reproduce it here) is broken down by currency outside of banks, demand deposits, time deposits, and other areas, and also shows the annual change in money supply.
That is your evidence of inflation in the 1920s. I greatly fear the money supply has been increasing faster than that during the Bush years. We were still on the gold standard in the 1920s. The inflation took place in the form of bank loans to businesses. The increase in the money supply was not covered by any increase in the gold supply regardless of some discussions of 1920s inflation (26). The gold supply did increase but the dollar supply increased a lot more. The banking system was actually bankrupt (27). So, exactly what was responsible for all of this? Well, duh! Greedy government and government-connected fatcats, of course, but how did they do it?
Dr. Rothbard said that currency in circulation (meaning pocket money) did not increase. The expansion took place in bank deposits and other monetary credit. Bank deposits are the foundation on which expansion is based, as he explained earlier. The reserve requirement varied according to where the bank was, but 13 percent was the highest. “Country” banks had the lowest requirement, 3 percent (28). So, was there a shift in demand deposits to “country” banks? Actually, there was not, which surprised me. Nor was there a shift from Fed member to Fed non-member banks.
However, there was an increase in the percentage of time deposits in the ‘20s. This is important as the reserve requirement on time deposits was much lower than that on demand deposits (both were obscenely low). There were time deposits in commercial banks (besides S&Ls) and commercial banks have a lot to gain by these, so of course they pitched time deposits to their customers, presumably by dangling attractive interest rates. I remember this happening in the early 1980s. I got to the bank and it was full of other yuppies with their tongues hanging out because of 15 percent interest rates. We were experiencing 18 percent inflation, but a loss of 3 percent was a lot better than a loss of 18 percent, so I bit too. What irked me the most then and still does now was that most people thought they were gaining 15 percent rather than losing 3 percent. Can’t they do simple arithmetic? Or is their blind faith in the system really that abject?
Thus, a change in reserve requirements was a definite factor, and so was a change in the total bank reserves themselves. The increase in total reserves accounted for more than 80 percent of the inflation (29).
But what caused the increase in reserves? This is key. Was this controlled by the Fed or another part of the government, or was it the result of market forces? At that time, one could deposit gold at the bank, and the bank would add that gold to its reserves at the Fed. (Most of these gold deposits were foreign transactions.) Of course at the time people did not know the coming Roosevelt administration was going to “borrow” (read steal) the people’s gold.
Let’s stop here a moment for a sidebar, a very important lesson that I hope you have already learned. If government at any level ever, and I mean ever wants to “borrow” anything, gold, guns, toilet paper, anything, and offers you a receipt, even a framed, engraved receipt, along with an ironclad promise on a stack of Bibles to return the item, do not under any circumstances whatsoever turn over your item if you value it. You will probably never see it again.
Also, fellow dissidents, listen up, if the government (or a firm you have never heard of) “invites” you to go and collect a “prize” you have “won,” don’t go. This is how they find and catch crooks. Well, crooks are dumb enough to fall for that, but we are not.
Meanwhile, back at the ranch, people would deposit their gold at the bank. This was the only increase or decrease of reserves the marketplace controlled. Other ways to increase or decrease reserves were controlled by the Fed or by the government (30). At the top of this list is Open Market purchases by the Fed. Then comes Fed loans to banks, and several more causes of changes in reserves. There are two tables shown on P. 102 and P. 103 that depict the forces causing reserve changes in the 1920s, and the rates in these changes. Reserves controlled by the market (i.e., gold reserves) declined, while reserves controlled by the Fed and the government increased dramatically. Dr. Rothbard believes this was entirely deliberate. It is a cinch, however, that deliberate or not, the inflation was not caused by an influx of gold. It does appear as though continuous and permanent inflation was the Fed’s goal (31). Loans to banks were on very easy terms; banks could borrow from the Fed at well below market rates, then lend at market rates (or maybe somewhat below), making a tidy profit on what amounts to a cost-plus basis for the purpose of helping all kinds of “legitimate” business (read “favored” business which obviously means big, pro-establishment business, and of course campaign contributions were involved then as now).
This is the result of a bailout having “strings attached.” We had a “no-strings” bailout in 2008. (I am not so sure there were really no strings.) For the coming bailout (or “stimulus package” as they insist on calling it) there will be “oversight” and regulations, so we will have loans going to favored recipients (read politically correct recipients) and not to other equally legitimate businesses. This whole thing just opens the door to even more government manipulation of all society, causing distortions in the marketplace, and limiting freedom and opportunities for individuals.
And, now, as another sidebar, I see where there is some close observation of the details of the package, after Pres. Obama declined to talk about it except in general terms. We see there is some further government spying thrown in and ways to even further extend the list of people who will not be allowed to buy a gun for one reason or another.
Now, we go from various causes of the changing of reserves to the actual cause of the boom of the 1920s. One might ask, why are you comparing the ill actions of government during the boom with the ill actions of the government now during today’s recession? The reason is that the actions of government do compare. In the 1920s these policies kept the boom going (which made the policies appear to work) and a boom caused by credit expansion must end with a depression when credit is contracted. We have had over-expansion of credit for many years and our chickens have come home to roost. What is the government doing? This “stimulus package” is more of the same policies. Either it will “work” by causing another boom (only to be followed by a worse depression later, maybe even hyper-inflation) or else it will not work and we will sink into a depression anyway. The latter is the lesser of evils.
Cheap credit was the policy in the 1920s. There was a recession in 1920 - 1921, and the inflationary policies appeared to end that.
Loans to foreign countries factored in too, of course. Then, as now, the U.S. government felt it was responsible to give foreign countries a hand, at tremendous expense to American taxpayers, the more astute of whom were most unwilling. Charities such as World Vision who help the impoverished overseas are fine, in fact I have money deducted monthly for WV, but these are voluntary and actually help people. Government aid and loans are non-consensual and help mostly governments. In the ’20s, Britain was helped in particular. Britain botched an attempt to return to the gold standard after World War I and wound up inflating. Gold left the country for the States, so the U.S. inflated too on the backs of Americans (32) for the benefit of many foreign countries, especially the Brits, particularly their government and labor unions (33), as Dr. Rothbard explains here in a step-by-step fashion (34). This was a major cause of the Great Depression, in which, as I pointed out in Three Enemies, American children were crying for food. And, yes, they did know something like that would happen. How could they not?
While this inflation was happening, however, there was seeming prosperity masking the inflation. This was throughout the Western world where central banks were working together (35).
The American people were flat-out not allowed to know what was going on. They believed lies and once the crash had come, they blamed capitalism rather than inflationary government (36).
This sounds familiar. The mainstream media of today refuses to carry the truth. When the crash came on October 24, 1929, it took people by complete surprise, and when our economy turns in such a way as to show that the current monetary and fiscal policies (particularly the 1,100-page “stimulus package” bill that no law-maker ever got a chance to read) have backfired, people will be surprised again. What needs to be done is to deflate (37)!
Herbert Hoover was elected president in 1928 and took over the office in March, 1929. He has the reputation of being a laissez-faire, hands-off president but actually he was far from that. He laid the groundwork for the New Deal, which prolonged the Great Depression for more than a decade when the right policies could have ended it in a very short time. How he ever got the reputation as pro-laissez-faire I will never understand and the same can be said of President George W. Bush. The ultra-pro-government-slanted mainstream media is and was a main culprit along with the abysmal education in economics.
The inflationary policies continued. “To help the farmers” was the given reason to make borrowing easier (bad idea) and this was done in late summer after the farmers had done their seasonal borrowing, so it did not help them at all (38). Funny that people did not see this.
In the next chapter, Dr. Rothbard turns to “price stability.” This is something else I cannot figure out. What is so great about price stability? Maybe people are interested in knowing what prices will be down the road. I suppose that would be good to know (knowing the price of gas and motels next summer would help me budget my trip), but nobody knows even their own distant future wants, so why would that be so important?
In the minds of many, even economists, prices holding steady means inflation is checked. We have learned that this is not necessarily true. The mischief caused by inflation is in the distortion of the relationships between prices. In the 1920s, greatly increased productivity pushed wholesale and consumer prices down to about the same extent that inflation pushed them up, so overall they held steady, obscuring the inflation. Inflation is evidenced by the increase in the money supply (39). This is what economists should be tracking, not prices. Not only that, not all prices were stable: real estate, stocks, rent and wages all increased about 13 percent between 1922 and 1929 (40). Some prices fell and some rose.
But the establishment, going all the way back to 1911, was jazzed on stable price levels. When prices are rising, that idea is not so bad since it can put a brake on inflation, but if they are falling the idea is indeed pernicious (41). Not much about “why” was discussed by the establishment except for the non-truth that a fall in prices causes unemployment (42). The labor unions and others on the left picked up the ball on that.
Now, we get out of the “boom” era and into the Depression itself, or at least the prelude to it. Dr. Rothbard makes it quite clear that President Herbert Hoover was anything but a free market president. He is quoted in one of his campaign speeches (for a second term) as a real critic of the free market (43). In fact, a lot of the quote could have come from Pres. Obama. He insulted the market by exhorting businesses to “voluntarily” follow rules, but if they did not, the rules would become compulsory. Now, even a dog understands that there is nothing voluntary about this. He was not laissez-faire, and never pretended to be! Nor had he been for quite some time. As Secretary of Commerce under Pres. Harding he pioneered the course away from laissez-faire toward more government economic activity. Of course, among businesses, the biggest businesses hopped on board first (44). This “spirit of cooperation” sowed the seeds of the New Deal.
Hoover was fiercely pro-union and pro-collective bargaining, and was in favor of keeping wages above market level. It does not take an advanced degree in economics to realize that this will cause unemployment; indeed this concept is what we cut our baby teeth on.
Another government intervention Hoover fought for during the 1920s was the 8-hour work day (45). The steel industry, and others, had a 12-hour day. For some workers, maybe this is obscenely long, especially with a 6-day week. But this is between worker and employer. A worker can always go to work for a more reasonable employer, and the really good workers will. Workers can also organize into associations (unions) and I have no problem with this as long as it is voluntary. I have always refused to join unions precisely because closed shops make membership compulsory. Last winter – if you read my essay you may recall – I wrote about my striding out of an employee meeting when the discussion turned to a compulsory union.
But a totally voluntary organization is based on free association, and in a free country this is perfectly legal. Employees who wished for an 8-hour day could take measures to achieve one. They did not need any anti-free-market, pro-government Herbert Hoover to agitate for the passage of any law. But he was doing just that and he was doing a great deal more to promote government intervention into labor and, hence, into the economy as a whole. Terms like “scientific” and “modern” were used to lull people into thinking that all this backward thinking was the new cutting edge (46).
Herbert Hoover was instrumental in spreading the new (false) gospel that high wages cause prosperity when actually high productivity causes both prosperity and high wages.
In the next lengthy chapter, “The Depression Begins: President Hoover Takes Command,” Dr. Rothbard shows exactly how far Herbert Hoover was from laissez-faire. He was at the interventionist starting gate on October 24, 1929, when the stock market crash sounded the shot and opened the gate. And he was off!
The first thing he did after the crash was to call conferences with big business wheels to “persuade” them to do exactly the wrong thing to be done at that time and that was to maintain wage rates and expand their investments. That was very unsound when cutbacks are appropriate for anyone. The brunt of the depression should fall on profits, Hoover said (47), which is even more unsound. Profits motivate business activity, hence motivate higher wages and expansion.
But, possibly the most important development in these conferences was that now industrialists would act together rather than as individuals (48). To this particularly individualistic free-market libertarian, that says more about the Hoover administration than anything else.
Meanwhile, back at the Federal Reserve, inflation did not end with the boom. More money was poured into the banks to spur lending. This sounds very much like the Bush/Obama bailout plan. It saved shaky banks just as it does today. But should shaky banks be saved? Only if the marketplace decides they should. To pour money into failing businesses is to throw good money after bad. The marketplace will not do that, but the government will, for the sake of its well-connected cronies.
A public works program began. Hoover urged governors to expand state public works, and the federal government began to build ships and federal buildings, a wasteful boondoggle that the country could ill afford.
If Hoover’s philosophy is sound, then the next time I have a shortfall of funds, I will treat it by booking a Caribbean cruise or something.
It was Hoover who began the New Deal Farm program, characterized by farm price supports. Farm intervention had been going on for many years. Farmers became “kept” by subsidies, loans, encouragement of curtailing yields to keep prices up, and other regulation favoring farmers (49). So much for laissez-faire in the 1920s.
Kudos to those rugged individualist farmers who defiantly expanded production anyway, and reaped the profits they deserved.
What it all added up to was a farm cartel directed by the government for the cartel (50). This is so typical of regulation, and reason number two I so fiercely oppose it (reason number one being the God-given rights of individuals) is that regulation of big business is almost always controlled by the regulated and only poses as protection of the little guy from big-guy abuse. It actually screws the little guy and benefits the big guy. A truly free market levels the playing field.
By early 1930, people were lulled into thinking recovery was nigh, thanks to Pres. Hoover taking the bull by the horns and assuming dictatorial control over the economy. A public works program had been started with federal funding to states and municipalities in hopes of opening up jobs. This does sound very much like the “stimulus package” Pres. Obama just signed. There were $915 million in federal dollars in 1930 which would be billions today when you consider the inflation in the last eighty years (51).
Well, let’s see what happened as a result of the 1930 bailout. Maybe we will get some idea of what is ahead of us now. It is not good, and of that I am positive.
An easy-money policy was instituted. For a while it seemed to be working as the stock market rose, but it fell sharply again, and employment and production fell too.
Then Hoover pushed through the Smoot-Hawley Tariff, which hampered the economy, especially the farm economy even more. Obviously a protective tariff is going to be retaliated against by countries at which it is aimed (52).
Hoover made it plain that he believed the crash was caused by credit being unavailable, insufficient public works, and underconsumption. Obviously, then as now, the situation is the reverse. Overspending and overextension of credit are the root causes.
There were some economists then, as there are now, who understand how foolish these policies are. But these economists are unheeded (53). It is almost impossible to believe that policymakers are that ignorant. The policymakers, politicians and top bureaucrats benefit, so why shouldn’t they turn a blind eye to sound advice? They do benefit from the status quo, as is evidenced by recent news stories (mainstream news, yet!) of Congressional junkets after business executives were publicly raked over the coals by Congresspeople, and a huge bonus for the Postmaster General and for those bureaucrats in Fannie and Freddie who wreaked such havoc, after Pres. Obama announced that mega-bonuses in the private sector had to stop. Is this all just a drama being staged?
So, new government programs, such as public works, sprang up to help fix the problems government programs had caused. Of course, the idea of discontinuing the causes of the problems was never mentioned.
Today, the local unemployment figure is nearly 10 percent here and the local government is salivating over federal money headed this way. They are going to build a new city hall! And, boy, is it ever fancy! All the bells and whistles. I suppose it is a little better than paying people to dig holes and fill them up again, as eventually a new city hall will have to be built anyway.
Wait a minute!! To build a government building is to dig a hole and fill it up again ... isn’t it?
If I had my way, I’d move the city bureaucrats into tents and allow the homeless to occupy city hall. (Maybe then I would not scream bloody murder so loud whenever cruel bureaucrats bulldoze the tent city.) And, that is moderate in my opinion; why can’t the mayor and city council sit on the sidewalks and do their “work?”
Government expenditures are not part of the GDP. Rather, because they come out of the pockets of unwilling (those who ever think are unwilling) taxpayers, these expenditures are actually a burden. Not only does a depression indicate straightening up and flying right in the monetary policy area, but fiscal policy needs to be sounder as well. That means a cutback in government spending and taxes, so that people will be able to do the smart thing. People seem to be doing the best they can right now, and that is to cut their own spending, pay off debts, and save. Saving is particularly important, not just to hold money aside for a rainy day but also to invest. I realize how many times I have said this, but as the present situation worsens it becomes ever more important.
But, of course, this will never happen. Government’s take from the GDP grows all the more during a depression, taking away people’s ability to do what needs to be done, and tax money is spent on projects that the market cannot afford at the time or does not need at all.
As the Great Depression wore on, people always thought recovery was just around the corner. Well, when I have a headache I keep vacillating between thinking it will never end and thinking it is about to end. This was probably the attitude of people who were really suffering. But of course we now know that it was not about to end. Even establishment histories say it did not end until 1933. Dissident free-market historians’ views vary. My own is that it ended when World War II ended and the government finally let go or at least lightened up.
In 1931, Europe was particularly hard hit thanks to inflation and tariffs (54). Many European countries went off the gold standard because they were broke, and this affected the U.S. as many feared the U.S. would go off the gold standard, such as it was (55). The Federal Reserve inflated, but wages and prices still dropped.
Meanwhile, government expenditures rose (56). Dr. Rothbard calls these “depredations,” which I had to look up in the dictionary. A “depredation” is a plundering. Very appropriate as the government does plunder the people, especially when they are already down and out. This was one burden the people did not need, and we do not need it now, either. President Obama is sending new troops to Afghanistan, their numbers being greater than the small city I grew up in. President Hoover amassed the largest deficit to date at that time, just as President Bush did during his administration. Laissez-faire either one of them? Not in the minds of anyone who has actually lived on the planet Earth.
These expenditures were in transfer payments, public works and aid to cities and states, not unlike today’s, only at least at that time we were not at war (yet) (57). We need to remember that expenditures towards public works, which may or may not be what the marketplace (that’s you and I!) wants or can afford, crowd out expenditures in the private sector, which are what the marketplace wants (58).
Meanwhile, there was a futile attempt to keep wages steady as prices went down. The idea was that if wages were high there would be more consumption and consumption spurs production, alleviating the depression. Actually is donkey backwards! The two reasons, both of which Dr. Rothbard has already driven home, are that wages held artificially high cause unemployment and that employers have to make money or close their doors laying off everybody.
The cost of production does not determine a product’s selling price. The selling price is determined by what people are willing to pay. Therefore, production costs have to be brought down lower than the selling price, and if they cannot be, production ends. If selling prices go down, then the costs of production, including labor which is the greatest single cost of production, must also go down (59).
Well, I guess nobody is a complete socialist, not even Herbert Hoover. When it came to relief (welfare), he opposed it on the grounds that this belonged to private charity. Unfortunately, he later caved. (Of course. Oh, well.) People were generous then as they are now. In those days there was enough spirit of independence still alive that when a relief bill was introduced in Congress, charitable organizations such as the Red Cross fiercely opposed it (60). Would that they would today! But today, such charities work hand in hand with government, and I personally do my own giving to churches and charities that stay independent.
Despite that, aid to farmers was ongoing and there were relief programs at the state and local level (61).
President Herbert Hoover was so far from being a laissez-faire advocate, that the passage on P. 242 - 243 could describe today’s Obama policies, if one substituted “Obama” for “Hoover.” This just about says it all. The difference is only in the details. Banks and others were “asked” to cooperate, and if they were not going to they would be forced to by legislation (62).
Meanwhile, toward the end of 1931, socialist ideas were creeping into the business community. Why, I know not. Possibly the authoritarianism on the part of the Hoover regime played an intimidation part and/or falsehoods about need to cooperate to end the depression hoodwinked people. Just like today, when there is any sort of crisis, people whimper about the setting aside of individual rights, needs or even beliefs for the sake of the “public good.” Dissent cannot be tolerated. Really fruitcake ideas were taken seriously such as a board (a government board, I take it) to rule over each industry and even a board board to rule over the boards.
Why didn’t Hoover simply wire the Soviet Union and say, “Take us, we’re yours?” In fact, one plan was to emulate the Soviet system, complete with asinine “Five Year Plans” (63).
These people were nuts! I hope we do not degenerate to this point, but I fear we will.
It was interesting how the States (primarily) micromanaged crude oil. This may well have been the beginning of the oil problems that go on still today (64).
There was a federal deficit (obviously) just as there is today. Apparently Hoover was in Bush’s league (Bush league?) when it came to spending, but at least he gave balancing the budget more than mere lip service. He could do one or both of two things: he could cut spending and/or raise taxes. Unfortunately, he chose the latter with a vengeance (65). He yet again showed absolutely no knowledge of either economics or individual rights. This backfired, partly due to the depression itself, which of course, was caused by the government (66).
Meanwhile the States and locales were forced to cut back. Unlike the federal government, they cannot print up money (well, thank goodness!). Federal spending was down too, but a higher percentage of the GDP.
To Hoover, a reduction in spending would cause the sky to fall, while to halve the budget would have left in place all the annual government spending per person in the previous decade. But, like today’s liberals, Hoover could not conceive of a cut in spending. Establishment liberals were blunt in saying (in fact, my jaw dropped to the floor) that we had saved our way into depression, so we must spend our way out of it. They were serious! (67).
I cannot make this stuff up! Neither could Dr. Rothbard.
So, Hoover stepped up his inflationary policies (68). The public resisted by looking out for their own interests. People hoarded cash which was a smart thing to do, especially in the light of possible bank failures, and this is one of a few reasons why all his efforts did not increase the money supply and raise prices (69). A massive propaganda effort to shame people out of this hoarding was begun. The hoarding did slow down in mid-1932, but fortunately still some people were too wise to fall for the idea that individuals should sacrifice their own and their children’s interests for society as a whole.
Meanwhile, the banks were being smart and cautious too by putting a brake on lending. Hoover got after them too, over that (70).
But, if we think Herbert Hoover was a rip snorting interventionist and inflationist, some of his big-wig cronies were calling for even more extreme measures to inflate the money and “stabilize” prices (71).
Then, Hoover went after the stock market. Short-sellers and others who were simply peering into the future as entrepreneurs do are merely trying to make an honest buck. Claiming that stock prices represent “true values” (and we talked about “true values” while reviewing Man, Economy and State), he trumpeted the socialist rhetoric that investing should be done with the interests of the country’s future in mind, presumably in contrast to the buyers’ and sellers’ rational self-interest.
I have a hunch that the Soviet Union was thinking that it would take very little effort on its part to bury us.
During the 1932 presidential campaign, after the GOP was fool enough to re-nominate this anti-free-market president, he campaigned on a platform of intervention. One glaring example of campaign rhetoric was the statement loudly made that we had the “highest real wages in the world” which were due to artificially bolstering wage rate, of course, but of course he never mentioned the high unemployment rate caused at least in part by the same thing (72). This is only one example of how Hoover’s policies hurt the little guy (73). Obviously his interventionism had miserably failed and he got his just deserts on Election Day, just as Pres. Bush’s identical twin John Mc Cain did in 2008. Unfortunately, the Democratic candidate who won on essentially the same platform, Franklin D. Roosevelt, was just the same, only worse, much worse.
You can read my excoriation of how Roosevelt carried on with Hoover’s policies on this blog in my Three Enemies essay. Suffice it to say that permanent damage was done to this country, and to this day people cling to the old superstitious myths about the Hoover/Roosevelt New Deal.
The book ends with the end of the Hoover administration, but Dr. Rothbard does not pretend that the Great Depression ended in 1933 as the fables contend. It did not. It went on and on, the economy was strangled and people suffered until the end of World War II when the government finally loosened its stranglehold.
At the end of the Hoover administration the monetary system really took a turn for the worse and people started to worry about the incoming Roosevelt administration, as some of Roosevelt’s advisors were talking crazy about new policies (74). At that time administration changeovers occurred in March, and in March of 1933 the depression was at its depth (75).
Why? Was it because President Hoover had boldly gone where no man had gone before (in this country) to jettison the free market and rule the economy with an iron hand for its own good pulling it out of depression quicksand?
Had these policies worked, the depression would have ended even faster than past recessions that blew over quickly when government allowed nature to take its course via the free market.
But, these policies did not work at all, and the depression worsened.
We should learn from this. The current recession, or depression, caused by the Federal Reserve over many decades, and especially by interventions by the G.W. Bush administration, will not improve unless the Obama administration does an about face very soon.
That is not happening. We are already on the rough ride that the economists of the Ludwig von Mises and Murray Rothbard (Austrian) school have predicted.
(1) Rothbard, Murray, America’s Great Depression, Nash Publishing, Los Angeles 1972, P. 2.
(2) Ibid. P. 3.
(3) Ibid. P. 11.
(4) Ibid. P. 12.
(5) Ibid. P. 12- 13.
(6) Ibid. P. 14.
(7) Ibid. P. 17.
(8) Ibid. P. 17.
(9) Ibid. P. 18.
(10) Ibid. P. 19 - 20.
(11) Ibid. P. 21 - 22.
(12) Ibid. P. 22.
(13) Ibid. P. 26 - 27.
(14) Ibid. P. 28.
(15) Ibid. P. 30 - 31.
(16) Ibid. P. 39 - 40.
(17) Ibid. P. 42.
(18) Ibid. P. 45.
(19) Ibid. P. 49 - 50.
(20) Ibid. P. 54 - 55.
(21) Ibid. P. 55.
(22) Ibid. P. 56.
(23) Ibid. P. 58.
(24) Ibid. P. 64.
(25) Ibid. P. 81.
(26) Ibid. P. 87.
(27) Ibid. P. 89.
(28) Ibid. P. 92.
(29) Ibid. P. 95 - 96.
(30) Ibid. P. 96.
(31) Ibid. P. 112.
(32) Ibid. P. 131.
(33) Ibid. P. 132.
(34) Ibid. P. 131 - 145.
(35) Ibid. P. 135 - 137.
(36) Ibid. P. 143 - 144.
(37) Ibid. P. 148.
(38) Ibid. P. 151.
(39) Ibid. P. 153.
(40) Ibid. P. 154.
(41) Ibid. P. 158.
(42) Ibid. P. 162.
(43) Ibid. P. 169.
(44) Ibid. P. 171.
(45) Ibid. P. 178 - 181.
(46) Ibid. P. 184 - 185.
(47) Ibid. P. 188.
(48) Ibid. P. 190.
(49) Ibid. P. 194 - 211.
(50) Ibid. P. 203.
(51) Ibid. P. 212.
(52) Ibid. P. 215.
(53) Ibid. P. 221.
(54) Ibid. P. 227.
(55) Ibid. P. 228.
(56) Ibid. P. 233.
(57) Ibid. P. 234.
(58) Ibid. P. 235.
(59) Ibid. P. 238.
(60) Ibid. P. 239.
(61) Ibid. P. 240.
(62) Ibid. P. 243.
(63) Ibid. P. 245 - 251.
(64) Ibid. P. 250.
(65) Ibid. P. 253 - 254.
(66) Ibid. P. 255.
(67) Ibid. P. 257 - 258.
(68) Ibid. P. 268 - 272.
(69) Ibid. P. 270.
(71) Ibid. P. 272 - 277.
(72) Ibid. P. 282 - 283.
(73) Ibid. P. 282.
(74) Ibid. P. 285.
