Alright y'all, welcome back to the show, it's Antiwar Radio on Chaos 95.9 FM in Austin, Texas.
I'm Scott Horton.
We are streaming live worldwide on the internet at ChaosRadioAustin.org and at Antiwar.com slash radio and I'm really excited about this interview, it's actually going to be a debate.
We have Robert Higgs from the Independent Institute and James Galbraith from the University of Texas at Austin.
First of all, Robert Higgs is Senior Fellow in Political Economy for the Independent Institute and Editor of the Institute's quarterly journal, the Independent Review.
He received his PhD in Economics from Johns Hopkins University and he's taught at the University of Washington, Lafayette College, Seattle University and the University of Economics in Prague.
Of course, is the author of Opposing the Crusader State, The Challenge of Liberty, Emergence of the Modern Political Economy, Depression War and Cold War, Neither Liberty Nor Safety, Crisis and Leviathan, Against Leviathan, The Resurgence of the Warfare State, etc. etc.like that.
It's no secret that I am a big fan.
And James Galbraith is an Economist at the Lyndon B. Johnson School of Public Affairs and at the Department of Government at UT Austin.
He's also a Senior Scholar with the Levy Economics Institute of Bard College.
Of course, is the son of the famous John Kenneth Galbraith and he's the author of the books Balancing Acts, Technology, Finance and the American Future, Created Unequal, The Crisis in American Pay, Inequality and Industrial Change, A Global View and The Predator State.
Very interesting stuff.
Welcome both of you to the show.
Thank you.
Hi Scott.
Hi Bob.
And hi James.
Thank you very much both of you for joining us on the show.
Really appreciate it.
Now, to be up front disclaimer and everything, I am biased toward Bob Higgs' point of view.
However, my understanding is Bob is very biased toward James Galbraith and y'all have met before and Bob says that y'all got along just great.
So this is going to be a nice, very interesting conversation.
For me anyway, I hope the audience likes it too.
But I guess let's start out with finding some common ground.
All of us are opposed to empire and militarism and militarism in the economy and war profiteering and such like that.
So at least we know that none of us are bloody handed neocons or anything like that.
Everybody here basically is a humanitarian with Jeffersonian, I think, very little D or very little L liberal beliefs about humanity.
And so anyway, thank you both for joining us.
And I guess I'm not sure where to start.
There's a lot of different places, but I guess what's on most people's mind is the economic recovery or lack thereof, depending on your point of view, the bailouts and the economic crisis since September 2008.
So I guess I'll start with you, James.
Would you make the case that the bailouts and some of the stimulus and Federal Reserve and congressional policy since the economic crisis started has saved us basically from the unraveling of the financial system and a worse crisis?
No, what saved us basically were the budget deficits.
The fact that we have the capacity for the federal government to run a very large budget deficit, supply income to the population at the time when the banking system was imploding meant that the fall in incomes and the fall in spending was not nearly as severe as the fall in production and employment.
And that's the reason why the economy didn't go into a 1929 to 1932 complete collapse.
For the rest, I think the stimulus package helped to a certain degree.
It certainly created some jobs, provided some help to the construction sector, provided some help to state and local governments.
The help to the big banks, which was absolutely massive, mainly succeeded in keeping them alive.
They have not been doing any significant amount of new lending.
In fact, lending is much smaller now than it was a year ago.
And the result of that is that the private sector is still not contributing very much to this expansion.
So that's where we are at the moment.
I think it's clear things are fairly stable, but I don't see the outlook as being particularly favorable.
Okay.
James, I'd like to ask you, just to make sure I understand right, you're saying that basically they've done kind of half measures and bailed out some, but not really done enough.
Is that right?
Half measures is not the way I'd describe it, but I would have done some things quite differently.
I see.
So it's not, pardon me for mischaracterizing it, it's they've done something, but it isn't what you would have had them do.
That's right.
Yeah.
I would have started at the beginning of the Obama administration with a really serious reform of the banking system.
There were a number of major banks that should, I think, simply have been taken over, handed over to the FDIC for restructuring.
And that way you could have gotten the financial sector cut down to size and made some serious changes in the way it does business.
And I think you'd be further along toward a sustainable recovery in the private sector than you are now.
And now, Robert Higgs, that sounds pretty agreeable, huh?
I do agree with the idea that the big banks that got themselves into trouble and received most of the money from the bailout, the TARP program, should have been liquidated.
It was a mistake to reward those firms by saving them at a time when they had acted irresponsibly.
And the salvation they received from the Treasury amounted to penalizing people who had behaved responsibly and were still earning enough money to be paying taxes for the sake of people who had behaved irresponsibly or simply incompetently.
And keeping alive those big banks that were, in fact, insolvent puts us in a situation similar to the one that Japan went into in the early 90s and, in a sense, never got out of, which is to keep alive zombie financial institutions that have not adjusted their accounts to reflect the fact that they are insolvent and have been given some fudge factors to work with in their accounting after the crisis broke that allows them to pretend that they're insolvent still, even though it's pretty clear that they still hold a lot of assets that are worth less than what their accounts say they're worth.
And this is a very undesirable situation, not just because of the injustice that it represents, but for the economic consequences it will have, because if it plays out in any way similar to the way the situation played out in Japan, then we are probably looking at a long period of, at best, very poor economic performance, as these institutions simply continue to basically sit there absorbing any funds they get from the government or the Fed or from depositors and trying to bulk up their balance sheets, which is what they've been doing for the past year or so, rather than acting as financial intermediaries, which would be their positive role in promoting some kind of recovery and prosperity down the road.
So I do agree with Professor Galbraith that that aspect of the government's relief was certainly undesirable, and it would have been much better if those big banks had simply been liquidated and their assets had been reshuffled to people who would manage them better, and then we'd get things going on a sounder basis again fairly quickly.
I'm not going to have much of a debate if we go on like this, because we're really...
I think I have another bit of common ground here, perhaps.
Now Glass-Steagall is part of the New Deal legacy, which I know, Bob, you have a lot of things to say about the New Deal.
I don't know exactly what you have to say about Glass-Steagall and its repeal, but I know that Dr. No himself, a man who's as laissez-faire as you, Ron Paul, voted against the repeal of Glass-Steagall and gave a big speech against it.
So what exactly was that in terms of...
I know it had to do with separating the different kinds of banks from each other and what have you.
I think, you know, maybe we can get to a unified field theory of what banking ought to look like in this country here, guys, if we keep at it.
It wouldn't quite be the debate we were looking for, but maybe we'll make some progress, huh?
Well, as you say, Scott, one aspect, perhaps the most important one, of the Glass-Steagall Act of 1933, there was an earlier act the previous year also called the Glass-Steagall Act.
But the one that everybody remembers and the aspect of it they remember is that it separated investment banking from commercial banking.
Now, economic historians have since shown that the basis for doing that, that is, the claims that were made at the time about how nefarious it was to have those two functions combined in the same banking firm were basically false, that, in fact, the banks that combined investment banking and commercial banking were not the ones that were dragging the banking system down, especially in the early 1930s.
If anything, they were sounder banks than those that didn't combine those activities.
However that may be, I simply think it's a bad idea to have the government involved in regulating the banking system to begin with.
So if they're going to fuss around and go back to some 1933-style regulation, I don't see any good reason to expect good things to come of that.
I don't think that was the reason why the banking system avoided 2008-style disasters before, and I don't think if we go back to it, it'll be any insurance against disasters in the future.
Well, I think if I can...
Well, let me come in on that.
I think the argument needs to be placed in the context of the other thing that was done at the time in the New Deal, which was the institution of deposit insurance.
The idea behind deposit insurance was that it's really not reasonable to expect ordinary holders of savings and checking accounts to monitor the asset quality of banks.
So what happened was for commercial banks is they got an insurance contract with the government, the Federal Deposit Insurance Corporation, and in return for that, they were subjected to regulation, basically, of their asset quality.
And the FDIC has the authority to come in and take over, close, restructure, sell, merge a bank which is about to...in danger of becoming insolvent.
And so the reason for separating out the commercial banks from the investment banks has less to do with what their performance had been in the Depression, and more sort of looking forward at the risk that if you allow commercial banks who've got deposit insurance to play the role of underwriting securities, the role that investment banks normally play, they're going to have an enormous incentive to gamble with insured funds, with taxpayers' money.
And that's what you wanted to avoid, and that was the logic behind Glass-Steagall.
Well, I think if I remember right from back then or from reading the speech, Ron Paul's point of view when he opposed Phil Graham's bill to repeal Glass-Steagall was, I think, basically sounded like Bob Higgs and said, I would like to completely deregulate the financial industry, but I don't want to repeal this first and still leave the ability of the banks to make all these crazy bets.
But now we're just repealing the limits on what kind of crazy bets they can make and with whose money.
Now, the problem with repealing all regulation is that you're then basically saying to the ordinary banking customer that you've got to be the one who's monitoring the internal activities of the banks, and that's simply not practical.
It's going to create a situation in which people will be running from one bank to another and a tremendous instability in the system.
Yeah, well, I don't agree with that.
I think ordinary people deal with all kinds of products and services in the economy about which they know nothing.
And the reason they normally do pretty well in their dealings is not because of any knowledge they have or lack about the inner workings of these firms they're dealing with, but because there's an incentive in this situation for specialists in basically monitoring and providing information to arise.
And it will be those specialist monitoring activities that hold in check the misbehavior of these firms, which, of course, as you say, most people know nothing.
I don't know anything about how automobiles are put together.
But there are people who do, who monitor automobile companies, who report extensive information about the quality of different automobiles, and I can and have used that information in making my own decisions.
So I think it's misleading to say that ordinary people can't do this and so, and therefore, we have to have the government to come in and take charge of the monitoring and quality control, because, in fact, having the government come in and take charge of anything is a recipe for injecting political concerns to the foremost in how that monitoring takes place and how the government regulation takes place.
And I would much prefer to have people who had an interest, that is, a profit interest, in getting the information correct and in selling it to people who valued it rather than handing it over to the tender mercies of politicians.
Well, you know, politics and government are not really dirty words to me, and I think that government is a tool that needs to be used in certain circumstances.
In fact, we can't avoid it.
It's a very, very large part of everybody's life.
And my sense is, my thinking is that in the kind of world in which we actually live, which is a technically complex society in which production chains are very long, food chains are very long, financial chains are very long and complicated, the reason you want a government is that you want to have an institution which has a supervisory responsibility.
And it's very easy to see what happens when you're dealing with a society which doesn't have that capability.
People do cope, but they cope by putting an enormous amount of time and effort into protecting themselves from fraud and abuse, deception, and quality failure in the marketplace.
And it's extremely costly.
I've lived, for example, take an example of China, I've lived there briefly, and it's easy to observe how people deal with these problems.
They deal with the problem of cleanliness in restaurants by demanding boiling water to wash their plates and glasses before they eat to protect themselves from hepatitis.
They deal with the problem of food cleanliness by not eating anything that looks like a raw vegetable and not washing, certainly, anything in unboiled tap water.
They deal with electrical appliance problems by unplugging them at night so they don't catch fire.
And, of course, anything that they do with a financial institution has to be, I mean, people are extremely careful about that.
They keep a lot of cash around outside of the banks.
So this kind of thing is what happens when the government is not functioning efficiently and not doing its job properly.
And I think we're all really much better off having a set of institutions that actually do work.
And it does require a certain amount of understanding of what the function is and political awareness and willingness to challenge government to be on top of it.
It requires a court system that is providing some checks and balances.
But all of that is really part of the fabric of life in a technically advanced society.
And I don't think there's anything intrinsically wrong with relying on government and expecting government to perform that role.
Well, what I see wrong with it is that you're doomed to disappointment again and again and again.
Not such as life.
We live in a world of comparative institutions, and if we have any choice about the matter, it behooves us to choose institutions that have some kind of incentive compatibility.
And that's where we so often find ourselves being disappointed with government.
We relied on the SEC, for example, to ride herd on financial fraud.
And what did we get?
We got an SEC so uninterested and incompetent in fraud that even when knowledgeable people persisted in telling them about Bernie Madoff, they did nothing.
That's how much protection we got from the SEC.
Not only did they not ferret out the biggest scamster in history, aside from the government itself, but they weren't even interested in knowing about it when someone came and laid the information in their lap.
We get in one regulatory institution after another a similar level of incompetence, of co-option, of government regulators that are basically the creatures of the regulated industries.
This is...
Well, I'm not disagreeing with that.
I wrote a whole book titled The Predator State that laid out this phenomenon, and I think you're entirely right to criticize the SEC and other regulatory agencies.
What happened over the course of the past 20 or 30 years was a systemic attack on the autonomy and competence of those agencies, a political attack, the takeover of the agencies by the most aggressive elements in the regulated industries.
And basically, in the Bush administration, the approach to the regulatory agencies was to hand them over to the most anti-regulatory lobbies there were.
So the mine safety agencies got handed over to the coal lobby, and the financial safety agencies got handed over to the most aggressive mortgage originators.
They were told in no uncertain terms that they could get away with anything they wanted to get away with.
And, you know, I think actually Madoff is a relatively small beer compared to what happened in the housing sector, which led to a meltdown of trillions of dollars in home equity values.
So I think that's – what you say about that's entirely correct.
Now I want to jump in here on Professor Galbraith's side for just a second, Bob, and at least kind of play devil's advocate here.
What about the idea that libertarians end up wholly, accidentally, with all of the best intentions, in fact playing a role basically as shills for the corporate state in that any kind of regulations, like say the Glass-Steagall for one example, any kind of regulations that actually do protect the American people at all from the most powerful in our society, those don't get enforced, and yet the bailout regulations stay, and all the regulations that get to, you know, socialize their costs onto the rest of us stay.
And so maybe, you know, when we argue for real free trade, we get NAFTA, and when we argue for real laissez-faire, we get Alan Greenspan.
Well, that is a typical pattern, Scott, but again, if you say why is that a typical pattern, what makes it a typical pattern, you come back to the same points I was making before, which is that there are powerful people involved in all of these sectors or industries that have a persistent, strong interest in controlling any regulation that exists there, and the idea that somehow public-spirited regulators are going to rise above all of this does not comport with any stage of the regulatory state's history.
It's not that the Bush administration corrupted all of this regulation, this has been the pattern from the get-go.
You can go back 100 years to the ICC, you can go back to any regulatory agency you like, you can go back to the National Labor Relations Board in the 1930s, which was anything but controlled by industry, but it was corrupt in the sense that it was basically acting as the handmaiden of the big unions at the time.
So whatever you look at historically, you find that the regulatory agencies do not act in the way that this kind of blackboard theory of economic regulation tells you they should be acting.
That is just not the nature of the political system in which we live, and the only way to avoid these kinds of problems is to not get into them to begin with.
When we created, for example, Glass-Steagall, and I think Professor Galbraith is correct, part of the rationale was we now had deposit insurance, so we couldn't be handing public money over to bankers to gamble with on investments.
So what did we do?
We first intervened by creating deposit insurance, which after a few decades came back to bite us with massive moral hazard problems.
But meanwhile, having created one intervention in the form of deposit insurance, now we've got to intervene in another way by telling banks they can't be investment banks and commercial banks at the same time, and so forth.
You keep building one intervention to repair the failures or lapses of another until finally you have a world so tied in regulatory knots that the only people who can operate in it are wheelers and dealers inside the state apparatus, and the regulatory industrial connections and coziness that builds up over time.
All right, now this is Antiwar Radio on KOS 95.9 in Austin, Texas.
I'm talking with Robert Higgs from the Independent Institute and James Galbraith from UT, and we're talking economics.
And Professor Galbraith, what about that?
In fact, if I can take Professor Higgs' same chain of logic there, what about the idea that the only reason they really needed the FDIC insurance in the first place is because they had legalized the printing of money out of nothing, really with the Federal Reserve Act, and they had created a system whereby basically every bank has the interest to run as close to the red as they can every night and have these reserve ratios where they don't have as much money as they're loaning out.
And so they're all basically mandated to engage in a system of banking that leaves them vulnerable to bankruptcy at any given time, and then that's why we need the FDIC.
And then as Bob Higgs says, then that's why we need Glass-Steagall, so we're not bailing out the wrong kinds of banking and on and on down the chain like that.
What about that?
Well, the world is complicated, and if one wants to imagine going back to the 19th century when you had the country in a state of political and practically warfare over monetary questions because we were on the gold standard, which was something that was essentially controlled in the interest of the money center banks in New York and greatly to the detriment of the farmers and manufacturers of the time, you can imagine doing that, but I tell you that we went off the gold standard and we left that system because it wasn't functional, because it led to panics and crashes, disruptions, unemployment that weren't tolerable.
And so we have to come into the modern world and work with the institutions that seem to be necessary in order to make the modern world functional.
And I'm not a romantic, I'm a realist.
I think that I totally agree that these institutions are capable of being subverted and destroyed, but the consequence of doing that is that the markets themselves will break down and disappear.
If we didn't have, for example, a federal aviation administration that we were reasonably confident would keep airplanes from running into each other in the sky, people wouldn't get on airplanes.
And so that industry would simply go away, and the same principle applies to practically anything else.
You can imagine we wouldn't be able to support the population that we presently have.
Well, let's keep it on money.
I appreciate the metaphor.
The principles are essentially the same.
I understand.
I understand.
But I don't want to divert too far from the monetary issue because I want to re-evaluate.
I say this is a very clear example.
If you didn't have a system in which there was a supervision of the banking system that enabled people to believe that their money was basically secure in the bank, they wouldn't stay in the banks, and you would then have to deal with the inefficiencies of trying to operate without those institutions.
It would be very, very difficult.
So the principle is exactly the same, in my view, and there's really no alternative to facing up to those problems and trying to deal with them basically one by one.
Well, I see an alternative.
I don't see the world as one in which if government doesn't monitor, regulate, and control, nothing will be done.
If it is in the interest of people to do something, if it is in their interest to do things in a reliable or secure way, that means they will be willing to pay for whatever it takes to organize, monitoring, security, and essentially private regulation of activities.
And this has happened again and again and again in economic history.
So it's not simply a libertarian fantasy.
In fact, in many of the areas today where people think they're protected by government regulators, the real protection comes totally outside the regulatory framework.
I discovered a huge apparatus for that when I studied the medical device industry, for example, where people think the FDA is protecting them.
It isn't.
It's just the other way around.
But there is a huge set of institutions for monitoring, testing, fixing, informing, doing all the things that people really value about medical devices, and doing them not because there's no government regulation in place, but because there is regulation in place and it's not doing the job.
So it has to be done privately.
And this is done similarly in the banking industry as well.
There are plenty of people who make it their business to monitor banks, to monitor investments.
I was reading just this morning about some people that made a ton of money betting that the whole apparatus of mortgage-backed securities and the mountain of derivatives built on that was doomed to collapse.
And so basically they shorted all those mortgage-backed securities and similar derivatives and credit default swaps, knowing that it was just a matter of time because the whole process rested on the idiotic belief that house values would always rise.
And the minute they didn't rise, the whole thing collapsed.
But the point is, these guys were money thieves.
Let's not idealize that process too much, because I'm sure the articles in which you were reading the stories were articles that were describing the suit that the FDIC just filed against Goldman Sachs.
No, it wasn't about that at all.
What was going on there in the FDIC's filing and pleading it to be believed was that Goldman was involved in basically a conspiracy to select for Mr. Paulson particular mortgage instruments which were most likely to fail so that he could bet against them with great confidence that he would be successful, and that they then offloaded those instruments in a way which it did not reveal to the people who were buying them as though they were good assets, people who were admittedly not the shrewdest investors on the planet, that they were getting something that had been designed to collapse, that basically they selected the worst quality of investments they could find.
And as a result of that, RBS, the Royal Bank of Scotland, and the German bank lost a billion dollars or so apiece that had to be made up by the taxpayers of those countries.
Pardon me, pardon me, pardon me, but I see you.
No, it wasn't there.
It was a process which, yes, you're right, bet against the mortgage-backed security industry, but it did so in a way that involved a ban on civil fraud, if the FDIC is to believe.
Well, the first thing I wanted to say was that those bailouts didn't have to be taken.
They were presuming here that if these people do fraudulent things or if they just do stupid things, then the taxpayers have to come in and rescue them, but that's false.
They didn't have to be rescued.
That was a policy decision by their pals, who happened to be in high places in the government, which, as I was saying a moment ago, always will be the case, won't it?
We always had Secretaries of Treasury and people running the SEC who have very cozy connections and backgrounds with the very people they're supposedly riding herd on.
We don't have any other kind, basically, and so that's always going to be the case.
But they don't have to be rescued.
If we had a government that in any way represented the people rather than these big, powerful insider interests, they would just say, tough luck, you made some bad bets, bank, you're in trouble, good luck, I hope you can find a way to come out with something at the other end.
But they don't say that, of course.
They say, this is an ideal time to tell people that if we don't come in and bail out our pals, the world is going to go smash.
And I don't think the world would have gone smash if Goldman Sachs, Bank of America, Citibank, and all the rest of them had to reveal their insolvency.
But they weren't, they didn't have to, and that's because the government projected itself into the situation.
Let me just, on that point, I don't want to take exception to the blanket claim that regulatory agencies always fail in their responsibilities.
I don't think it's true.
I think you can point to many failures, but you can also point to some successes.
And I would specifically point to the enormously courageous position taken in the early 1980s by an appointee of President Reagan's, a guy by the name of Ed Gray, who was head of the Federal Home Loan Bank Board, who stood up when he realized that the savings and loan industry was being taken over by networks of criminals, people sponsored by people like Charles Keating, the Lincoln Savings and Loan, responsible for one of the greatest bank frauds in American history.
He stood up, and he basically unleashed his investigators and his prosecutors, and they managed to get that industry back under regulation, and ultimately there were fraud investigations and prosecutions that put about 1,000 insiders, officers of corrupt savings and loans, into prison, indicted, convicted on federal felony charges, and imprisoned.
So there was a massive cleanup of that industry that did occur.
People don't know about that, but the point I'm making is that it happened, and it is something which reflects the possibility of honest and successful regulation in the financial sector.
But it has to be done by people who are determined, who have a lot of courage in the face of enormous political pressure, and Gray suffered enormously for the stand that he took, and who are backed up by professionals who have a really clear sense of what their mission is.
I think those people do, in fact, have existed at various moments in our history, and they're basically the people that we need to have in those positions.
Well, yes, you can find examples.
I thought when you started, you were going to speak about Alfred Kahn, who was another oddball example, I think, of somebody in a regulatory capacity who actually proposed to do, and carried through, something that was in the public interest.
But the striking thing about cases like that is how atypical they are.
This is not what we normally expect to see from people in high regulatory positions.
We expect to see incompetence and coziness with the people they're regulating.
We expect to see revolving doors, and revolving doors spin wildly in all these regulated industries.
It's no secret at all.
Oh, wow.
Okay.
Time for me to jump in and say something.
Cool.
Well, I'm having fun.
Everybody, it's Bob Higgs debating James Galbraith.
We're talking about money and regulation.
In a sense, I guess we're talking basically about democracy versus laissez-faire and property rights and markets, and how these things interact with each other, and the regulatory state, and so forth.
I want to hear you guys discuss the Great Depression.
As far as I know, neither of you have the conventional view of it, exactly whatever that is.
I'd like to give you both a chance to describe what your view of what happened in 1929, before that, after that, what you think is important, and hear you guys discuss that.
That should be interesting.
Go ahead, Bob, and then I'll ...
Well, Scott, that's a real challenge to boil down my view of the Great Depression, is a few sound bites.
Well, we have 15 minutes.
We have 15 minutes.
I think we can have a real discussion.
We can fit a discussion in 15 minutes.
I would start by going back, in a way, to something Professor Galbraith said a few minutes ago about the gold standard and how it created these troubles.
The first thing I would say is that the gold standard, pre-1914, was never put back together again, and that was where the trouble began, in a sense.
Well, the trouble really began with World War I, which destroyed not only the old gold standard, but the whole financial economic apparatus of the Western world.
So World War I was an enormous event for economic history, as well as other kinds of history.
But when we get up to this kind of jerry-rigged system of the 1920s, and the Feds attempting to manage the gold exchange standard, and to carry out a policy of commodity price stabilization, though all the time its policies are fueling a huge asset inflation at the same time in real estate and later in stocks, it brings us to 1929.
But even with all that, I think that the contraction that began in 1929 might have been no worse than the one that began in 1920, which was very sharp, severe, in some ways one of the worst depressions of U.S. economic history.
And yet, recovery happened very quickly.
From the bottom of that depression in 1921, in just two years, the unemployment rate had fallen to about 2.5%, and the economy had fully recovered, and it was astonishing how quickly recovery could take place, if the government did nothing, basically, with fiscal and monetary policy to save the day.
Now what happened after 1929 was just the reverse.
In that case, owing to the predilections of Hoover, who was a progressive, an avowed interventionist, who immediately began to intervene in a variety of ways, and by the end of his term, the government had done huge damage by its interventions.
But it was nothing compared to the damage that was done when Roosevelt took office, and then a gigantic storm of counterproductive policy actions took place that virtually ensured that rather than recovering quickly, as the economy had done in 1922-23, it would never recover fully, and it wasn't really until after World War II that the economy properly returned to prosperity.
Okay, well that gives me a few handholds to grab onto here.
Let me start with my view of that earlier period.
The big difference between what happened in 1920 and what happened after 1929 was the depth of the collapse.
In 1920, prices had started out in the World War I period at a very high level, and they fell somewhat, but there was not a collapse of asset values that wiped out, in a sense, the collateral that was the foundation of the banking system, and that's what did happen in 1930.
It was a tremendous, basically the banking system was rendered insolvent by the collapse of the asset values behind it, and the result of that was ultimately a panic that led to the collapse of the banking system itself.
That was the situation that unfolded over the course of the Hoover administration.
I don't share the view of the Hoover, but Hoover certainly did a few things, created the Reconstruction Finance Corporation, for example, but I don't share the view that Hoover was a radical activist by the standards of the problem that he was faced with.
The administration didn't do nearly enough.
What happened, beginning in March of 1933, when the Roosevelt administration came in, was a massive wave of activity, beginning with Bank Holiday and a sorting through of the banking sector, which is what restored confidence in those banks that were allowed to reopen.
The bank didn't reopen unless it had been basically checked to make sure that it was solvent and safe, and that was something that should have, as we both agree, should have been done essentially at the start of the Obama administration, and it was not.
What Roosevelt then went on to do was to rebuild the country.
The New Deal in the early-mid 1930s started a process that, by the end of the decade, had built about 700,000 miles of roads, had rebuilt every school in the country, had built about 1,000 airfields that weren't there before, had created the Chicago waterfront, the Triborough Bridge, the Lincoln Tunnel, massive public works and public improvements, built a number of aircraft carriers that proved quite useful in 1942, and just a great many things.
The total amount of unemployment, when you count workers who were actually working for the government who were not normally counted in those statistics, but certainly should have been, fell from 25% in 1933 to just under 10% by 1936-37, just before Roosevelt tried to balance the budget and push the economy back into a recession.
The growth rate in that period was the highest ever in peacetime, and so I think it's fair to say that Roosevelt would not have been re-elected with all but two states voting for him if, by 1936, the country hadn't felt that the Depression was over, the Depression had been dealt with effectively by the New Deal.
But they did, and he was.
What didn't happen, and what hadn't happened, even by the outbreak of the Second World War, was the recapitalization of the banks, the restructuring of the financial system, essentially the recreation of the private financial side of the economy.
That didn't happen because the 1930s were basically on a cash-and-carry basis.
There wasn't a lot of foundation for private individuals to be able to finance themselves with bank loans.
That really didn't start up again until after the war, and partly the reason it was able to start up again had to do with the massive financial changes that occurred as a result of the Second World War itself, when the American population was able to accumulate a massive amount of government bonds that had been issued to finance the war effort, and that provided them with claims on purchasing power that lasted into the 1950s.
Well, I've got a book I'd like to recommend to you, Professor.
It's called Depression War and Cold War, and I think you might find it interesting, but at all events, I'll recommend it anyhow and see what you think of that, because there are arguments and a great deal of data laid out in that book that run pretty much against everything you've said in characterizing the 1930s, and that's one of the reasons I was a little reluctant to reduce my views to a few sentences for Scott's benefit.
Is this your book, Bob?
Yes, it is, and it pulls together a lot of things I wrote mostly for journals over the years, but it was published in 2006 by Oxford University Press, and so that's something that I'm trying to get people to pay attention to, but at all events, I think one of the things that must be noted, even in a brief discussion, is that many of the signs of recovery during the 1930s are in the form of either piling up concrete in government projects, which look as if they have some value, but it's hard to know.
Some of them may have been valuable in the sense that people would have been willing to pay for them if there'd been an opportunity for a payment system to be employed, and probably many of the others would not have been valued by people if there'd been any kind of exchange system available, but we don't have any way to know, because that isn't how they were financed and built.
They were put up through political means, and so we piled up a lot of concrete in the form of dams and highways and runways.
Bridges and tunnels that people drive on every day.
They do, but indeed, that doesn't mean those things are worthwhile, just because once put there, people use them.
But we did that.
We also created a lot of make-work employment through WPA, CCC, and all the rest of them.
Well, CCC planted about a billion trees to help them deal with the Dust Bowl.
You can question whether people would have paid for that out of their pockets had they been asked to do so, but at the end of the day, the Dust Bowl was overcome, and that ...
Well, but not overcome by CCC.
Well, you know, when you're planting that many trees, you're making a contribution to it.
I'll let the meteorologist handle that one.
I don't think the CCC had anything to do with ending the Dust Bowl, but however that may be, one of the things that I think even people who don't like my views in general have been willing to concede is that the drag on the economy throughout the 1930s was the collapse of private investment and its failure to recover.
And in fact, if we go back and take the investment data apart into different kinds of investment, what we find is that long-term investment virtually disappeared in the 1930s.
And it wasn't until after World War II that private, long-term investment recovered.
Now, for the decade of the 1930s as a whole, as the whole 11 years from 1930 through 1940 inclusive, net private investment in the U.S. economy was negative.
Negative for an entire decade and a year.
There's never been anything like that in our economic history.
And of course, everybody knows if you don't have any kind of addition to the capital stock, you really aren't going to have any kind of economic growth.
But the key word in your exposition here is private.
Yeah, that's the key word.
It was a vast amount of public investment, which does add to the capital stock.
Now, you may say, well, that isn't the investment I would have done.
It isn't the investment that a private business would have chosen.
But it is investment nevertheless, and one can make the counterargument that some of that investment was, in fact, very valuable, provided the foundation for the modern economy, for the framework within which private business invested in the post-war period.
You know, my dad got a scholarship to go to Berkeley in 1930, and he took a Model T from the port in Cleveland.
He arrived from Ontario and drove out.
And one of the things he noted in his diary at the time was that from Lincoln, Nebraska, to the California line, the roads were all unpaved.
And by the end of the 1930s, they weren't.
Now, you could say, okay, well, we wouldn't have done that out of private funds.
But we did it, and there we are.
We became a country that was tied together by paved roads.
There is something, I think, I mean, I think you make a reasonable argument that, in retrospect, most people would have approved of and would approve of that.
My point is that you can have things that are useful in some sense, that is, if they're put there, people will find it valuable to use them, and yet they still represent economic waste in that the cost of putting them there was greater than the benefit of having them there.
This has been done many times in government projects.
The interstate, excuse me, the transcontinental railroads, for example, that the government subsidized in the 19th century were like that.
They just didn't pay.
And it's true.
Once they were there, people said, isn't this great?
We can get on the train and go to San Francisco all the way from New York.
But it was waste.
It was wasted.
I'm going to stand firmly on the side of the transcontinental railroad and paved highways, frankly.
That's a very firm ground.
Well, I'll just have to refer you to the economic historians for the rates of return on those.
My understanding of that literature is that those railroads were economically wasteful, and that's why they had to be subsidized in the first place.
Well, there are differences between the private rate of return and the social rate of return.
Indeed, it is.
But that's gone into the calculations on those railroad studies as well.
Although, again, that's always iffy when we try to infer the social rates of return, apart from any actual markets, we're entering the world of creative accounting there.
That's one way of describing it, but one can also say that's the world of historical judgment.
That's the world in which we basically have to live, it seems to me.
That's where I'm arguing that we don't have to live in that world.
We've lived in that world very often in the past, but there were alternatives, and there are alternatives now.
And I believe that people simply resign themselves to saying, well, we live in a complicated world, and it's riven with political intervention, and we have to live in that world.
Then they're resigning themselves to a system that is never going to serve the interest of the general public and is always going to serve the interest primarily of the political insiders.
All right.
With that, we're going to have to leave it.
This has been very interesting.
I appreciate both of your time very much on the show today.
Thanks very much.
You're a great man.
Higgs enjoyed it.
Thank you, Professor.
Okay, everybody.
That is James Galbraith from the LBJ School at UT and Robert Higgs from the Independent Institute and editor of their journal, The Independent Review.
