Great Depression Analysis: The guest challenges popular narratives from a Wired video, arguing the 1929 crash’s lasting impact cannot be explained by lax regulation alone and highlights the Federal Reserve’s role in fueling the 1920s boom.
Banking Structure: U.S. unit banking regulations made banks fragile relative to Canada’s branch banking, amplifying localized shocks into systemic failures during the early 1930s.
Hoover Policies: Contrary to the “do nothing” myth, Hoover expanded federal spending, ran deficits, raised taxes in 1932, and pushed to keep nominal wages high, which the guest argues worsened unemployment.
Monetary Dynamics: Broad money contracted due to bank failures even as the Fed expanded the monetary base, while the 1920–21 depression featured sharper deflation yet a faster recovery, complicating simple deflation-based explanations.
Gold Standard Debate: Exiting gold offered temporary relief via devaluation but is framed as an illusory fix akin to partial default, not a sustainable solution to the Depression.
World War II and Recovery: War production is said not to improve living standards; the drop in unemployment was driven by the draft and GDP statistics were distorted by wartime price controls and massive government spending.
Overall Perspective: The guest presents an Austrian-leaning critique of Keynesian interpretations, emphasizing policy missteps over market failure and recommending works by Rothbard and Higgs for deeper analysis.
Transcript
[Music] This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to the Human Action Podcast. This episode I'm going to be going through a recent Wired video where the host was Christopher Clark who's an economist and the topic was the economics behind the Great Depression. And Jonathan Newman actually I want to give him credit. He sent me this video and said hey there's a lot of good fodder here. And indeed there is. Now I should say you don't need to be watching the video. We are going to put up some diagrams near the end and some of my responses. Um, but also you may want to tune into the video version of this because this guy Clark's beard game is just, you know, I haven't seen anything like it at least uh since Manger. So anyway, I would point you to that. Having said all that, there was a lot of stuff he said in this video uh that I I think is either misleading or, you know, leave stuff out or just flat out false. And, you know, some of it I was I was kind of surprised. Okay. So, what we're going to do is I've got one, two, three, four, five clips for you folks just to pace yourselves. So, I will try to keep these responses snappy just to provide fodder for you. You know, maybe yeah, you know, you're with the the relatives and I guess this will probably be dropping after Thanksgiving, but maybe you're still be in touch with them or maybe you still be on vacation and you can go bring this stuff up to them. It'd be good f. Okay. So, oh, before I dive into this last thing, I'm going to just give you like sort of a teaser here on some of the Austrian/ libertarian responses on some of these issues. If you want to see more, uh Murray Rothbard has a book, America's Great Depression, which is great. However, that mostly covers like the 20s and what caused the unsustainable boom that then led to the 29 crash from an Austrian perspective and then the Hoover administration's response. it doesn't really get into the New Deal. Um, I have a book in the politically incorrect guide series on the Great Depression, the New Deal, which as the name suggests does cover that stuff. Um, but also the work of Robert Hegs is really good on the claim that, oh, did World War II get us out of the depression? Right? So, at the end of this video, I will touch on some of the specific points that that Higs brought to the attention of the profession um, you know, in scholarly articles. But anyway, I just wanted to point you to further reading if you do want to um dive into this stuff more. Okay, so let's get right into it. This first clip, he is going to explain why did the Great Depression start. Bright Sherbet asks, explain it like I'm five. What caused the Great Depression between 1929 and 1933? In the late 1920s, the United States financial markets were experiencing a speculative boom. Now the real economy was growing and there were real profits to be shared on Wall Street but they started investing heavily on margins. Now what this means is that they would take out huge loans and then buy stocks with those loans and then they would set up a different company to buy stocks in that company again on huge loans. So that meant an initial investment of say $100 could turn into $1,000 worth of stock. So any rise in the stock would be a huge boom. But any speculative boom is eventually going to end. The economy hit a run-of-the-mill recession in the summer of 1929. The slowdown in economic activity led the market to peak on September 3rd. But because so many of these stocks were not held outright, but by loan, any fall in the price meant a cascading chain of everyone calling in their loans. Which meant by October we experienced a huge crash. Here's a picture of Wall Street on the corner of Wall Street and broad showing the crowds all worried about their falling fortunes. Now, despite what everyone thinks, the stock market is not the economy. Only 1 to 2% of Americans at the time held any stock. This event could have primarily just affected folks in New York and other financial markets. How did it start affecting the rest of the economy? A falling stock market means there's less wealth in the economy. Less wealth means less consumption. Businesses can't move goods. They're not able to hire people. They got to let others go. Things start cascading into the real world once we start seeing massive bank failures. You see, if a bank loses a lot of their stock, they're not going to be able to honor folks who put their deposits in. This is how a bank works. You come along, you put your money in the bank, they take it, and then they lend it out to other people. But if those loans aren't being paid back, then the bank can't pay their depositors back. Which means you as a depositor are only going to get there if you're first. And how do you get there first? You got to be the number one person in that line. If you're too far back, the banks ran out of cash and they're not going to be able to pay you back. The bank doesn't have any loans available because the people who owe them money are now going bankrupt. And so banks are starting to fail. It's not just one or two banks here and there. It's 10,000 banks that are collapsing across these years. One of the reasons is because all these banks are forced to be really small. So if you get a modest shock, they don't have the resources to ensure themselves or to draw on other regions. Surprisingly, just north of the border, Canada only had 10 banks served the entire country and they didn't experience runs. This was unique to the United States and our fractured banking system. Okay. So, the problem with blaming sort of like, oh, lacks regulation and that's there was margin lending and things like that is, and I've used this analogy before, so forgive me folks if you heard me make it, but it's kind of like there's a plane crash and then the investigators go in and they do their research and whatnot and they come back and people say, "So, why did that plane crash?" And they say, "Oh, because of gravity." Right? That's not a good explanation. Now, it's involved, right? But the point is, why is that not a good explanation? Is because gravity applies to lots of other planes that didn't crash. So, you're trying to explain what went wrong with this flight to just say gravity doesn't really work. And so likewise, when we're trying to understand why did the financial crisis that you know blew up in 1929 then lead to the worst decade of economic performance in US history both up to that point and you know has not been surpassed since then to say oh because in the 20s you know the mid to late 20s there they didn't have the SEC and they didn't have uh you know GlassSteagall in place and they didn't have all these regul regulations and limits on margin lending and stuff that we take for granted now. It was just unregulated wildcat capitalism. Okay, but that was also true in all of the earlier financial panics or depressions with a small D. All right, so if you're not aware in US economic history, there were several depressions and that was the word they used that had happened before the Great Depression. Okay. So the the question is, you know, how how come those didn't turn into what we now think of as the worst one ever. All right. So again, just to say because there was lacks regulation going into it that caused this specul speculative bubble, that really doesn't explain much. I will say what could kind of go along towards an explanation is that there was the Federal Reserve was in place during the 20s that could possibly have been fueling the speculative boom that would not have been true for earlier ones. Right? So we're trying to understand like if if the explanation is for some reason the boom in the 20s was just a lot bigger and less sustainable or you know more fundamentally unound than all prior ones. What accounted for the difference? Again, it's not that before they had really tight regulation and then Calvin Culage stripped all that away or something in the 20s. That's not what's going on. >> Okay. But again, what conceivably could make sense is to say that the central bank was now up and running. It fueled, you know, the boom during World War I and so on, right? You could say that. also um he kind of had it as a throwaway line there, but in terms of all the massive bank failures and he said because the the banks were not allowed to, you know, have largecale chains or so, I forget the exact wording he used or they they were forced to remain small, but he didn't really elaborate on that. That was government regulation, right? They had what were called um unit banking regulations. Okay. So in Canada there were just a few major banks in terms of like the companies that could have branches all over the country. And so the idea was yeah if a bunch of farmers in a certain region had taken out loans and then their crops failed and they defaulted. It's not that the whole bank went down just you know that area those loans were not performing but the bank had business had loans all over the country and so those could cushion the blow. All right. Whereas in the United States that was not the case. You did not have giant banks that had branches in all the different states. That wasn't legally allowed. And so that's what made you know if each bank now is just confined to a particular state and they can't spread that portfolio as it were geographically around the whole country. Well then yeah local problems then get exacerbated right. So that that's one of the reasons that the US banking system was so much more fragile and had thousands of bank failures in the early 30s whereas as as Clark said there Canada didn't have a similar experience with their banks. All right. But you might have just thought that was something peculiar to oh yeah capitalism run a muck in the US. No, it was because of government regulations that that's why that was the situation. All right, let's now go to the familiar claim that oh yeah, the do nothing Herbert Hoover was the reason this happened. So, here we go. A Reddit user asks, "How much did Herbert Hoover's policies contribute to the Great Depression?" President Hoover largely didn't do much, and it was somewhat against his instinct. On his path to the presidency, he served in the postworld war I reconstruction. He was a humanitarian. He was an engineer and he wanted the best for the country. His advisor, Andrew Melon, told him that recessions are healthy and necessary in an economy. They cut out the fat. If you're a business that has a bad model, a recession cleans it out so we can use our resources more effectively. After the depression, Hoover in his memoirs lambasted that previous view and completely regretted his lack of action. He complained that Melon simply wanted to liquidate labor, liquidate investment, liquidate Wall Street, liquidate everything. And clearly, you can't liquidate an entire economy. This sets up a debate. Still today, there is a split between economists on how much should the government get involved in a depression. But Hoover wasn't entirely actionless. He brought in folks from industry and he pled with them to keep wages high. There are some economists who think that this effort to keep wages at a high level prevented the economy from self-correcting that it encouraged monopoly practices and that distorted the market slowing it down even further. >> Okay. So again, in general to say why did the Great Depression happen when it did and the answer being oh because Herbert Hoover sat back and did nothing like maybe he meant well but geez he just had this these qualms you know oh this whole constitution's tied in my hands what can I do that doesn't really work because prior US presidents during their associated financial panics or depressions with the small They also didn't implement a new deal. They didn't have fireside chats and whatnot and all the things that we think FDR did that finally somebody gets in there and rolls the sleeves up and take care of this problem that that was also lacking during prior administrations. So to explain what was it that made the great depression great in the bad sense it doesn't really work to say oh because the US federal government didn't do much to try to fight it. Okay. Beyond that though, we can say a lot more. And and this is the this was the clip where I was really surprised that I I think, you know, uh Chris Clark here, he didn't merely leave certain things out or say something, you know, without telling the full story or whatever. But here, I think what he said was actively misleading. Okay? Now, I'm not I'm not accusing him of deliberate deception, but I'm just let me just show you what I'm talking about. So from his commentary there, you would have thought that Herbert Hoover in his memoirs was saying, "Ah, yeah, you know, when when that when the stock market crashed, Secretary of the Treasury Melon came to us in the cabinet meeting and he said, "Hey, we should just liquidate everything." And that's the, you know, that's the medicine for the economy right now. I know it's going to be painful for some, but we just got to hit rock bottom. And yeah, and I went along with it. But, you know, now looking back years later, I wish I had pushed back more. I I wish we I wish we had intervened and tried to done, you know, had the federal government do something to help people back that. Right. That's what you would have thought. And no, that's not at all. It's it's a not what Hoover said in his memoirs, and I'm going to read it to you in a second, and b objectively Hoover didn't quote do nothing. Okay, so here, let me just first establish the point of what did he write in his memoirs. So in the part and people cite this a lot to try to blame the Hoover administration for you know being this right-wing Republican do nothing uh regime as opposed to you know the interventionist activist FDR who wanted to go in there and use the power of the government to help the poor people. So Hoover in his memoirs, you know, years later writing about this period says after the stock market crash, this is what he says. Two schools of thought quickly developed within our administration discussions. First was the leave it alone liquidationists headed by my secretary of the treasury Melon who felt the government must keep its hands off the economy and let the slump liquidate itself. Okay. Now, people often stop the quotations there, but then Hoover goes on to say, "But other members of the administration also having economic responsibilities under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont, and Secretary of Agriculture Hyde believed with me that we should use the powers of government to cushion the situation." Okay. So this famous smoking gun that people point to from Hoover's memoirs in which they say ah Hoover's, you know, Secretary of the Treasury Melon advocated liquidate stocks, liquidate labor, liquidate real estate, da da da, and that's they were just going to let the economy find its rock bottom and that's a terrible strategy. The only reason we even know that that was what Melon said is because Hoover was paraphrasing that in his memoirs and said we didn't listen to him. Others in my there were two schools of thought. Some people agreed with what Melon was saying. Other people said no, we should use the power of government to help including me and that's what we did. Okay. So it's it's incredible to me because and I'm not just mad at this Clark guy like Brad Delong has said this before and I went after him at the time. I mean, so this this comes up a lot where people accuse Hoover of heeding the advice and following this strategy of liquidationism when again the only way reason we even know about that is because Hoover was throwing Melon under the bus to say people blame me for the Great Depression, but I mean look at we did everything we could. We didn't listen to this nut job Andrew Melon. Okay, so that that's where that stands. And then you could say, okay, maybe Hoover later, you know, since it didn't work out was trying to cover his butt. And no, they were not. The the Hoover administration was the most interventionist into the economy during peace time in US history up to that point. So, it's true when FDR comes in after him, they did more, but it's not that they did things that were qualitatively different. They just turned up the dial. All right? And in fact, one of FDR's chief lieutenants of the New Deal later on in the 30s, I'm I'm paraphrasing, but this is close to the quote, said something like, "Yeah, we never would have admitted it at the time, but much of what we did during the New Deal simply elaborated upon what Hoover did in his administration." Okay, so there was all kinds of public spending. Again, it was not just the quantity, but also the quality, like the types of things the federal government did under the Hoover administration was unprecedented, right? In terms of just absolute levels, we can flash up a shot here. So, what this is showing is federal spending broken down by fiscal year in billions of dollars. And so, you can see um from 28 to 29, that fiscal year it was about three billion. And then it goes up a little bit the next year. And then it goes up even more to about 3 and a half. I'm just eyeballing the chart here in 3031. And then in the, you know, 31 to 32 fiscal year, it's about eyeballing about 4.8 billion. Okay. So this is a large percentage increase in total federal spending going into the depths of the Great Depression while the money supply is contracting by a third. Okay. So in real terms, inflationadjusted terms because prices are falling, this is an even bigger increase in federal spending. And then also if you want to say, well, what about, you know, were they weren't they were they willing to borrow money in deficit spend? Yeah, they went in the beginning there was a slight surplus and then you could see in the 3031 that flipped to a deficit and then in the 3132 fiscal year the federal deficit was 4% of GDP. Okay, so it got bigger under FDR, but again, this idea that Hoover sat back and did nothing and was just trying to balance the budget is not correct. Okay. Also, Clark there, he mentioned the issue of um Hoover trying to prop up wage rates, but he didn't really nail down exactly why that was so destructive. So here um Richard Veter um and Galloway have have done great empirical work on this but among other things what happened is after the 29 crash Herbert Hoover calls in like the big leaders from big business and labor unions and says look at what I absolutely do not want you to do in response to this financial crisis now is to start cutting wage rates, right? Because I, you know, Hoover had this theory based on his study of past economic depressions with a small D that he thought the problem was, oh, when there's a financial shock, you know, the households clam up, they try to say, you know, they try to cut out superfluous spending, they want to save more. That makes sense. It's rational for an individual household. The businesses likewise, they try to really tighten their belts and they try to, you know, negotiate uh wage reductions with their workforce and say, "Hey, times are tough right now, so we, you know, we got to cut your pay." And then the problem is there's this downward spiral that prices, you know, because this is back in the day when, you know, during a boom, prices would rise, but then during a bust, prices would actually fall perhaps significantly, right? In our times, we don't usually see that. We like we're used to just prices are always going up. It was just a question of are they going to go up a lot or a little bit. But back then it was like during a boom prices went up and then during a bust prices went down because with the on the hard gold standard um you know things were the purchasing power of money was constant over long stretches. Okay. And so Hoover thought, "Oh, we got to break out of this cycle because the problem is when the businesses cut workers pay thinking they're being pro, you know, smart and trying to just stay lean and mean, now the workers don't have as much money in their pockets, so they can't spend as much on products and services. And so now the business's revenue goes down again. And what do they do? Oh, they cut wages again because, hey, sales have fallen off." And so Hoover thought it was this downward spiral, this race to the bottom. And he said, "Let's just nip that in the bud." And so again, he called in all the big business leaders and labor unions and said, "I want you to keep money wage rates constant. Do not cut them because we'll just we'll, you know, as long as the workers have enough purchasing power to buy the products, it'll, you know, prop up employment." That's what he so he was just wrong. That was a faulty economic theory, but that's what he believed and that's what he told them. And they used the power of the government. It wasn't just, you know, him asking pretty please. They used various government policies to try to incentivize them to heed that. So whatever methods, carrots and sticks they used empirically, it is undeniable that wages were quote stickier in 1930 than they had been in earlier periods of US history. So in particular the 1920 and21 depression and I'll put a link in the show notes page folks to that where I I have an article called the the depression you've never heard of and I show by various metrics in 1920 and 21 there was a depression and there like CPI fell faster in a 12-month period there than any 12-month stretch during the great depression. Okay. Okay. So, the idea that, oh, the problem with the Great Depression was deflation. Well, no. Deflation was worse in terms of, you know, the one-year drop back in the 2021 depression. And that didn't lead to the 20s being awful. It was the roaring 20s. All right. The Fed was much tighter. The Fed raised rates to record highs in 2021. They cut rates to record lows between 29 and 33. Okay. So the you know the Fed by other metrics the Fed contracted in 2021. The Fed expanded in 29 to 33. What I'm saying might surprise you because geez I thought the Fed was really tight and no that that's not what happened. I I'll talk about that. I'll just go ahead and elaborate on that right now. Clark does come to it but it's really not worth playing. But what happened is yes there were a bunch of bank failures in the early late you know 29 through 33 and so the money supply broadly construed shrank that's true because of the fraction reserve banking system right if people are pulling their money out of the banks like if if a $100 in cash in the vault is supporting $400 in total checking account balances by members of the community and then someone takes the hundred out in cash cuz they want it because they're afraid that the bank's going to fail. Well, now the bank has to call in those loans and whatnot. So, there's a sense in which $300 gets destroyed if you think of it like that. Okay? So, while that was going on, the Fed was expanding the monetary base. There were more $100 bills if you want to think of it that way. But the point is the Fed didn't inflate enough to fully offset the contraction to the broad money supply that was happening in the private banks. Okay? So that's partly what was going on there. All right. So the Fed was not adopting a tight money policy. It's just they did not open the monetary spigots enough to fully offset what was happening because people were panicked and pulling their money out of the banks. All right. But my point being under various metrics, the things that people say were the explanation for why the 29 stock market crash ended up spawning the Great Depression, this decade of despair economically. A lot of those bullet points were worse in the 2021 depression. And yet the US hit rock bottom real fast and then had a robust recovery that we call the roaring 20s. Okay. So, I want to say for a lot of those things and again the reason back then the government didn't do all the stuff that like the Hoover administration did, right? So, just to finish that train of thought. So, what's happening just as prices in general are falling rapidly, right? Because the overall quantity of money is shrinking is right when the Hoover administration is propping up money wage rates, right? So like the number of dollars per hour that workers are getting paid doesn't shrink, doesn't fall. Wages all of a sudden become quote sticky. And so that's a recipe for disaster. Right? He workers every year in the early 30s kept getting more and more expensive in real terms and inflation adjusted terms because the the goods and services they were helping create the amount that their employers could sell them for in the marketplace kept falling and yet they were supposed to keep paying the workers the same hourly amount measured in dollars. So that meant the workers kept getting more and more expensive. So, as the economy is shrinking and workers are getting more and more expensive, what are you going to do as an employer? You're going to hire fewer workers. You're going to let people go. And so, that's why unemployment went up to 25%. By 32. Okay. So, again, Clark, you know, alluded to that a little bit, but he didn't really spell out just how disastrous that was. So, again, the issue was not, oh, Hoover Hoover just sat back and did nothing. If only he had. But no, he did a lot. Okay. Also, it is true that he they tried, you know, having larger, you know, increased government spending and they let the deficit grow, but then they got nervous and thought, okay, we we got to re the deficit. And they had massive tax hikes in 1932, like massive tax hikes. And so, yes, that doesn't help the economy when it's on the ropes also. But for me, you know, that the lesson there is not, oh, they weren't engaged in Keynesian pump priming. That's counteryclical to raise. The explanation is, yeah, when the economy is in freef fall, the last thing you want to do is impose massive tax hikes. That's not embarrassing for the Austrian to admit that Herbert Hoover did that and that helped contribute to the awful economy. Okay, here's a little bit on the role of the gold standard. iHeart Alpacas asks, "What role did being on the gold standard play during the Great Depression?" Everything. Monetary policy is one of the primary tools we have to help recessions and Hoover and initially FDR did not want to get off the gold standard. The gold standard at the time said one ounce of gold could be purchased for $20 and that price could not fluctuate. And the way to maintain that is to have a certain quantity of gold on hand. So if the value of the gold changed then the central bank can buy and sell gold to maintain that dollar peg. But the problem is this is going to tie your hands to respond to an economic crisis. Nobel Prize economist Milton Friedman and his co-author Anna Schwarz published this book, The Monetary History of the United States, and it was monumental. It argued that the Great Depression was largely the fault of the central bank, in part trying to hold on to that gold standard. The total demand in the United States economy was collapsing. Prices were falling. This meant that businesses couldn't pay back their loans, which meant you saw more and more bank collapses, which in turn would put more businesses out of line and decline more and more wealth. If you allow the currency to change, if you get off the gold standard, in other words, you allow the central bank to print money, that's going to increase the amount of cash in the economy. That's going to make it so the banks can stay open. That's going to allow the economy to start growing again. This is such a big deal that as we see when each country got off the gold standard, their depression stopped and growth returned. The first to do this was Scandinavia way back in 30 and 31. And then Great Britain did it in 1931. The United States and Germany, we did it in 1933. And then finally, France waited all the way to 37 before their economy started recovering. Okay, again just being a broken record here going back to right after the formation, you know, the the constitution comes in of the new republic in its current version, the coinage act of 1792 define the US dollar as certain amount in terms of grains of gold and silver. Okay. So to say why did the 29 stock market crash then have follow was followed by a wave of bank failures and then we had the worst decade in economic history for the for the US and you know the globe. Why? Oh because the gold standard that doesn't make any sense. The gold standard had been in operation for centuries. Okay I'll I'll give you a little bit of more of a hint. all the belligerent except the US totally went off the gold standard in World War I and printed up a bunch of currency and then they came back through half-hearted measures during the 20s because they didn't want to bite the bullet and just allow the massive deflation that would be necessary to go back to pre-war parody and they didn't want to suffer the embarrassment of just revaluing their currency and say, "Yeah, we printed up a bunch in that horrible war and so let's just acknowledge reality and and tie our currency back to gold." but now at a more reasonable rate because we've printed so much. They didn't want to do that either. And yes, that half-hearted attempt to return to a pseudo gold standard in the 20s didn't work. And eventually they threw in the towel, you know, one country after another through the 30s. And yes, that quote helped, but again, it it it was illusory. Okay. And notice too, like he was saying when some of the countries went off, like those are happening except for France, all on the early early 30s. Oh, so is that why the history books all say the Great Depression ended in 1933 for every country except France? No, that's not what the history books say. So again, this idea that, oh, all they had to do was abandon gold and then everything was fixed, that's obviously not true. And so, yes, again, as an Austrian, I it doesn't embarrass me. I don't have to say make excuses for the fact that if central banks print a bunch of money that can give a temporary period of illusory prosperity or if you're starting already in the midst of an awful economy, printing a bunch of money might fool people into thinking a recovery is underway but it's not sustainable. You're literally just pinging papering over the problems. And that's why Yeah. It didn't get us out of the depression, did it? Okay. So, um, you know, I've used this analogy before, but if I owe people a bunch of money, and then I say, you know what, the problem is this peg to the dollar. Like, I owe all these creditors $100,000, the problem is this fixed definition of what a dollar is. If I could just print up Murphy notes that have a value of only 50 cents to the dollar, that would ease my debt burden. That would really raise my standard. Wow. I would experience a recovery. I would I would really prefer that rather than have to chafe under this fixed definition of a full body dollar in terms of my debts. Yeah. So if if the US is just allowed to say, "Yeah, you know how we owe a bunch of dollars to people when it was defined as uh an ounce of gold was $20.67 an What if instead we could just redefine it and say now it's $35 an ounce for gold?" Then wouldn't that make things easier? Well, yeah, but that's because you're doing a partial default. All right. Okay. And then the last myth, of course, has to do with World War II. So, let's go ahead and play that. Breath 1100 asks, "Was World War II really? What ended the Great Depression?" The economics of war is war is bad. War is bad for your economy. The reason the US did so well in World War II is basically because the fighting didn't happen here. But you look at Europe and they collapsed. They had two giant civil wars during the first half of the 20th century. Not good for their economy. It's a whole lot better to build houses, to build businesses than it is to build weapons and bombs. On the other hand, World War II gave a reason for the government to increase their spending at levels that they hadn't seen ever in the history of the country. And they did this through deficit spending. That means through borrowing. This is a relatively new idea under Hoover and under FDR. They originally wanted to balance the budget. John Maynard Kanes was an economist back in England and he is the most influential economist in the 1920s. The modern study of macroeconomics basically can get its start looking at this guy. When he published his book, his general theory in 1936 and from his writings that he had been doing in the years previous, he said during a recession, the government needs to step in and be the spender of last resort. In his world, it didn't matter what you spent on, anything is better than nothing. This position has largely been dominant in the years since. Every time the economy experiences a recession, the government is going to increase its deficit spending. During COVID, we spent $5 trillion to make sure that folks were taken care of, and they were. The amount of economic suffering we had in the 2020 recession was a fraction of what we saw just previously. Studying macroeconomics and learning how to prevent catastrophes like recessions and massive depressions is one of the most important things we can do. We want to prevent economic suffering. We want to encourage prosperity for everyone. >> Okay. So, I was actually pleasantly surprised by Clark's response there that he did stress the truisms that diverting your resources away from making cars and radios and nylon stockings and houses and into making battleships and munitions and things like that. Is primmaaccia not good for your standard of living? Like, if you need to do it to save off a military disaster, okay, fair enough. But the idea is you're actually not making your people richer in material terms by engaging in war production, right? That's at best a necessary evil. Okay. So, I'm glad. And then also even more so to engage in massive war and to blow other people and have your workers going overseas and getting slaughtered. That's certainly not good for your economy that was already on the ropes in terms of the Great Depression. So the idea that oh could the outbreak of a world war fix what was ailing all the economies of the world that no primmaasia that's nuts that that's not right okay but he didn't really get into some of the revisionist work that um again Robert Higs has done some pioneering efforts on this on this genre. So let me just mention a few points he's made. So, one thing is Hegs pointed out that the like you can look at the official unemployment rate and then just see how oh yeah, it's still it bounced up and down. You know, it wasn't as ever as high as 25% as it was in the depths under Herbert Hoover, but it still kept bouncing up into the double digits during the New Deal, right? So, it was clear that the New Deal and also clear that devaluing the dollar visav gold didn't solve the problem. Um, and then you only see unemployment come way down in terms of the official statistics once the US goes into the war effort, right? But Higs points out that I mean, just just think about it. You've got a bunch of unemployed people and then when the war breaks out, they start drafting men, taking them and sending them overseas. So even if it were one for one, it's not obvious that you're really solving the problem by doing that, right? But the thing is it wasn't even one for one, right? In other words, HEGs just shows the numbers and that the reduction in the amount of unemployed men, you know, going from 38 to 42 or whatever, it the expansion of the men in the armed forces was bigger than the drop in the number of unemployed. Okay? So, it wasn't even a one for one swap. So just in terms of like that that's a very costly way to quote solve the unemployment problem. All right. Um beyond that even using the official statistics we'll go ahead and flash this up that yeah you can see that real GDP according to the official data series that the government maintains you know it shrank significantly in the early 30s and then it recovered up and then it came down a little bit you know the 37 38 double dip but then it really just zooms up in the early to mid-40s with, you know, the US getting into the war. But part of the problem here is real GDP just naively includes government spending. And so if you disagregate the data, which we've done here, right, where the green now is showing the government share of GDP and the blue is the private sector share. And these are the official numbers, right? This isn't me using a Rothbardian metric or something. This is the government's own figures. You can see that in the depths of World War II, the total amount of real GDP in the private sector was lower than it had been in the worst depths of the Great Depression under Hoover. And this is, you know, more than a decade later and the population's bigger, right? So per capita real GDP is way lower at this point. Okay? So there so there's that element. So again, I'm showing it's it's not that oh yeah, the the depression was bad and it kept lingering and then the war finally just jumpst started the economy and then you know we had prosperity again that no on the home front the privation in 43 44 was even worse than it had been in 32 in terms of the amount of real goods and services getting distributed to people in the private sector. Okay. Again, according to the government's own statistics, and there's one more element to all this that Higs pointed out because you could say, well, well, yeah, but still, you I mean, because yeah, they had to pivot away from making cars, so they had to make battleships and aircraft carriers and tanks and bullets and d and, you know, combat boots and whatnot. And so that took real resources or whatever, but people were fully employed. And yes, they they knew they had to go without and they had to skip meat and stuff like that. and the women had to just let their stockings get holes in them and things. But there was a war on, you know, there's this common unity and people understood, okay, but beyond that element in terms of like the distribution and like the war machine gobbling up all the resources and not leaving and leaving only crumbs for the private sector. Besides that, there's another um fraud going on with these official GDP statistics. So, in principle, these things are real GDP. They account for inflation. But as Higs pointed out in his work, what happened when the US government, you know, fully goes into the war effort, they run up massive budget deficits and the Federal Reserve was instructed to monetize those deficits, right? So the Federal Reserve printed money in order to buy government bonds because if the government just went to the private sector without being aided by the central bank, right? If the total quantity of of base US dollars just stayed the same or you know was normal and you wouldn't have realized from looking at the Fed's data that there was a war going on then the amount of money that the US federal government spent on the war effort they couldn't have raised it just from taxes and they couldn't have even raised it by turning to the bond markets and floating more treasuries without the Fed coming in in assisting. Okay. Or another way you could put it is the Fed ran the printing press to keep interest rates from spiking too much given how much the federal government wanted to borrow. Okay. So normally if the Fed is just going to open up the monetary spiggots to assist with government deficit spending, you would see prices rise, right? And so then if you're looking at the ostensibly real GDP statistics, what are you supposed to do? You you look at nominal GDP, right? what's total spending on finished final goods and services just measured purely in monetary terms. But hey, if like if that doubles like let's let's just say the the Fed doubles the money supply and just assume naively all prices double. Okay, so spending patterns remain the same, nominal GDP would double. But when you say what happened to real GDP, you would say, oh, we'll look at a basket of consumer goods and we'll see what happened. And so like I said, if everything just simplistically assumed doubled, then the basket of that those consumer goods would also double. And so when you go to calculate real GDP, you'd say, "Oh, nominal expenditures doubled." Uh, but the relevant price level also doubled. And so real GDP remained unchanged. Okay? So that's the way you would do it. So that kind of makes sense, right? that the Fed just printing money per se, you know, shouldn't all of a sudden goose the statistics and make it look like real output went up. Okay? But in the World War II period here, what happened? The Fed opened up the monetary spigotss that helped the federal government spend boatloads of more extra money and that would have pushed up prices. But guess what? They imposed wage and price controls. it was illegal for merchants to raise prices in accordance with the new laws of supply and demand and what the market would bear. And so the point is these real GDP series are bogus because they're showing the increase in nominal expenditures aided and embedded by the Fed creating new base money in this period, but they don't allow the natural market reaction of the prices shooting up to offset that when you go to calculate the real version of the statistics. And in when I read this argument from Higs, I emailed him and I said, "Hang on. Are you saying that they did adjust for the, you know, the wage and price controls, but you don't think they adjusted properly, like they underestimated that effect, or are you saying they didn't adjust for that whatsoever?" And he answered and said, "They didn't adjust for that whatsoever." All right. So, another way of seeing it is there were lots of shortages during this period, right? and they had ration cards and you know this kind of stuff. And so there were other ways that the monetary inflation impaired consumer satisfaction that were not reflected just with skyrocketing prices on the stickers. Okay. But that was all swept under the rug in terms of these official statistics because the government just said, "No, it's illegal. you can't raise prices and wages or you know there were strict limits on how rapidly they could rise. Okay. So again, when people say, "Oh, World War II solved the depression because it finally gave the government the uh ability to deficit spend the way Canes would have wanted." That no, that that is not at all that, you know, the data don't show that. And you can think it through. If it sounds crazy to you, how could letting the government channel real resources into very destructive things, how does that make us richer? It doesn't. Okay. And the various data sets that ostensibly show otherwise there are serious problems with as Robert Higgs has demonstrated better than anybody else. Okay. Well, that's a good spot to wrap up. Thanks everybody for your attention. Again, check out Rothbart's America's Great Depression, my book, The Politically Incorrect Guide to the Great Depression: New Deal in Robert Higs's like he's got a lot of this in his Crisis and Leviathan, and he's also got other books if you just browse his catalog um things about, you know, on the Great Depression and War and such. So, it's all his good stuff is in there. Okay, see you next time, folks. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on nieces.org. [Music] [Applause] [Music] [Applause] [Music] [Applause]
The Great Depression: An Austrian Reply to WIRED
Summary
Transcript
[Music] This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to the Human Action Podcast. This episode I'm going to be going through a recent Wired video where the host was Christopher Clark who's an economist and the topic was the economics behind the Great Depression. And Jonathan Newman actually I want to give him credit. He sent me this video and said hey there's a lot of good fodder here. And indeed there is. Now I should say you don't need to be watching the video. We are going to put up some diagrams near the end and some of my responses. Um, but also you may want to tune into the video version of this because this guy Clark's beard game is just, you know, I haven't seen anything like it at least uh since Manger. So anyway, I would point you to that. Having said all that, there was a lot of stuff he said in this video uh that I I think is either misleading or, you know, leave stuff out or just flat out false. And, you know, some of it I was I was kind of surprised. Okay. So, what we're going to do is I've got one, two, three, four, five clips for you folks just to pace yourselves. So, I will try to keep these responses snappy just to provide fodder for you. You know, maybe yeah, you know, you're with the the relatives and I guess this will probably be dropping after Thanksgiving, but maybe you're still be in touch with them or maybe you still be on vacation and you can go bring this stuff up to them. It'd be good f. Okay. So, oh, before I dive into this last thing, I'm going to just give you like sort of a teaser here on some of the Austrian/ libertarian responses on some of these issues. If you want to see more, uh Murray Rothbard has a book, America's Great Depression, which is great. However, that mostly covers like the 20s and what caused the unsustainable boom that then led to the 29 crash from an Austrian perspective and then the Hoover administration's response. it doesn't really get into the New Deal. Um, I have a book in the politically incorrect guide series on the Great Depression, the New Deal, which as the name suggests does cover that stuff. Um, but also the work of Robert Hegs is really good on the claim that, oh, did World War II get us out of the depression? Right? So, at the end of this video, I will touch on some of the specific points that that Higs brought to the attention of the profession um, you know, in scholarly articles. But anyway, I just wanted to point you to further reading if you do want to um dive into this stuff more. Okay, so let's get right into it. This first clip, he is going to explain why did the Great Depression start. Bright Sherbet asks, explain it like I'm five. What caused the Great Depression between 1929 and 1933? In the late 1920s, the United States financial markets were experiencing a speculative boom. Now the real economy was growing and there were real profits to be shared on Wall Street but they started investing heavily on margins. Now what this means is that they would take out huge loans and then buy stocks with those loans and then they would set up a different company to buy stocks in that company again on huge loans. So that meant an initial investment of say $100 could turn into $1,000 worth of stock. So any rise in the stock would be a huge boom. But any speculative boom is eventually going to end. The economy hit a run-of-the-mill recession in the summer of 1929. The slowdown in economic activity led the market to peak on September 3rd. But because so many of these stocks were not held outright, but by loan, any fall in the price meant a cascading chain of everyone calling in their loans. Which meant by October we experienced a huge crash. Here's a picture of Wall Street on the corner of Wall Street and broad showing the crowds all worried about their falling fortunes. Now, despite what everyone thinks, the stock market is not the economy. Only 1 to 2% of Americans at the time held any stock. This event could have primarily just affected folks in New York and other financial markets. How did it start affecting the rest of the economy? A falling stock market means there's less wealth in the economy. Less wealth means less consumption. Businesses can't move goods. They're not able to hire people. They got to let others go. Things start cascading into the real world once we start seeing massive bank failures. You see, if a bank loses a lot of their stock, they're not going to be able to honor folks who put their deposits in. This is how a bank works. You come along, you put your money in the bank, they take it, and then they lend it out to other people. But if those loans aren't being paid back, then the bank can't pay their depositors back. Which means you as a depositor are only going to get there if you're first. And how do you get there first? You got to be the number one person in that line. If you're too far back, the banks ran out of cash and they're not going to be able to pay you back. The bank doesn't have any loans available because the people who owe them money are now going bankrupt. And so banks are starting to fail. It's not just one or two banks here and there. It's 10,000 banks that are collapsing across these years. One of the reasons is because all these banks are forced to be really small. So if you get a modest shock, they don't have the resources to ensure themselves or to draw on other regions. Surprisingly, just north of the border, Canada only had 10 banks served the entire country and they didn't experience runs. This was unique to the United States and our fractured banking system. Okay. So, the problem with blaming sort of like, oh, lacks regulation and that's there was margin lending and things like that is, and I've used this analogy before, so forgive me folks if you heard me make it, but it's kind of like there's a plane crash and then the investigators go in and they do their research and whatnot and they come back and people say, "So, why did that plane crash?" And they say, "Oh, because of gravity." Right? That's not a good explanation. Now, it's involved, right? But the point is, why is that not a good explanation? Is because gravity applies to lots of other planes that didn't crash. So, you're trying to explain what went wrong with this flight to just say gravity doesn't really work. And so likewise, when we're trying to understand why did the financial crisis that you know blew up in 1929 then lead to the worst decade of economic performance in US history both up to that point and you know has not been surpassed since then to say oh because in the 20s you know the mid to late 20s there they didn't have the SEC and they didn't have uh you know GlassSteagall in place and they didn't have all these regul regulations and limits on margin lending and stuff that we take for granted now. It was just unregulated wildcat capitalism. Okay, but that was also true in all of the earlier financial panics or depressions with a small D. All right, so if you're not aware in US economic history, there were several depressions and that was the word they used that had happened before the Great Depression. Okay. So the the question is, you know, how how come those didn't turn into what we now think of as the worst one ever. All right. So again, just to say because there was lacks regulation going into it that caused this specul speculative bubble, that really doesn't explain much. I will say what could kind of go along towards an explanation is that there was the Federal Reserve was in place during the 20s that could possibly have been fueling the speculative boom that would not have been true for earlier ones. Right? So we're trying to understand like if if the explanation is for some reason the boom in the 20s was just a lot bigger and less sustainable or you know more fundamentally unound than all prior ones. What accounted for the difference? Again, it's not that before they had really tight regulation and then Calvin Culage stripped all that away or something in the 20s. That's not what's going on. >> Okay. But again, what conceivably could make sense is to say that the central bank was now up and running. It fueled, you know, the boom during World War I and so on, right? You could say that. also um he kind of had it as a throwaway line there, but in terms of all the massive bank failures and he said because the the banks were not allowed to, you know, have largecale chains or so, I forget the exact wording he used or they they were forced to remain small, but he didn't really elaborate on that. That was government regulation, right? They had what were called um unit banking regulations. Okay. So in Canada there were just a few major banks in terms of like the companies that could have branches all over the country. And so the idea was yeah if a bunch of farmers in a certain region had taken out loans and then their crops failed and they defaulted. It's not that the whole bank went down just you know that area those loans were not performing but the bank had business had loans all over the country and so those could cushion the blow. All right. Whereas in the United States that was not the case. You did not have giant banks that had branches in all the different states. That wasn't legally allowed. And so that's what made you know if each bank now is just confined to a particular state and they can't spread that portfolio as it were geographically around the whole country. Well then yeah local problems then get exacerbated right. So that that's one of the reasons that the US banking system was so much more fragile and had thousands of bank failures in the early 30s whereas as as Clark said there Canada didn't have a similar experience with their banks. All right. But you might have just thought that was something peculiar to oh yeah capitalism run a muck in the US. No, it was because of government regulations that that's why that was the situation. All right, let's now go to the familiar claim that oh yeah, the do nothing Herbert Hoover was the reason this happened. So, here we go. A Reddit user asks, "How much did Herbert Hoover's policies contribute to the Great Depression?" President Hoover largely didn't do much, and it was somewhat against his instinct. On his path to the presidency, he served in the postworld war I reconstruction. He was a humanitarian. He was an engineer and he wanted the best for the country. His advisor, Andrew Melon, told him that recessions are healthy and necessary in an economy. They cut out the fat. If you're a business that has a bad model, a recession cleans it out so we can use our resources more effectively. After the depression, Hoover in his memoirs lambasted that previous view and completely regretted his lack of action. He complained that Melon simply wanted to liquidate labor, liquidate investment, liquidate Wall Street, liquidate everything. And clearly, you can't liquidate an entire economy. This sets up a debate. Still today, there is a split between economists on how much should the government get involved in a depression. But Hoover wasn't entirely actionless. He brought in folks from industry and he pled with them to keep wages high. There are some economists who think that this effort to keep wages at a high level prevented the economy from self-correcting that it encouraged monopoly practices and that distorted the market slowing it down even further. >> Okay. So again, in general to say why did the Great Depression happen when it did and the answer being oh because Herbert Hoover sat back and did nothing like maybe he meant well but geez he just had this these qualms you know oh this whole constitution's tied in my hands what can I do that doesn't really work because prior US presidents during their associated financial panics or depressions with the small They also didn't implement a new deal. They didn't have fireside chats and whatnot and all the things that we think FDR did that finally somebody gets in there and rolls the sleeves up and take care of this problem that that was also lacking during prior administrations. So to explain what was it that made the great depression great in the bad sense it doesn't really work to say oh because the US federal government didn't do much to try to fight it. Okay. Beyond that though, we can say a lot more. And and this is the this was the clip where I was really surprised that I I think, you know, uh Chris Clark here, he didn't merely leave certain things out or say something, you know, without telling the full story or whatever. But here, I think what he said was actively misleading. Okay? Now, I'm not I'm not accusing him of deliberate deception, but I'm just let me just show you what I'm talking about. So from his commentary there, you would have thought that Herbert Hoover in his memoirs was saying, "Ah, yeah, you know, when when that when the stock market crashed, Secretary of the Treasury Melon came to us in the cabinet meeting and he said, "Hey, we should just liquidate everything." And that's the, you know, that's the medicine for the economy right now. I know it's going to be painful for some, but we just got to hit rock bottom. And yeah, and I went along with it. But, you know, now looking back years later, I wish I had pushed back more. I I wish we I wish we had intervened and tried to done, you know, had the federal government do something to help people back that. Right. That's what you would have thought. And no, that's not at all. It's it's a not what Hoover said in his memoirs, and I'm going to read it to you in a second, and b objectively Hoover didn't quote do nothing. Okay, so here, let me just first establish the point of what did he write in his memoirs. So in the part and people cite this a lot to try to blame the Hoover administration for you know being this right-wing Republican do nothing uh regime as opposed to you know the interventionist activist FDR who wanted to go in there and use the power of the government to help the poor people. So Hoover in his memoirs, you know, years later writing about this period says after the stock market crash, this is what he says. Two schools of thought quickly developed within our administration discussions. First was the leave it alone liquidationists headed by my secretary of the treasury Melon who felt the government must keep its hands off the economy and let the slump liquidate itself. Okay. Now, people often stop the quotations there, but then Hoover goes on to say, "But other members of the administration also having economic responsibilities under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont, and Secretary of Agriculture Hyde believed with me that we should use the powers of government to cushion the situation." Okay. So this famous smoking gun that people point to from Hoover's memoirs in which they say ah Hoover's, you know, Secretary of the Treasury Melon advocated liquidate stocks, liquidate labor, liquidate real estate, da da da, and that's they were just going to let the economy find its rock bottom and that's a terrible strategy. The only reason we even know that that was what Melon said is because Hoover was paraphrasing that in his memoirs and said we didn't listen to him. Others in my there were two schools of thought. Some people agreed with what Melon was saying. Other people said no, we should use the power of government to help including me and that's what we did. Okay. So it's it's incredible to me because and I'm not just mad at this Clark guy like Brad Delong has said this before and I went after him at the time. I mean, so this this comes up a lot where people accuse Hoover of heeding the advice and following this strategy of liquidationism when again the only way reason we even know about that is because Hoover was throwing Melon under the bus to say people blame me for the Great Depression, but I mean look at we did everything we could. We didn't listen to this nut job Andrew Melon. Okay, so that that's where that stands. And then you could say, okay, maybe Hoover later, you know, since it didn't work out was trying to cover his butt. And no, they were not. The the Hoover administration was the most interventionist into the economy during peace time in US history up to that point. So, it's true when FDR comes in after him, they did more, but it's not that they did things that were qualitatively different. They just turned up the dial. All right? And in fact, one of FDR's chief lieutenants of the New Deal later on in the 30s, I'm I'm paraphrasing, but this is close to the quote, said something like, "Yeah, we never would have admitted it at the time, but much of what we did during the New Deal simply elaborated upon what Hoover did in his administration." Okay, so there was all kinds of public spending. Again, it was not just the quantity, but also the quality, like the types of things the federal government did under the Hoover administration was unprecedented, right? In terms of just absolute levels, we can flash up a shot here. So, what this is showing is federal spending broken down by fiscal year in billions of dollars. And so, you can see um from 28 to 29, that fiscal year it was about three billion. And then it goes up a little bit the next year. And then it goes up even more to about 3 and a half. I'm just eyeballing the chart here in 3031. And then in the, you know, 31 to 32 fiscal year, it's about eyeballing about 4.8 billion. Okay. So this is a large percentage increase in total federal spending going into the depths of the Great Depression while the money supply is contracting by a third. Okay. So in real terms, inflationadjusted terms because prices are falling, this is an even bigger increase in federal spending. And then also if you want to say, well, what about, you know, were they weren't they were they willing to borrow money in deficit spend? Yeah, they went in the beginning there was a slight surplus and then you could see in the 3031 that flipped to a deficit and then in the 3132 fiscal year the federal deficit was 4% of GDP. Okay, so it got bigger under FDR, but again, this idea that Hoover sat back and did nothing and was just trying to balance the budget is not correct. Okay. Also, Clark there, he mentioned the issue of um Hoover trying to prop up wage rates, but he didn't really nail down exactly why that was so destructive. So here um Richard Veter um and Galloway have have done great empirical work on this but among other things what happened is after the 29 crash Herbert Hoover calls in like the big leaders from big business and labor unions and says look at what I absolutely do not want you to do in response to this financial crisis now is to start cutting wage rates, right? Because I, you know, Hoover had this theory based on his study of past economic depressions with a small D that he thought the problem was, oh, when there's a financial shock, you know, the households clam up, they try to say, you know, they try to cut out superfluous spending, they want to save more. That makes sense. It's rational for an individual household. The businesses likewise, they try to really tighten their belts and they try to, you know, negotiate uh wage reductions with their workforce and say, "Hey, times are tough right now, so we, you know, we got to cut your pay." And then the problem is there's this downward spiral that prices, you know, because this is back in the day when, you know, during a boom, prices would rise, but then during a bust, prices would actually fall perhaps significantly, right? In our times, we don't usually see that. We like we're used to just prices are always going up. It was just a question of are they going to go up a lot or a little bit. But back then it was like during a boom prices went up and then during a bust prices went down because with the on the hard gold standard um you know things were the purchasing power of money was constant over long stretches. Okay. And so Hoover thought, "Oh, we got to break out of this cycle because the problem is when the businesses cut workers pay thinking they're being pro, you know, smart and trying to just stay lean and mean, now the workers don't have as much money in their pockets, so they can't spend as much on products and services. And so now the business's revenue goes down again. And what do they do? Oh, they cut wages again because, hey, sales have fallen off." And so Hoover thought it was this downward spiral, this race to the bottom. And he said, "Let's just nip that in the bud." And so again, he called in all the big business leaders and labor unions and said, "I want you to keep money wage rates constant. Do not cut them because we'll just we'll, you know, as long as the workers have enough purchasing power to buy the products, it'll, you know, prop up employment." That's what he so he was just wrong. That was a faulty economic theory, but that's what he believed and that's what he told them. And they used the power of the government. It wasn't just, you know, him asking pretty please. They used various government policies to try to incentivize them to heed that. So whatever methods, carrots and sticks they used empirically, it is undeniable that wages were quote stickier in 1930 than they had been in earlier periods of US history. So in particular the 1920 and21 depression and I'll put a link in the show notes page folks to that where I I have an article called the the depression you've never heard of and I show by various metrics in 1920 and 21 there was a depression and there like CPI fell faster in a 12-month period there than any 12-month stretch during the great depression. Okay. Okay. So, the idea that, oh, the problem with the Great Depression was deflation. Well, no. Deflation was worse in terms of, you know, the one-year drop back in the 2021 depression. And that didn't lead to the 20s being awful. It was the roaring 20s. All right. The Fed was much tighter. The Fed raised rates to record highs in 2021. They cut rates to record lows between 29 and 33. Okay. So the you know the Fed by other metrics the Fed contracted in 2021. The Fed expanded in 29 to 33. What I'm saying might surprise you because geez I thought the Fed was really tight and no that that's not what happened. I I'll talk about that. I'll just go ahead and elaborate on that right now. Clark does come to it but it's really not worth playing. But what happened is yes there were a bunch of bank failures in the early late you know 29 through 33 and so the money supply broadly construed shrank that's true because of the fraction reserve banking system right if people are pulling their money out of the banks like if if a $100 in cash in the vault is supporting $400 in total checking account balances by members of the community and then someone takes the hundred out in cash cuz they want it because they're afraid that the bank's going to fail. Well, now the bank has to call in those loans and whatnot. So, there's a sense in which $300 gets destroyed if you think of it like that. Okay? So, while that was going on, the Fed was expanding the monetary base. There were more $100 bills if you want to think of it that way. But the point is the Fed didn't inflate enough to fully offset the contraction to the broad money supply that was happening in the private banks. Okay? So that's partly what was going on there. All right. So the Fed was not adopting a tight money policy. It's just they did not open the monetary spigots enough to fully offset what was happening because people were panicked and pulling their money out of the banks. All right. But my point being under various metrics, the things that people say were the explanation for why the 29 stock market crash ended up spawning the Great Depression, this decade of despair economically. A lot of those bullet points were worse in the 2021 depression. And yet the US hit rock bottom real fast and then had a robust recovery that we call the roaring 20s. Okay. So, I want to say for a lot of those things and again the reason back then the government didn't do all the stuff that like the Hoover administration did, right? So, just to finish that train of thought. So, what's happening just as prices in general are falling rapidly, right? Because the overall quantity of money is shrinking is right when the Hoover administration is propping up money wage rates, right? So like the number of dollars per hour that workers are getting paid doesn't shrink, doesn't fall. Wages all of a sudden become quote sticky. And so that's a recipe for disaster. Right? He workers every year in the early 30s kept getting more and more expensive in real terms and inflation adjusted terms because the the goods and services they were helping create the amount that their employers could sell them for in the marketplace kept falling and yet they were supposed to keep paying the workers the same hourly amount measured in dollars. So that meant the workers kept getting more and more expensive. So, as the economy is shrinking and workers are getting more and more expensive, what are you going to do as an employer? You're going to hire fewer workers. You're going to let people go. And so, that's why unemployment went up to 25%. By 32. Okay. So, again, Clark, you know, alluded to that a little bit, but he didn't really spell out just how disastrous that was. So, again, the issue was not, oh, Hoover Hoover just sat back and did nothing. If only he had. But no, he did a lot. Okay. Also, it is true that he they tried, you know, having larger, you know, increased government spending and they let the deficit grow, but then they got nervous and thought, okay, we we got to re the deficit. And they had massive tax hikes in 1932, like massive tax hikes. And so, yes, that doesn't help the economy when it's on the ropes also. But for me, you know, that the lesson there is not, oh, they weren't engaged in Keynesian pump priming. That's counteryclical to raise. The explanation is, yeah, when the economy is in freef fall, the last thing you want to do is impose massive tax hikes. That's not embarrassing for the Austrian to admit that Herbert Hoover did that and that helped contribute to the awful economy. Okay, here's a little bit on the role of the gold standard. iHeart Alpacas asks, "What role did being on the gold standard play during the Great Depression?" Everything. Monetary policy is one of the primary tools we have to help recessions and Hoover and initially FDR did not want to get off the gold standard. The gold standard at the time said one ounce of gold could be purchased for $20 and that price could not fluctuate. And the way to maintain that is to have a certain quantity of gold on hand. So if the value of the gold changed then the central bank can buy and sell gold to maintain that dollar peg. But the problem is this is going to tie your hands to respond to an economic crisis. Nobel Prize economist Milton Friedman and his co-author Anna Schwarz published this book, The Monetary History of the United States, and it was monumental. It argued that the Great Depression was largely the fault of the central bank, in part trying to hold on to that gold standard. The total demand in the United States economy was collapsing. Prices were falling. This meant that businesses couldn't pay back their loans, which meant you saw more and more bank collapses, which in turn would put more businesses out of line and decline more and more wealth. If you allow the currency to change, if you get off the gold standard, in other words, you allow the central bank to print money, that's going to increase the amount of cash in the economy. That's going to make it so the banks can stay open. That's going to allow the economy to start growing again. This is such a big deal that as we see when each country got off the gold standard, their depression stopped and growth returned. The first to do this was Scandinavia way back in 30 and 31. And then Great Britain did it in 1931. The United States and Germany, we did it in 1933. And then finally, France waited all the way to 37 before their economy started recovering. Okay, again just being a broken record here going back to right after the formation, you know, the the constitution comes in of the new republic in its current version, the coinage act of 1792 define the US dollar as certain amount in terms of grains of gold and silver. Okay. So to say why did the 29 stock market crash then have follow was followed by a wave of bank failures and then we had the worst decade in economic history for the for the US and you know the globe. Why? Oh because the gold standard that doesn't make any sense. The gold standard had been in operation for centuries. Okay I'll I'll give you a little bit of more of a hint. all the belligerent except the US totally went off the gold standard in World War I and printed up a bunch of currency and then they came back through half-hearted measures during the 20s because they didn't want to bite the bullet and just allow the massive deflation that would be necessary to go back to pre-war parody and they didn't want to suffer the embarrassment of just revaluing their currency and say, "Yeah, we printed up a bunch in that horrible war and so let's just acknowledge reality and and tie our currency back to gold." but now at a more reasonable rate because we've printed so much. They didn't want to do that either. And yes, that half-hearted attempt to return to a pseudo gold standard in the 20s didn't work. And eventually they threw in the towel, you know, one country after another through the 30s. And yes, that quote helped, but again, it it it was illusory. Okay. And notice too, like he was saying when some of the countries went off, like those are happening except for France, all on the early early 30s. Oh, so is that why the history books all say the Great Depression ended in 1933 for every country except France? No, that's not what the history books say. So again, this idea that, oh, all they had to do was abandon gold and then everything was fixed, that's obviously not true. And so, yes, again, as an Austrian, I it doesn't embarrass me. I don't have to say make excuses for the fact that if central banks print a bunch of money that can give a temporary period of illusory prosperity or if you're starting already in the midst of an awful economy, printing a bunch of money might fool people into thinking a recovery is underway but it's not sustainable. You're literally just pinging papering over the problems. And that's why Yeah. It didn't get us out of the depression, did it? Okay. So, um, you know, I've used this analogy before, but if I owe people a bunch of money, and then I say, you know what, the problem is this peg to the dollar. Like, I owe all these creditors $100,000, the problem is this fixed definition of what a dollar is. If I could just print up Murphy notes that have a value of only 50 cents to the dollar, that would ease my debt burden. That would really raise my standard. Wow. I would experience a recovery. I would I would really prefer that rather than have to chafe under this fixed definition of a full body dollar in terms of my debts. Yeah. So if if the US is just allowed to say, "Yeah, you know how we owe a bunch of dollars to people when it was defined as uh an ounce of gold was $20.67 an What if instead we could just redefine it and say now it's $35 an ounce for gold?" Then wouldn't that make things easier? Well, yeah, but that's because you're doing a partial default. All right. Okay. And then the last myth, of course, has to do with World War II. So, let's go ahead and play that. Breath 1100 asks, "Was World War II really? What ended the Great Depression?" The economics of war is war is bad. War is bad for your economy. The reason the US did so well in World War II is basically because the fighting didn't happen here. But you look at Europe and they collapsed. They had two giant civil wars during the first half of the 20th century. Not good for their economy. It's a whole lot better to build houses, to build businesses than it is to build weapons and bombs. On the other hand, World War II gave a reason for the government to increase their spending at levels that they hadn't seen ever in the history of the country. And they did this through deficit spending. That means through borrowing. This is a relatively new idea under Hoover and under FDR. They originally wanted to balance the budget. John Maynard Kanes was an economist back in England and he is the most influential economist in the 1920s. The modern study of macroeconomics basically can get its start looking at this guy. When he published his book, his general theory in 1936 and from his writings that he had been doing in the years previous, he said during a recession, the government needs to step in and be the spender of last resort. In his world, it didn't matter what you spent on, anything is better than nothing. This position has largely been dominant in the years since. Every time the economy experiences a recession, the government is going to increase its deficit spending. During COVID, we spent $5 trillion to make sure that folks were taken care of, and they were. The amount of economic suffering we had in the 2020 recession was a fraction of what we saw just previously. Studying macroeconomics and learning how to prevent catastrophes like recessions and massive depressions is one of the most important things we can do. We want to prevent economic suffering. We want to encourage prosperity for everyone. >> Okay. So, I was actually pleasantly surprised by Clark's response there that he did stress the truisms that diverting your resources away from making cars and radios and nylon stockings and houses and into making battleships and munitions and things like that. Is primmaaccia not good for your standard of living? Like, if you need to do it to save off a military disaster, okay, fair enough. But the idea is you're actually not making your people richer in material terms by engaging in war production, right? That's at best a necessary evil. Okay. So, I'm glad. And then also even more so to engage in massive war and to blow other people and have your workers going overseas and getting slaughtered. That's certainly not good for your economy that was already on the ropes in terms of the Great Depression. So the idea that oh could the outbreak of a world war fix what was ailing all the economies of the world that no primmaasia that's nuts that that's not right okay but he didn't really get into some of the revisionist work that um again Robert Higs has done some pioneering efforts on this on this genre. So let me just mention a few points he's made. So, one thing is Hegs pointed out that the like you can look at the official unemployment rate and then just see how oh yeah, it's still it bounced up and down. You know, it wasn't as ever as high as 25% as it was in the depths under Herbert Hoover, but it still kept bouncing up into the double digits during the New Deal, right? So, it was clear that the New Deal and also clear that devaluing the dollar visav gold didn't solve the problem. Um, and then you only see unemployment come way down in terms of the official statistics once the US goes into the war effort, right? But Higs points out that I mean, just just think about it. You've got a bunch of unemployed people and then when the war breaks out, they start drafting men, taking them and sending them overseas. So even if it were one for one, it's not obvious that you're really solving the problem by doing that, right? But the thing is it wasn't even one for one, right? In other words, HEGs just shows the numbers and that the reduction in the amount of unemployed men, you know, going from 38 to 42 or whatever, it the expansion of the men in the armed forces was bigger than the drop in the number of unemployed. Okay? So, it wasn't even a one for one swap. So just in terms of like that that's a very costly way to quote solve the unemployment problem. All right. Um beyond that even using the official statistics we'll go ahead and flash this up that yeah you can see that real GDP according to the official data series that the government maintains you know it shrank significantly in the early 30s and then it recovered up and then it came down a little bit you know the 37 38 double dip but then it really just zooms up in the early to mid-40s with, you know, the US getting into the war. But part of the problem here is real GDP just naively includes government spending. And so if you disagregate the data, which we've done here, right, where the green now is showing the government share of GDP and the blue is the private sector share. And these are the official numbers, right? This isn't me using a Rothbardian metric or something. This is the government's own figures. You can see that in the depths of World War II, the total amount of real GDP in the private sector was lower than it had been in the worst depths of the Great Depression under Hoover. And this is, you know, more than a decade later and the population's bigger, right? So per capita real GDP is way lower at this point. Okay? So there so there's that element. So again, I'm showing it's it's not that oh yeah, the the depression was bad and it kept lingering and then the war finally just jumpst started the economy and then you know we had prosperity again that no on the home front the privation in 43 44 was even worse than it had been in 32 in terms of the amount of real goods and services getting distributed to people in the private sector. Okay. Again, according to the government's own statistics, and there's one more element to all this that Higs pointed out because you could say, well, well, yeah, but still, you I mean, because yeah, they had to pivot away from making cars, so they had to make battleships and aircraft carriers and tanks and bullets and d and, you know, combat boots and whatnot. And so that took real resources or whatever, but people were fully employed. And yes, they they knew they had to go without and they had to skip meat and stuff like that. and the women had to just let their stockings get holes in them and things. But there was a war on, you know, there's this common unity and people understood, okay, but beyond that element in terms of like the distribution and like the war machine gobbling up all the resources and not leaving and leaving only crumbs for the private sector. Besides that, there's another um fraud going on with these official GDP statistics. So, in principle, these things are real GDP. They account for inflation. But as Higs pointed out in his work, what happened when the US government, you know, fully goes into the war effort, they run up massive budget deficits and the Federal Reserve was instructed to monetize those deficits, right? So the Federal Reserve printed money in order to buy government bonds because if the government just went to the private sector without being aided by the central bank, right? If the total quantity of of base US dollars just stayed the same or you know was normal and you wouldn't have realized from looking at the Fed's data that there was a war going on then the amount of money that the US federal government spent on the war effort they couldn't have raised it just from taxes and they couldn't have even raised it by turning to the bond markets and floating more treasuries without the Fed coming in in assisting. Okay. Or another way you could put it is the Fed ran the printing press to keep interest rates from spiking too much given how much the federal government wanted to borrow. Okay. So normally if the Fed is just going to open up the monetary spiggots to assist with government deficit spending, you would see prices rise, right? And so then if you're looking at the ostensibly real GDP statistics, what are you supposed to do? You you look at nominal GDP, right? what's total spending on finished final goods and services just measured purely in monetary terms. But hey, if like if that doubles like let's let's just say the the Fed doubles the money supply and just assume naively all prices double. Okay, so spending patterns remain the same, nominal GDP would double. But when you say what happened to real GDP, you would say, oh, we'll look at a basket of consumer goods and we'll see what happened. And so like I said, if everything just simplistically assumed doubled, then the basket of that those consumer goods would also double. And so when you go to calculate real GDP, you'd say, "Oh, nominal expenditures doubled." Uh, but the relevant price level also doubled. And so real GDP remained unchanged. Okay? So that's the way you would do it. So that kind of makes sense, right? that the Fed just printing money per se, you know, shouldn't all of a sudden goose the statistics and make it look like real output went up. Okay? But in the World War II period here, what happened? The Fed opened up the monetary spigotss that helped the federal government spend boatloads of more extra money and that would have pushed up prices. But guess what? They imposed wage and price controls. it was illegal for merchants to raise prices in accordance with the new laws of supply and demand and what the market would bear. And so the point is these real GDP series are bogus because they're showing the increase in nominal expenditures aided and embedded by the Fed creating new base money in this period, but they don't allow the natural market reaction of the prices shooting up to offset that when you go to calculate the real version of the statistics. And in when I read this argument from Higs, I emailed him and I said, "Hang on. Are you saying that they did adjust for the, you know, the wage and price controls, but you don't think they adjusted properly, like they underestimated that effect, or are you saying they didn't adjust for that whatsoever?" And he answered and said, "They didn't adjust for that whatsoever." All right. So, another way of seeing it is there were lots of shortages during this period, right? and they had ration cards and you know this kind of stuff. And so there were other ways that the monetary inflation impaired consumer satisfaction that were not reflected just with skyrocketing prices on the stickers. Okay. But that was all swept under the rug in terms of these official statistics because the government just said, "No, it's illegal. you can't raise prices and wages or you know there were strict limits on how rapidly they could rise. Okay. So again, when people say, "Oh, World War II solved the depression because it finally gave the government the uh ability to deficit spend the way Canes would have wanted." That no, that that is not at all that, you know, the data don't show that. And you can think it through. If it sounds crazy to you, how could letting the government channel real resources into very destructive things, how does that make us richer? It doesn't. Okay. And the various data sets that ostensibly show otherwise there are serious problems with as Robert Higgs has demonstrated better than anybody else. Okay. Well, that's a good spot to wrap up. Thanks everybody for your attention. Again, check out Rothbart's America's Great Depression, my book, The Politically Incorrect Guide to the Great Depression: New Deal in Robert Higs's like he's got a lot of this in his Crisis and Leviathan, and he's also got other books if you just browse his catalog um things about, you know, on the Great Depression and War and such. So, it's all his good stuff is in there. Okay, see you next time, folks. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on nieces.org. [Music] [Applause] [Music] [Applause] [Music] [Applause]