For Antiwar.com and Chaos Radio 95.9 FM in Austin, Texas, I'm Scott Horton.
This is Antiwar Radio.
Introducing our first guest on the show today, it's Robert P. Murphy.
He's got a PhD in economics from New York University, formerly a professor at Hillsdale College, is an adjunct scholar with the Ludwig von Mises Institute at Mises.org, is a senior fellow in business and economic studies at the Pacific Research Institute, and an economist with both the Mackinac Center for Public Policy and the Institute for Energy Research.
He's testified before Congress on economic issues, has worked as both an investment and business analyst and as a journalist.
He is also the author of the Politically Incorrect Guide to Capitalism and the brand new Politically Incorrect Guide to the Great Depression and the New Deal.
You can find his website, free advice, at consultingbyrpm.com.
Welcome back to the show, Robert.
How are you doing today?
Thanks for having me, Scott.
I'm doing well.
Well, I'm really excited to have you here today.
Another Politically Incorrect Masterpiece here, the Politically Incorrect Guide to the Great Depression and the New Deal, and, well, I hope it doesn't, you know, bias the interview too much if I go ahead and tell everybody to run out and get this and get multiple copies and give them to people you know, because this book destroys what I believe is the central founding myth of the American empire.
You can forget your George Washington and even your Abraham Lincoln.
Franklin Roosevelt is the founding father of America now, and his New Deal and his great war, well, extra great war, you know, basically are the foundations of the ideas upon which America is run now, our permanent world empire abroad and, of course, our massive leviathan state at home, and what you have done here, sir, is the antidote to it.
So, thank you and congratulations.
Well, yeah, thanks so much for the kind words, and I think you're right that certainly when it comes to domestic policy, I mean, the fundamental foundation of all the things that the government does, people just go back to it and say, well, we had a free market, and it gave us the Great Depression, so clearly we need all of these massive interventions, and I try to show in the book that that's just not true, both historically and just theoretically, just thinking about it, it doesn't make any sense what the official story is once you just entertain the notion that it's completely wrong.
Right.
Yeah, that's all you have to do is question it for a minute and the whole thing falls apart.
And, all right, so here's the deal.
We got about an hour here, so I guess let's start with how it was that the stock market crashed in 1929, that sounds like a good place to start.
Everything was humming along just fine, we're in our 20s, and then this Great Depression happened because of the excesses of laissez-faire capitalism and margin stock buying and that kind of thing, right?
Well, that's certainly the story you'll get in the conventional history books, but again, just thinking that through, that really isn't much of an explanation, because it's true, having the option of margin trading in which people could buy stocks basically with borrowed money, that certainly exacerbated the situation, and then once stock prices began falling drastically, it just turned into a runaway effect, because people were getting margin calls, and then they had to sell all their stocks in order to pay off their loans, and then that caused a mass wave of selling, so it was a vicious cycle, but the question still remains, okay, why did all these people make such foolish investments in the first place?
And really, the real issue is, how come all the people who lent them money, both domestically and foreigners, also lent Americans money so they could buy on margin?
Why did they do those things?
And really, the question is, what pushed up the stock market so much, and then why did it start collapsing?
And then margin trading could explain the amplitude of those swings, but couldn't really explain the mass errors, so what I say, is I adopt what's called the Austrian Theory of the Business Cycle, that says, look, interest rates in a market economy, they perform a real service, those interest rates mean something, just like the fact that steak costs more than a hamburger, that really means something, that steak is more scarce, by the same token, the interest rate sort of indicates how much real savings there are compared to how much investment people want to make.
Well now, hold it right there, because as simple as that is, wow, that's a really important truth, I think a lot of people, well I'm just thinking of me not too long ago, or whatever, right?
That's an important truth that I think most people don't really have their head wrapped around.
The interest rate, at any given time, is determined, or I guess in a free market, would be determined by how much capital there actually is to lend, and how many people want to borrow that capital, that's where the price of money to borrow is going to come from.
You're right, you're right, what's really ironic is that it's not just Marxists or real left-wingers who think that the interest rate can be changed at whim, it's even supply-side economists, people coming from the Chicago School, who now they'll write op-eds in the Wall Street Journal saying, oh, the Fed should cut interest rates to such and such, and what they're doing is central planning in terms of interest rates.
Okay, so what happened to the interest rate in the 1920s, was there central planning?
I mean, obviously, Franklin Roosevelt created the Federal Reserve as part of his new deal to curb the excesses of capitalism in the 30s, right?
Well, the Federal Reserve was created earlier, of course, but yeah, what happened in the 20s was the Fed did pump in a bunch of artificial credits, so it created money literally out of thin air, and that pushed down interest rates.
So when the Fed cuts interest rates, as they say in the papers, what that really means is the Federal Reserve creates a bunch of new bank credits and it buys securities and things and then writes checks on itself, and then that money gets deposited in the banking system, but the crucial point is that's not backed up by real savings.
So for example, if everybody in the 20s just decided to save a bunch, to abstain from consumption and invest that money, that would push down interest rates and that would fuel a rise in stock prices, but they tried to have their cake and eat it too, that Americans were consuming a lot more in the 20s, and the stock market was getting pushed up by all this investment because it wasn't coming from real savings, it was coming from ... the actual historical circumstance was in 1927, the Bank of England was getting in trouble because of the link between the pound and gold, and they were getting their gold reserves drained, and so the Bank of England asked the Fed to bail them out, basically, by cutting U.S. interest rates, and the Fed agreed to that, and that's when you see the stock market boom really kick in.
If you look at a graph of U.S. stock prices to 1927, when it really starts shooting up, and so that perfectly fits in with the Austrian theory that it's Fed manipulation of the credit supply and interest rates that drove this unsustainable boom.
Well, now, this Ludwig von Mises guy, he was around in the 1920s, right?
Oh, yeah.
And so did he say, hey, look out, Benjamin Strong and the Federal Reserve are creating a bubble and it's going to pop and cause a giant depression?
Well, this is a point where some Austrians will differ.
Certainly Mises has writings from the late 1920s when he talks about unsustainable booms and how they can't last.
I don't know that Mises specifically said the U.S. in the late 1920s is in such a boom.
Friedrich Hayek has later on alluded to writings that he had made, and scholars are having ... they were in German, so it's hard to track down exactly.
But many Austrians do think that they had predicted the great crash before it occurred.
Oh, but Mises at that time was not in the United States, so he would have probably been mostly writing about economic policy in Europe at the time.
Right, that's right.
But Hayek did claim later on ... we have Hayek claiming in an interview that he gave decades later saying, at the time, I predicted the crash because I said we would need to see the interest rates change in America and that will happen once the current boom collapses.
But like I said, I haven't been able to track that down in the original.
All right.
Well, besides all that, which is just kind of a side note anyway, I mean, if the theory is still right, whether they applied it to what was going on in front of their face at the time is kind of besides the point.
But let's make sure that the theory is right here.
What you're saying is that the economy basically in the 1920s was doing whatever it was doing and then came the Federal Reserve System in cooperation with the Bank of England somehow created a bunch of new money and that money blew up a big bubble in the stock market.
So then that giant crash where everybody threw themselves out the window and it was the Black Tuesday or whatever and all the Black Monday and the terrible stock market crash of twenty nine.
That wasn't the cause of the depression.
That was the effect.
That was the beginning of the end of the boom time.
That was an artificial boom time that had that had been fueled by all this phony government money.
Is that basically the point?
Right.
That's exactly right.
That's the Austrian story, because, in other words, a lot of people will say things were going just fine until all of a sudden 1929 for some reason the government or the Fed or somebody screwed things up and caused this collapse where the Austrian sources know the real distortion came in earlier and pumping that bubble up in the first place.
And then once you have this huge unsustainable bubble, it's going to pop eventually.
And you know, why did it happen in 1929 and not six months later or earlier?
I mean, that's up to historians to argue about.
But the point is that the U.S. economy was in an unsustainable configuration by the late 1920s.
So the mistakes had been made during the boom period.
And that meant that a bust was inevitable.
And then, yes, the first sign of that, obviously, was the crashing of the stock market.
But there were more fundamental problems with the American economy beyond just the movement of stock prices.
Well, like what?
I mean, we know in our current circumstances, as we'll talk about later, that we had a giant bubble in the housing sector.
What other sectors of the economy in the 20s were artificially stimulated by this phony money?
Well, ironically, actually, the real estate market also in the earlier in the 20s had suffered through a boom and a bust period.
But I mean, the point is just more generally, I mean, I can't tell you specifically which ones.
I mean, because there was a massive expansion.
But the idea was that people were consuming too much.
They thought they were wealthier than they were.
And so there wasn't enough real resources being plowed back into maintaining the structure of output.
So to put it loosely, like machines might be depreciating, and people just kept cranking out more radios and more cars rather than diverting some of those resources into maintaining the machinery of production.
And so you can do that for a few years, and you can have this apparent prosperity where you're getting all sorts of new consumer goods, and people feel wealthy because their stock portfolios are rising even as they're increasing consumption.
But the underlying physical capital structure is basically getting distorted, and you can't keep doing that year after year.
Something's got to give.
And that's basically the Austrian theory of what happened.
All right, everybody, if you're just tuning in, it's Robert Murphy.
He's the author of The Politically Incorrect Guide to the Great Depression and the New Deal.
Now, the common myth, the conventional wisdom or whatever, is that Herbert Hoover was basically a Ron Paul, Lazar Farrar libertarian type who refused to do anything about the Depression.
And in your book, you make quite the opposite case.
Would you share with us a little bit of what it was that Hoover did to try to ameliorate the effects of the Depression once it started?
Sure.
And I think this is probably the single biggest myth of all.
I mean, the other points people can debate and there's pros and cons, but I mean, here, I just think it's clear-cut that if you go back and look at Hoover's policies at the time, if you look at his memoirs that he wrote years after the fact, and if you look at the actual government statistics of what his spending plans were and things like that, you'll see that Herbert Hoover was the furthest thing from a Lazar Farrar reactionary, that he proudly said in his speeches and memoirs that he was departing from the precedent established by previous U.S. presidents when they really did just basically keep a hands-off approach and let the market fix itself.
Hoover, on the contrary, when the stock market crashed, for example, he called in all the big business leaders and he told them, I don't want you to cut wage rates because he thought that would just set in motion a vicious downward spiral, that workers would have less money so they would spend less on products and then it would just be a vicious downward spiral.
And so Hoover said, I want you to keep wage rates up, but that's what caused the massive unemployment of the early 1930s, that you had prices in general were falling, business profits were dropping and sales were dropping, and yet they weren't cutting wage rates.
And so that meant that as workers got laid off from certain places, other employers didn't want to hire them because they kept getting more and more expensive as every other price kept falling.
So basically what you're saying was, because it makes sense on its face, right, that now we're in bad times, obviously the people who are the lowest on the economic ladder, so to speak, are going to get it the hardest first.
Why not have business agree, if not be forced by law, to keep their wages kind of high to ameliorate the effects of the depression on the weakest among us?
But what you're saying is, it doesn't work.
It only just shuffles the unemployment problem around and I guess in the book you really make the case that it kept unemployment artificially much higher than it would have been if they had let wages fall.
Right, that's exactly right.
Let's put aside for the moment whether or not it's a good idea or whether it's fair, but it seems pretty clear-cut to me and other economists who have studied these periods that the reason unemployment went up so high during the 30s, during the Hoover years, is because of his so-called high-wage policy.
For example, during a previous downturn, the 1920-21 depression, and they wrote it with a small d, there you had prices fell much more rapidly than they did at any time during the Great Depression, and yet unemployment only went up to a little bit under 12% and then it quickly went down after that.
And the reason was that wages fell even more sharply during those few years.
So Hoover had lived through that and he thought it was unconscionable that the workers had to take a huge cut in their paychecks or their rate of pay, but the point was that cleared the labor market, that at least people had jobs at the lower pay rate, whereas when Hoover was in charge and businesses weren't allowed to cut the hourly rate that they paid for their workers, they ended up employing fewer workers.
It's economics 101 when you talk about a price control.
If you set the price above what the market level is, you get a surplus.
And that's what happened in the labor markets in the early 30s, is people had to be paid more than they were worth to employers at the time, and so a lot of people couldn't find work.
And that's what unemployment means.
Well, it's interesting when you bring up 21, you had all these guys, what, hundreds of thousands, millions of guys, I don't know, coming home from World War I, people who'd been taken out of the labor market being all dumped back into it, and yet still you say the recovery was on again by the end of 21?
Unemployment was already falling again?
Right, exactly.
I think it peaked in 21 and then started falling in 22 and 23 fairly sharply.
It was down to, like, under 3% by 1923.
Yeah, but it's not merely the people coming back from fighting in World War I.
You also had, during this earlier 1920-21 depression, the government drastically cut its budget.
I mean, cut it something like 60% in the course of a few years, and you also had the Fed had a very tight monetary policy that it jacked up interest rates to record highs because it was trying to get under control the price inflation from during World War I.
And so all the typical explanations, whether it's from the monetarists like Milton Friedman or Keynesians like Paul Krugman about what happened during the 30s and why it was so bad then, those things apply times 10 during the 1920-21 depression, and yet we know that the 1920s were generally a period of prosperity.
So for people who are giving their reasons for why the 1930s were so bad, they really can't explain why the 1920s were so good because the government did what they're saying was the wrong thing to do much more severely during the 1920-21 depression, and that's why I think the arguments are right.
In other words, Bob, when the bubble popped from the World War I bubble, the bubble that the Fed had created in order to pay for that war, when it popped, the Federal Reserve basically did what the free market would have done with interest rates, which is raise them.
And they basically, even though it was central planning, they basically forced the recession that was needed, and then the recovery came right on the heels of that, rather than trying to prolong it.
Right, so you had the Fed doing that, whereas in contrast, after the stock market crash in 1929, the Fed did what nowadays we consider to be normal.
They kept cutting rates and saying, oh gee, the economy is not picking up, let's keep cutting rates and making money cheaper and cheaper.
And they did the opposite, as you say, during the 1920-21 depression, they raised rates to try to purge the excess waste out of the system.
And also on the fiscal side, the government, Herbert Hoover ran what at the time were unprecedented peacetime deficits after the stock market crash, again trying to stimulate, pump up the economy.
And so it's totally disingenuous when modern Keynesians paint Hoover as this tight-fisted budget balancer, when nothing could be further from the truth.
He ran, as I say, unprecedented deficits for peacetime, and in fact, FDR in the 1932 campaign ran against the profligate record of Herbert Hoover, and FDR promised to balance the budget.
But to finish that train of thought, during the 1920-21 depression, the government was not only failing to run huge deficits, they were actually slashing spending by large margins because coming back from World War I, they were bringing down expenditures.
Yeah, the return to normalcy, they called it.
Right.
So again, I mean, whatever the conventional explanation is, whether it's, oh, the government should have...
Some people will say, oh, Hoover should have run bigger deficits, and that would have fixed things.
Well, then again, the question is, well, how come when they slashed the budget, that didn't really cause a panic in the earlier decade?
Or people who say the Fed didn't ease credit enough after the stock market crash, and that's the problem.
Again, the question is, okay, but how come when the Fed jacked up interest rates in 1920-21 that that didn't cause utter disaster?
And yet, no, there was a very severe, but it was a short-lived downturn in the earlier period, and that paved the way for a lot of the genuine progress of the 20s.
I'm talking with Robert Murphy from the Ludwig von Mises Institute.
He's the author of the new book, The Politically Incorrect Guide to the Great Depression and the New Deal.
And we're talking about how the Great Depression would have been a depression, except for Hoover and Roosevelt made it great with all their interventions.
And before we get back to some of the mechanics of how it was that Hoover and especially Roosevelt intervened in the economy, I wanted to bring up this very important part of the story, really, that you've referred to a couple of times here now.
And this is the Chicago monetarist, supply-side Milton Friedman School of Economics.
And as you just referred to, their theory that the Fed should have pumped more liquidity into the system once the depression started in a counter-cyclical fashion.
My understanding of Keynes was that his theory had government intervention to the left, demand-side economics, put money in the pocket of the poor so they'll demand more and then that'll get the factories running again kind of thing.
Or you could intervene on the right side, which is supply-side economics, cut taxes and whatever, make it easier for people who already have money to invest their money in new forms of supply, building new factories and so forth.
That'll employ people and then put money in their pocket and then they can buy more stuff and whatever.
But basically, to my way of understanding Keynes, this guy Milton Friedman is nothing but a right Keynesian.
He's not actually outside of the Keynesian school at all.
He just says that supply-side is better than demand-side, which still makes him a socialist, right?
Well, obviously many people wouldn't go that far, but yeah, I think you're right.
We're told there's a huge difference between the Keynesians and the monetarists when it comes to their prescriptions for fixing a bad economy.
But I think you're right that they're both just stressing different ways that the government needs to stimulate things.
The Keynesians typically say, oh, run a big budget deficit, so that means spend more money or cut taxes.
And the monetarists say, oh, you've got to stimulate by cutting interest rates.
Yeah, but I mean, does Friedman deny, because I'm not nearly as literate in all the Friedman theory and stuff, but does he deny that his theory comes from John Maynard Keynes, that John Maynard Keynes invented supply-side economics and that he agrees with it?
I think he would probably say that, yeah, it draws on certain aspects, but that his Friedman's own approach is a lot different.
I mean, for one thing, part of what happened is in the 30s, Keynesian economics came to think that monetary efforts were fruitless.
It was called pushing on a string, or there was the famous liquidity trap.
And so the idea was that once interest rates get down to around zero, the traditional tools of cutting interest rates, you can't do that anymore, because you can't push interest rates below zero.
So you need Congress to pass a massive deficit budget.
Right, so that's why for a long time people thought that the 1930s had allegedly shown that monetary policy became impotent during times of liquidity trap, and that's why you needed Keynesian deficit spending.
So what Milton Friedman did is he upturned that consensus when he came along in the 60s with his co-author Anna Schwartz, and they went back and reviewed the period, and Friedman said, no, no, no, it's not that the Fed tried everything in its power and it couldn't do anything, it's the Fed didn't do enough.
And that specifically, the smoking gun in Friedman's argument is that the overall money supply, so the amount of money that was actually held by the public, like in their checking accounts and cash in their pockets, that declined by about a third from 1929 to 1933.
So that's a pretty big drop, and so for a lot of people that seems like, well, duh, obviously the economy's going to crash if the Fed stupidly lets the money supply shrink by a third over a few years.
And so that was Friedman's whole point, that how can you say the Fed was unable to do anything if they let the money supply shrink?
So in the book, obviously on our radio we can't get into too much technicality, but in the book I just show that that's really not a good explanation, because there were plenty of previous periods in U.S. history where the money supply shrank even more quickly, and yet we didn't have a decade-long depression.
And in particular, what about all the time before 1913 when the Fed didn't even exist?
So in other words, Friedman is saying the reason we got the Great Depression is because the Fed didn't intervene enough early on.
But then how come in all previous depressions before the Fed even existed, when obviously the Fed didn't intervene because it didn't exist, how come we didn't get a Great Depression back then, too?
Well, and don't Friedman and Schwartz just ignore the fact that there was a giant Fed-created bubble that had popped, that they were dealing with the effects of a previous cause in their argument?
Right.
So that's another huge difference between the Austrian explanation and the monetarist one.
The monetarists don't really have a theory of the capital structure, so for them, their apparatus couldn't even handle the Austrian claim that maybe there was this unsustainable expansion in production and consumption during the 1920s that required a bust period to patch up.
The monetarists, there's no room in their theory for that, because they're just looking at aggregates like money supply and total output, things like that.
Okay, well, here's a big open-ended question for you to fill in.
Just basically tell us all about the New Deal interventions in terms of gold, crops, wages, the National Recovery Administration, and all the different ways, even as far as Social Security and the Make Work programs.
Just tell us all about the New Deal and the effects of this thing, and I'll try to jump in and have you elaborate on certain points as I can.
Okay, well, sure.
The first point I want to make is that except for when it comes to the gold standard, just about everything that Roosevelt did under the New Deal had its precedence under Herbert Hoover.
Again, this goes back to the myth that Herbert Hoover was a do-nothing reactionary, that things like the Reconstruction Finance Corporation, which had billions of dollars to prop up banks that had made bad loans during the boom period, that was started under Hoover.
Things like the Hoover Dam, massive public works spending, again, all started under Hoover.
But FDR specifically, as you said, one of the big things was, especially for people who are advocates of a sound money, is one of the very first things he did was he took off the dollars tied to gold.
So up until then, it had been tied at $20.67 an ounce, was the official price.
And so he suspended that, and then under penalty of law and severe penalty, I think it was up to a $10,000 fine and a lengthy prison sentence, he made Americans turn in all of their gold, except for coins of numismatic value.
And that's actually why the bullion depository at Fort Knox was built.
It was to house all the gold that FDR seized from the American people.
And so that was probably one of the major things.
He also right away declared what he called a bank holiday.
Well, wait a minute.
On the gold thing, what's the point of that?
He took us off the gold standard.
Why?
Well, I mean, there may have been several reasons, not the least of which is just if you're in power and you take everyone's gold, that's a good thing for you because now you have all that gold.
But I think in terms of the strategic reason, it allowed the Fed much more discretion in inflating the money supply.
Because when the Fed was on a gold standard, they really couldn't get too carried away because ultimately people had the right to walk in and turn over $20.67 in paper money and get an ounce of gold.
And so if the Fed defaulted on that, that would cause an international crisis.
And so they really couldn't print up too much new money because of that.
Whereas when FDR took them off the gold standard, that gave the Fed the ability to inflate at will.
And in fact, if you look at a chart of consumer prices, they steadily decline month after month up until the month when Roosevelt was sworn in.
And then they just turn around on a dime and rise very rapidly.
Well, and this is according to your examination of all this stuff, according to the Austrian theory, all very counterproductive.
That actually it made things worse and made the bad times last longer.
Why?
Well, for one thing, I mean, according to my understanding of what happened, the reason they had this boom period, which then required the bust, was because of the Fed pumping up too much money into the credit system in the first place.
So it wasn't the gold standard, it was the fact that it was just a fractional gold standard at the time in the 20s.
Right.
Yeah, the gold standard at least imposed some discipline, but they still had a lot of wiggle room within that.
And that's what happened.
But then taking away the gold standard and then allowing them to inflate even more with even fewer checks on them, except public opinion, if price inflation got too high.
Well, that's obviously letting the genie out of the bottle.
And we could see that the economy was far more distorted relative to many periods of the classical gold standard.
But beyond that, I mean, the reason we were in a depression, according to my view when subscribing to the Austrian approach, it's not because people weren't spending enough.
It's because the actual real economy was distorted and it took time for workers.
They had to get laid off from areas that didn't make economic sense.
And they had to transfer to other industries where they were needed more urgently.
And so when Roosevelt came in and just started imposing all of his micromanaging measures from Washington, he basically stopped that recovery in its tracks.
And so then you don't make things better by just printing up a bunch of green pieces of paper on top of all that.
But that's not actually making the economy richer.
That's, in fact, making it harder for people to coordinate their activities with each other because now, in addition to all the other uncertainty, you've got the Fed, which could be injecting green pieces of paper at will.
And so that's really why conventional economists will often say, oh, the Fed had its hands tied by the gold standard, and that's why the U.S. was mired in depression for so long.
But to me, that doesn't really make much sense because you don't make the economy richer by printing up more dollar bills.
Okay, now, well, so what about intervention in the agriculture area?
I learned at community college that there was basically a deflationary spiral going on and that the more prices fell, the more they fell, and the lower prices got, the more the farmers all produced because each farmer, being only narrowly interested, would try to, if prices are falling, he needs to grow more and more and more and try to sell to make as much money as he did last year.
And so what happened was there was a giant glut of overproduction, and the farmers needed the government to buy up all the excess stuff because, after all, they were just being run out of business.
There would have been no agricultural production after a few years of this because everybody would have just been driven completely out of business if the government hadn't come and bought up all the excess grain, bought up all the excess oranges, bought up all the excess pigs, bought up all the excess everything to drive those prices up so that these farmers could even stay in business.
Bob, you're saying that that's not right?
My community college history professor misunderstood?
Well, I would say that that's not right.
So for one thing, I've heard that explanation too, but on the face of it, you could use that to explain why the government needs to take over any industry.
There's nothing peculiar to agriculture there.
You could say the government needs to buy surplus television sets because otherwise if the price of TVs fall, then the producers will just have to make more TVs in order to make as much money as they did before, but then that just pushes TV prices down even further, and so clearly you need the government to step in.
Otherwise, the market wouldn't be able to produce TVs or computers.
So that's just crazy.
You could apply that to any industry.
So specifically what happened in agriculture, I think is that it's true.
There was an overproduction in the sense that prices did need to fall as prices across the board were falling, and what happened is that people were led to believe, I think farmers were led to believe because Herbert Hoover had campaigned on a pro-farmer policy, and under the Hoover administration they had set up policies to try to assist farmers to buy up surplus wheat and so forth, and so I think a lot of the farmers stayed in that line of work when really they should have gone elsewhere.
So that's the issue.
If you have too much production, it means you need to cut back production, and it's not that every farmer needs to scale back 20%.
Again, rather what should happen is the farmers who really aren't very efficient, so the people who are the worst at farming, they should stop doing that and they should go do something else, but what happened is because of these expectations the government was going to come in and bail them out, a lot of people stayed in the farming sector that really should have gone elsewhere, and so you had these cycles of prices where, yeah, the government would fill up their silos and hold up the price, but eventually even the government would blink and they'd say, well, we can't just keep accumulating and growing stockpiles of this stuff, and so then they would dump it on the market and the price would collapse, and so you still had the same fundamental problem of too many farmers were in the industry, but on top of that now you had the uncertainty of the government stockpiling and then dumping these huge reserves.
And meanwhile you actually have, like in the Grapes of Wrath, food being destroyed in front of hungry people.
Instead of letting the price fall so that hungry people can afford it, it's better to let them starve and dump it all in the ocean?
I mean, what the hell kind of genius you got to be to figure that that's right?
You got to go to Princeton to think you're smart enough to decide that?
Right, and that's funny that a lot of people think that that's the result of cutthroat competition and pure capitalism, when on the contrary it was, it is true that Steinbeck wasn't lying in the Grapes of Wrath, there really were people who, you know, farmers and ranchers deliberately destroyed livestock and crops while people were literally starving.
But again, that was because of government efforts to cartelize the industry, that in an open market it wouldn't make sense for one guy who has 1,000 of the orange market to destroy half of his orange crop to raise prices, because most of the benefit would accrue to his competitors.
But if the government can come in and says, okay, every orange producer has to destroy 10% of his crop, well then they might all benefit from that, because the government is enforcing it and making sure no one's cheating.
And so, yeah, all those crazy outcomes were the result of the government coming in and doing what it thought was necessary to raise farm prices, which included actually paying farmers not to plant, and then even paying them to overturn crops that had already been planted if they thought there'd be too many.
Yeah.
All right, now, when the history of the 30s is told, and I think this is how I learned it when I was a little kid from my parents, was that FDR really did save capitalism in the sense that America probably would have ended up a fascist or a communist dictatorship if FDR had not come in and used the power of the state to put people to work digging holes and filling them back up again, building the Tennessee Valley Authority and whatever other, you know, FDR's massive, LBJ's massive make-work programs down in Texas, the whole Highland Lakes system, all that kind of stuff.
If he hadn't have put people to work running deficits but bringing the unemployment rate down the way he did, the whole place could have turned into, you know, Russia or something.
Yeah, well, that's, I mean, it's a difficult question.
You could obviously set up any kind of scenario you want and then stipulate, well, they had to do this, otherwise it would have been the end of the world.
Clearly, the only reason the U.S. was in that predicament in the first place was because of the whole sweep of intervention coming first from the Hoover administration and then the various Roosevelt administrations.
So, you know, if you just want to tweak one little thing and say would things, you know, would there have been a demand for a complete dictator if Roosevelt had done everything of the New Deal except paying, you know, for emergency relief effort, you might be able to make that case.
But if they had instead, you know, if Roosevelt had not done the New Deal at all and had just stuck to the gold standard slash government spending slash taxes and just let the market find bottom and then recover, yeah, it would have been a painful year, let's say, but then things would have been back to normal just like they had been during all previous downturns before Hoover decided to be compassionate and tell businesses not to cut wage rates.
So, you know, again, if the argument is, you know, it took the unprecedented intervention from Washington because the free market left to its own devices would have turned into communism, well, then you have to ask how come that didn't happen during all the previous depressions, you know, not only the 1920s and 21, but the various panics of the 19th century, you know, when you really did have pretty close to laissez-faire capitalism.
How come you didn't get workers' riots and communism back then?
And the answer is because things never got that bad because the market always fixed itself within a few years.
So when people look at, you know, the bonus army saying we want our World War I bonus early, you know, because we need it right now and the army going and driving them out of D.C. and I guess it was MacArthur drove them out of D.C. and all this stuff.
Basically, everybody's starting their argument at that point with a false premise that, you know, this was the way things are, all things being equal, whatever.
This is where history begins.
This is the crisis we're dealing with.
And so at this point, we need all this massive intervention to ameliorate the effects of our previous intervention where what you're saying is, no, the answer is always just repeal the intervention.
Stop intervening.
You're not making it better.
Right.
I mean, to make an analogy for your listeners who, you know, are anti-war radio, it would be like if you made the case for non-intervention and someone said, oh, so you're saying after Pearl Harbor we should have done nothing.
And technically you are saying that, but the point is, you know, if things wouldn't have been that bad, the U.S. would not have been intervening all up until that point.
And so, yeah, the further you push these things, the worse the tradeoff appears.
And by the same token, I mean, the only reason FDR had those awful tradeoffs by 1938 is because of the previous, you know, years of first Hoover and then his own interventions.
The stock market crash of 29 would have been ancient history a decade later had Hoover actually been the laissez-faire president that we're taught that he was.
All right.
Now, oh, I know the Keynesians always say, I saw Paul Krugman on, I forgot, some TV show.
And he was saying that, you know, the proof of the truth of the Keynesian theory for the Great Depression and what have you is that FDR got cold feet and that in the year 1937 especially, he listened to the conservatives and he tried to balance the budget.
He slashed a bunch of spending and what have you.
And that caused the depression within the depression of 1937.
And so that's the proof that he should not have listened to those guys.
He should have just kept stimulating.
Right.
I mean, so he can certainly, those facts are correct that it is true that the FDR did try to rein in the budget deficit and that did coincide with what was called the depression within the depression when unemployment rates shot back up to about 19% in 1938.
But at the same time, I mean, what Krugman's leaving out are other things that were happening too.
For example, the Supreme Court upheld the constitutionality of various New Deal measures that really gave strength to labor unions that people had thought they would be overturned like the Supreme Court overturned earlier things.
And then when they, you know, because they were cowed by Roosevelt's threats to pack the Supreme Court, they started upholding things.
And then, you know, union membership jumped way up.
I forget the exact number from 1937 to 1938.
And so wage rates got pushed up for those people who were lucky enough to keep their jobs.
And so, I mean, there's all sorts of particular things going on that could explain that.
I could just turn the tables on Krugman and say, look, Herbert Hoover did exactly what Keynesians recommend, that Hoover, after the stock market crashed, he cut income tax rates across the board and he started engaging in unprecedented peacetime deficit spending.
And, you know, the more he spent, the more unemployment went up.
So by the same token, I could say that clearly disproves Krugman's theory.
Or the 1921 Depression clearly shows that, you know, slashing government spending doesn't cause a runaway depression, that, you know, the thing was quickly over.
So, I mean, you can find any particular, you know, you can cherry pick any particular historical period to make your case because there's always ten different things going on.
Well, but you're sure that's what he's doing but not what you're doing.
Well, I'm not sure, but I think.
You're right.
I mean, there is a more general point that it is tricky because economists and social scientists generally, we can't run controlled experiments.
So really what we would like to be able to do is in a laboratory take everything that happened in 1938 and then just make the one change and have Roosevelt run a bigger deficit and then we'll see what happens to unemployment.
Right.
But we can't do that, obviously, because, you know, it's a historical event.
We can't go.
Even now, if we tried to reproduce it, it wouldn't be the same conditions because, you know, people have learned in the meantime and things are different now.
So you do have those problems.
But like I say, there are plenty of cases where we can see that increasing deficit spending went hand in hand with rising unemployment and budget slashing went hand in hand with very temporary downturns.
And so Krugman's general theory, to me, seems false.
So if I understand you right, basically what you're saying was up until 1937, as bad as things were, it was still not as bad as it was supposed to be as far as all the bad investments reorganizing themselves in a free market kind of way, they had continued to prop up the bubble to some degree and that what happened in 37 was basically, you know, again, the hangover from getting drunk the night before, even after all those years of depression.
Well, it was, but there were two things going on.
So on top of the misallocated resources that really need to be flushed out during a cleansing period of the bust period, you also had these new additional harms that were being imposed on the economy.
So it's like somebody who has a hangover from drinking the night before and then someone comes along and prescribes poison as a remedy.
So the person's not going to be better because of the hangover and the poison.
So in 1938 specifically, the reason that I think was so bad was because of the Supreme Court ruling that raised, that gave unions much more power and so they pushed up union wage rates and that forced a lot of people to be unemployed.
So in addition to how messed up the economy was anyway, now you had fewer people were able to work because of the strengthened unions.
Professor David Beto chimes in by email and he says, the thing is there was no organized communist or fascist threat within a million miles of being able to take over the government at that point.
And which is, I guess, reminds me of what Garrett Garrett said in the revolution was, he said, you know, all the revolutionaries were on the inside of the gates.
We were on the outside trying to stop them.
But you look for the fascist or communist revolution in the 1930s.
It was FDR and Harry Hopkins and this crew of crazies running the White House.
It's a good point.
And actually, Bob Higgs, economic historian, has done a lot of work on this area.
And it's ironic that people say, you know, FDR saved us from dictatorship when a lot of business people actually feared that FDR was going to declare himself a dictator.
And to a lot of Americans now, that seems crazy.
But, you know, just think it through.
He was the only U.S. president to serve more than two terms.
You know, other rulers around the world at that time were, you know, collectivizing their rule and they were declaring themselves dictator.
And FDR certainly took the U.S. the closest outright dictatorship that had ever been taken before.
And so it wasn't so outlandish for people to fear that he was really trying to take over or just look at what he did with the Supreme Court when they were trying to throw out what he did and he threatened to pack the court.
I mean, these were some very bold actions that made the executive a lot stronger than it had ever been.
And so a lot of business people, you know, and this is in surveys that Bob Higgs has dug up that were conducted during the time, you know, plenty of business people were afraid to invest because they thought that FDR was literally trying to take over.
Right, regime uncertainty.
Right, exactly.
So it was because the rules were changing and the people weren't sure whether they would be allowed to keep the profits from their enterprises that that's one of the main reasons that, you know, economic growth was so lackluster during the 30s was because people were afraid to put their money back into the U.S. economy.
All right, now, I think the way I learned the story of the 30s in school as a kid even included that, you know, the New Deal was a valiant effort, but it didn't quite do the trick.
It really helped a lot, but it didn't quite do the trick.
What really saved America from the Great Depression was World War II because everybody made so much money producing tanks and airplanes and bombs and bullets and rifles, I guess, that it cranked up production.
It was this massive stimulus far beyond the New Deal stimulus that really pushed American industry into gear and led to the wonderful American century, Bob.
Well, here's a point where, of course, in the book I reject that, but here's an interesting point.
A lot of right-wing conservatives or Republicans, they will correctly, in my view, denounce the New Deal and say, no, no, the New Deal was terrible.
It was a waste of money and it didn't help the economy.
It only made things worse.
But then they contradict themselves when they go on to say, as they often do, it was really the war that got us out of the Depression because they're basically buying into the Keynesian notion that if the government just spent enough money during the 30s, it could have fixed things.
It soaked up demand for enough goods and resources and that that didn't happen until the World War II military expenditures.
So rather than buying into the Keynesian notion unwittingly, I think the correct thing to realize is that, no, entering a war, while people can argue that it was justified in terms of national security, it's not good for your domestic economy.
It doesn't help things when you divert resources away from housing and cars and radios and instead you make tanks and bombers and munitions and you ship them across the ocean where they get blown up.
That doesn't make you richer to send your stuff overseas to get blown up or to take some of your most able-bodied men and ship them across to see where they get killed or maimed.
That's clearly not helping the domestic economy.
So it's a fairly technical area, but to see some of the problems with these conventional statistics, the reason many economists falsely think that the World War II brought prosperity is the look at stuff like the unemployment rate.
And it's true, the unemployment rate dropped sharply once the U.S. entered the war.
But if you think about it, that's not surprising that Roosevelt drafted millions of men and then shipped them across the sea.
So, of course, the number of guys standing around the home front without a job is going to go down when you start removing people.
And so that's all that really happened.
The falling unemployment rate wasn't an indication that the economy had become better at channeling workers into areas where they were needed.
It just showed that a lot of those excess workers got shipped across the ocean to go fight Nazis.
Yeah, well, and a few hundred thousand of them were killed.
That's good for the unemployment rate, too, right?
Right.
If what your objective is is to just drop the unemployment rate, then, yeah, there's plenty of ways you could do it, like to put in today's circumstances if President Obama just grabbed hundreds of thousands of people and sent them across the ocean to go fight pirates, the measured unemployment rate would drop.
But that certainly wouldn't be a boon to the economy.
It would just be an artifact of how you measure unemployment.
Mm-hmm.
Well, and you even make the case in the book that if they had taken a much more laissez-faire approach even to World War II, just in terms of the organization of the war effort, it would have been a hell of a lot more cost-effective than all these ridiculous rations and price controls and craziness and, you know...
I mean, I guess give us an overview of the kind of wartime controls over the economy.
They went far beyond the New Deal, right?
Oh, exactly, yeah.
I mean, in terms of when was the U.S. the closest to a command-and-control economy, it was unquestionably during World War II.
And so the theory...
Again, it's interesting because even people who typically, during peacetime, support the free market, at least, you know, within reason, they will all of a sudden become advocates of central planning when there's a foreign military threat.
All of a sudden, the market's ability to, you know, use a profit and loss system to coordinate resources among different industries, that all disappears, and all of a sudden you need to have the Pentagon...
Well, the Pentagon, I think, was in place in the beginning of World War II.
You need to have, you know, the Department of Defense and so forth, they got to start directing resources because they know, oh, we need all this rubber and all this steel and all these other things, and all this gasoline for the war effort.
And so, you know, in a market economy, the government can participate, that the government could raise...you know, borrow money or raise taxes, and then enter the market and buy all those resources.
That, you know, it could pay suppliers to give them tanks and so forth, and they in turn would use their war contracts to go bid away the steel and the rubber from these other potential uses.
And the public would be poorer because their taxes went up, or they lent their savings to the government by buying war bonds, and so the public wouldn't have the ability to get those resources.
So the benefit of doing it that way is, yeah, the government would still siphon off all these resources from the private sector, but at least with what the private sector had left to work with, it would be distributed in an efficient way.
But instead of that, what you had happen is the government came in, commandeered all those resources, taxes, distribute what was left to the private consumers, it imposed price controls, and then it had ration cards.
So you had all kinds of crazy outcomes where people had to trade in black markets to get what they ultimately wanted.
Well, now, in your book, you also give the World War II was good for the economy argument as much credit as you can, and you say specifically that the war, as terrible as it was, ended the regime uncertainty of the previous era.
I guess FDR fired the commies and hired the fascists, is that it?
That's actually a good way to put it.
Right, so the idea here is that there was a legitimate sense in which the coming of the war actually helped the U.S. economy finally get away from the Depression, and that was the fact that FDR knew that in order to win the war effort, his advisors were telling him, we need to get big business on board, and you can't keep demonizing them in your speeches the way you've been doing up until now, and you can't have these outlandish seizures or changing of property rights that the people were afraid.
For example, businesses were afraid when in 1939 they were surveyed, and people were saying they wouldn't want to take a government war contract for military preparedness because for all they knew, two years into it, the government would turn around the contractual price, because that would have been par for the course for what Roosevelt had been doing up until then.
And so the government knew that it had to placate those people, and so you're right.
What FDR did is he purged a lot of the ivory tower intellectuals who had been staffing various posts during the New Deal, and he replaced them with people drawn from big business itself.
And then he put those people in charge of the war effort so that the businessmen in the private sector knew they weren't going to double-cross them, and if they said, we'll pay you this much per tank, they believed it.
And so that's partly how the U.S. economy started to recover, was that there was a government-business partnership instead of a war between government and business.
So you're right, it wasn't capitalism, but it was a lot more productive than when the government from D.C. was basically declaring open war on all the big businesses.
And here's the thing, too, is they've basically kept us at war since 1941.
The whole thing's been going on this whole time.
I think he's saying in the book that 10,000 businessmen went to work for the federal government, and then, as we all know, we got a permanent military-industrial complex, a permanent warfare economy, and permanent inflation ever since.
Yeah, and it's...correct me if I'm wrong, but I think World War II was the last war that was officially declared.
In essence, then it's...you're right, I think it's kind of an issue that they don't want to go through the hassle of openly declaring the war because that would tie their hands.
Now they can have police actions and all sorts of interventions, you know, just as long as public opinion can be stirred up at the moment for it.
But you're right, it was a permanent transformation of the whole structure of the U.S. economy.
And it's true, I mean, things did recede a bit from their heights during World War II.
You know, Washington did tone down its spending and its demands on the economy.
It freed up the price... it lifted the price controls and other things.
But, as Bob Higgs points out, it's a ratchet effect that during a crisis the government expands, then when the crisis is over the government contracts, but it never goes back to the pre-crisis level.
And so that over time you have this secular increase in the size of government, and we saw that all through the 20th century.
And it's certainly continuing now.
All right, everybody, again, that's Bob Murphy from the Mises Institute.
His own website is consultingbyrpm.com the free advice blog.
And, again, the book is The Politically Incorrect Guide to the Great Depression and the New Deal.
And we'll be right back after this.
