07/01/14 – David Stockman – The Scott Horton Show

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That's MyHeroesThink.com Alright you guys, welcome back to the show.
I'm Scott Horton, this is my show, Scott Horton Show, on Liberty Radio Network from noon to 3 eastern time on the weekdays.
Full archives at ScottHorton.org And our next guest on the show today is David Stockman.
I was supposed to already have the book in my hand here for the bio.
He's formerly a congressman, was a budget director in the Reagan administration, and worked on Wall Street for a while.
And now he is a writer, oh he's the author of a book called The Triumph of Politics.
And this one is The Great Deformation, The Corruption of Capitalism in America.
And he writes at DavidStockman'sContraCorner.com DavidStockman'sContraCorner.com Welcome to the show David, how are you doing?
Very happy to be with you Scott.
Very happy to have you here, thank you for joining us.
I was going to get the book read and then interview you all about the book, but I got tired of procrastinating.
Well, I haven't gotten tired of procrastinating the book, but I got tired of procrastinating on getting you on the show.
So I'm going to take the opportunity of your great World War I article here.
Sarajevo is the fulcrum of modern history.
The Great War and its terrible aftermath.
And then there's also this other great article that I can't stop talking about on the show, because it's, well, I really, I think I could say, if there was one single thing I would try to get every American to read, it would be this.
The ultimate explanation of the connection between the Central Bank and the Empire and what it costs the American people.
It's called Keynesian Myths, Monetary Central Planning, and the Triumph of the Warfare State.
It's a transcript of a speech that David Stockman gave at the Committee for the Republic in February.
Okay, so I'll just ask you, we'll start with Sarajevo.
Of course, it was, Saturday was the anniversary of the assassination of, the 100-year anniversary of the assassination of Archduke Franz Ferdinand, which began the First World War.
So I'll just let you take it from there.
Well, yes, it's the 100-year anniversary, and of course, the conventional historians would like us to believe that this is all ancient history, that it can be sequestered in a four-year span of archival curiosities about battles, mustard gas, and monuments to the fallen.
But in fact, it's the fulcrum of the entire history of the modern world.
It had a huge, long footprint that has lasted for 100 years, and I say this occurred in three dimensions.
One, it gave rise to a century of totalitarianism, statism, and war, World War II, the Korean War, the Cold War, all of the interventions and massive expansion of the American empire that occurred in pursuit of that, and then continued into the immensely overdone and exaggerated war on terrorism.
So that's the first dimension, and it is still with us.
In fact, you can look at the chaos in the Middle East today, Syria, Iraq, the White House's proposal to intervene in situations that are none of our business, all originated in borders that were drawn in 1960.
The second leg of this is that World War I destroyed the 50-year golden era of prosperity that the world had enjoyed owing to what I call the liberal international economic order.
Free trade, free mobility of people and migration, free movement of capital, fiscal rectitude, governments balanced their budgets, and a gold standard that kept money sound and kept inflation and excessive speculation out of the system.
All of that was destroyed by desperate governments during World War I.
As they exhausted themselves financially, they basically destroyed their currency, suspended the gold standard, borrowed themselves into massive amounts of debt.
In England, for instance, their debt increased 14-fold.
Eventually, when we got into the war, which we never should have been involved in, our debt went from $1 billion, where it had been for 50 years since Gettysburg, to $27 billion in really just a few months during our participation in World War I.
Now, the reason this is important is that the old system, humpty-dumpty, so to speak, was never put back together again once the golden age and its components were knocked off the wall.
The next hundred years became a period of monetary central banking, the rise of fiat central banks, Keynesian economics, massive government intervention in capitalist free market economies, the enormous growth of the welfare state that is dragging down all of the economies of the developed world today.
Finally, it is not often appropriately connected, but it should be, and that is the Great Depression, which was the traumatic domestic event of modern times, was simply the delayed aftermath or cost of World War I coming home to roost.
And unfortunately, it was not properly understood.
The historians today don't even acknowledge the connection.
I have a long section in my book, and we can talk about it.
But it is important because the Great Depression became the, you know, it changed the intellectual tide to the conviction that capitalism was inherently flawed, inherently unstable, prone to drastic collapses and depressionary downward spirals, and therefore without activist government, constant intervention both fiscally and by the central bank, the capitalist economic system would fail.
That's upside down.
The failure was that the sound finances that existed before World War I were destroyed by the war.
They were never recreated, and eventually the world economy collapsed in the 1930s.
Capitalism got blamed when really it should have been blamed on borrowing, the collapse of the gold standard, the massive inflation of currencies that occurred during the war and its aftermath.
So in other words, we have had 100 years of aftermath that have given rise to all of the great problems that threaten free market capitalism and liberty and democratic government in the world in which we live today.
All right.
Well, on that last point, what about the Great Depression of 1920 and 21?
Because that usually is kind of shorthand in the Austrian school for even if the government, the central bank inflates a giant bubble to pay for a war, if you just let it hit bottom and let all the bad debts liquidate and leave it alone and take a hands-off policy, things will get back going again.
And I know Rothbard teaches in America's Great Depression that really prices should have been falling through the 20s because of all the increases in productivity, the so-called roaring 20s, and that the price stability was actually disguising the real inflation of the money supply that whole time.
But I guess so.
The question is, are you saying that the recovery from the Great Depression of 1920, 21 was actually not a real recovery, but one of these, you know, another inflated bubble that disguised the real pain that was due from the cost of the war?
Or was it the it was really the British and their refusal to come to terms with their war costs and America still propping them up strong and Norman and all of that?
Yeah.
Yeah.
There are many elements of what you say.
So let's take it one piece at a time.
The Great Depression, so-called of 2021, actually, I agree, was proof that if we allow the marketplace to work its will and liquidate excesses in bubbles and wartime debt, that eventually those things get purged and the economy then hits bottom and regenerates a healthy basis for growth.
Now, that did happen to some degree in 1920, 21.
There was a tremendous war inflation that people forget about.
The French currency quadrupled their inflation or tripled during that time.
British inflation doubled.
American inflation doubled.
But a lot of our commodity prices went up three or fourfold when we became the granary for the world and had a temporary booming artificial export market.
So all of that had to be adjusted back to the pre-war status quo ante.
Most of that happened, but unfortunately, it wasn't sustained.
And here's the second leg of this, and that is in 1923, the Fed discovered that it had the power, which was granted, unfortunately, to finance World War I.
It had the power to intervene in the bond market and to essentially inflate the credit structure of the United States in an effort to try to help the British get back on the gold standard.
Perhaps, you know, the intention of Benjamin Strong was good.
The world would have been better off if the whole European world could have gotten back to the 1914 status quo ante.
But unfortunately, the way he went about it was to suppress U.S. interest rates far below what they should have been in 1923 through 1929 in order to encourage capital to flow to Britain, which was unwilling to discipline itself financially and really deal with the consequences of its war debts and its war finance.
That, in turn, fueled tremendous speculative bubbles in real estate in the mid-'20s in the United States, and then eventually the final blowoff in the stock market.
Between 1924 and 1929, margin debt in the United States increased from about $1.5 billion to $9 billion, which sounds like small numbers today, but that was in the order of 1.5 to 2 percent of GDP, which would be far bigger than what the margin debt that we're facing even as we have another bubble today.
So unfortunately, we had the impact of who I call Bubbles Ben 1.0, Benjamin Strong, who basically created the bubbles that took the economy from a healthy recovery that started in 1922 and 1923 to the final boom and then bubble blowoff in 1929.
One of the factors that paved the way for the Great Depression that followed in both its severity and length.
The other thing it did was give rise to a massive international bond market.
In effect, corporations were raising equity in this booming stock market.
They used the cash to buy foreign bonds in order to generate yield and increase their earnings and play the financial engineering game.
The big bond market allowed foreigners to borrow the equivalent of today $1.5 trillion, which was used to buy American exports.
Well, that helped the economy boom for a period of time, but it was all on borrowed money.
It was vendor finance.
We were essentially loaning the money to our customers to buy our exports.
When the market collapsed in 1929, the foreign bond market collapsed.
The bonds were the subprime of their day.
They went to $0.07 on the dollar.
And when the foreign bond market dried up, demand for U.S. exports cratered overnight, dropped 80% from 1929 to 1932.
The collapse of the export industries then filtered back into the domestic economy and a huge reduction in inventories and capital spending and fueled the cycle that became the Great Depression.
So all of this is, one, a carryover from World War I, and second, due to the bad central banking policies of the mid-1920s that tried to deal with the hangover on the cheap, but instead of causing prosperity, they caused a financial boom, a bubble, and a bust that then saddled the world with this enormous misfortune that we call the Great Depression.
So if I go back to my junior high school social studies class, which is what I imagine most, I think, what the consensus opinion in America is about this, is that back when there was too much freedom, you had these top hat wearing robber barons who owned everything, and then finally after they blew up everything with the wild excesses of their free market capitalism, finally great granddaddy Roosevelt came and brought them to heel for the benefit of the people of the country, and so that's why we have to have every regulation actually ever since then is justified in that exact same way.
This is the only way that people can protect themselves from business is by hiring the government to regulate that business, and that really is certainly the foundational myth of the American state as it exists right now, which is just amazing since it's so wrong and has such terrible consequences as you've described.
But I wanted to ask you one minor point here before we get further into the Depression, which is that after the bubble broke in 1929, if I read you right in one of these essays here, the Keynesian Myths essay, I think you're saying that the numbers all show that even despite Hoover's big government, progressive, liberal, Republican interventionism, by the time Roosevelt was sworn in, the correction had already set in, that the crash was so bad after 29 that I think you say the beginning of the recovery had already begun.
The Great Depression at that point was over until Roosevelt came and got it started again.
Yeah, that's absolutely right.
The Hoover recovery began in June 1932, six months before the election.
You don't read that in the school books because modern history is totally dominated by the liberal and Keynesian view of what happened during the 1930s, which as we're discussing is 180 degrees at variance with the true facts.
Now, this recovery wasn't based on funny money, though, you're saying.
No, I think it was based on the fact that finally after the boom of the 20s, which was artificial and fueled by easy money at the Fed and massive speculation that it funded through margin loans, the so-called call money market on Wall Street, that once that crash had been fully absorbed and excesses began to be liquidated, the economy actually hit bottom.
Exports were down 80 percent.
They finally hit bottom.
Capital spending was down 85 percent.
It finally reached the point where it was going to begin to rise.
Inventories were massively liquidated because they were overinvested in during the boom, but you liquidate inventories one time, and after the liquidation is over, then businesses have to begin to rebuild.
Now, my point is that that's where the U.S. economy was, despite some of the stupid things Hoover did, and obviously signing Smoot-Hawley in June 1930 compounded and prolonged the problem.
It was a very bad decision.
Bringing in all of the business and labor leaders of the country in 1930 and telling them, don't cut wages, don't cut prices, keep everything propped up, was a huge economic mistake because the economy was crying out to liquidate the inflationary excesses that had been carried over from the war and from the Fed's artificial boom of the 1920s.
So Hoover made mistakes, but despite those, the economy was coming up off the bottom.
Between June and November, for instance, rail loadings increased 20 percent.
Construction orders were up by 25 percent.
A million people were rehired, put back to work, which is a big number given the size of the labor force then.
The stock market began to reflect that with a 40 percent gain over those six or seven months.
Wholesale prices, which had been deflating dramatically 40 or 50 percent after the crash, began to recover.
And so clearly the turnaround was there.
There was no existential crisis of capitalism.
Even the banking system was pretty well wrung out by that point.
You don't see that in the history books either, but by October 1932, right before the election, the last of the insolvent banks had been closed.
The rate at which, you know, deposits were being lost went down to a trickle, and essentially the economy was ready to recover on its own sort of capitalist juices and dynamics.
And it was only in the last month or so before Roosevelt's inauguration— remember, it was delayed in those days, March 3, 1933— that the banking crisis was kindled not because the banks were insolvent or because the Fed hadn't printed enough money and bought enough bonds, as Bernanke and even Milton Friedman said, but because a small crisis in Michigan became a national crisis.
When Roosevelt refused to cooperate with Hoover, it could have been solved easily.
And when his advisers announced that they were going to depart from sound monetary and fiscal policies and essentially unlink the dollar from gold after it had been linked for 100 years at a constant rate of 1 twentieth ounce of gold per dollar, that caused a panic in the gold market.
You don't even read that, and that panic occurred in the last two weeks of February.
You don't read that anywhere in the history books, but the panic in the gold market, which was massive, the people were coming to the gold window, and in those days we still had gold exchange standards, to turn in their cash for gold.
And it created a panic because in those days the currency, the dollar, had to be backed 40 percent by gold.
And as the gold of the treasury drained away, there was a fear that currency would be shrunk.
And as a result of that, people went to the banks for currency in areas all over the country out of fear that the run on gold was going to upset the monetary system.
But that run on gold ended once Roosevelt got in office, and essentially they reopened the banks within three weeks without doing anything.
In other words, the so-called banking crisis is vastly overstated in the history books.
It was not solved through regulation and reform.
It was solved by allowing things to quiet down after the inauguration.
In fact, Hoover's people were still in the treasury, and they reopened 7 out of 9,000 banks in the weeks right after the inauguration on an as-is-where-is basis.
So there's a tremendous amount of mythology about how capitalism was on its last leg, how the banking crisis brought the system down, how the Great Depression never would have ended, when all of that isn't true.
The Great Depression was over.
The banking crisis was tempest in a teapot caused by Roosevelt on the eve of his inauguration.
And the New Deal had nothing to do with resolving that crisis.
In fact, the New Deal, and we can go into that at another time, prolonged the Hoover recovery that then reemerged after the inauguration period banking crisis had ended.
Right.
All right, now, and I'm sorry, because it's not a minor point.
It's a huge point, but it takes a while to get there, to get through.
But I'm glad that I asked you, because that was certainly new to me, that it really was already, the clearing had already taken place by the time Roosevelt even showed up, which, of course, makes sense.
It's been, what, two and a half years, right?
Right.
Yeah, and I think it's just important, because that becomes another Falkland point of history.
As John said in your question, it was all blamed on free markets.
And I say the problem was free money.
The Fed created too much free money.
The Fed created too much speculation, both in real estate and out in the booming industrial areas, like Pittsburgh and Detroit and Chicago and Akron and Youngstown and so forth, and ultimately on Wall Street, where just a rip-roaring casino got going on margin debt.
And I can't really stress that enough.
The margin debt right near the crash in October 1929 was $9 billion.
The GDP was $90 billion at the time, so that's 10 percent of GDP.
Put that in today's context, the GDP is $17 trillion.
That would be the equivalent of $1.7 trillion of margin debt.
Now, today, even though we have all this froth in the market, and I think margin debt is out of control, it's only $450 billion.
So if you put it in today's perspective, in terms of size of the economy and dollars, the margin debt was something like four times greater at the peak in 1929 than it is even today.
So you can see the mischief that is caused by central banking that tries to take over the financial system, and it gave rise to the crash and then the mythology that capitalism had failed, that free markets had failed, that capitalist buccaneers had caused the problem, when in effect it was speculation based on easy money coming from central banks that had way overstepped their bounds.
All right.
Now, I should have known that there's no way in the world we're going to be able to do this in one interview at all, but I'm really glad, though, that we got into detail rather than being too overbroad.
But I would like to talk with you about, well, the boom and the bust, the boom being the bombs and the bust being the end of each inflationary bubble that seems to come with each and every war.
Unless I'm making some kind of error and I'm extrapolating some causation where it's only a correlation, but we're way over time and I've got to let you go, and I've got to get you back on the show to ask you all about that.
Maybe later this week or next week, sir, would that be all right?
Yeah, let's shoot for next week if we could do that.
I'd be happy to.
Okay, great.
Well, thank you so much for your time on the show.
It's been great.
Great.
Thank you.
All right, everybody.
That is David Stockman.
He is the author, of course, of the book The Great Deformation, of course caused by the central bank and the government intervention in the free economy.
And now check out these articles here.
Let me talk about these articles.
Both of these are just really, you know, something else.
You really got to look at them, okay?
Sarajevo is the fulcrum of modern history, the Great War and its terrible aftermath, and Keynesian myths, monetary central planning and the triumph of the warfare state.
This one, it's like the speech I gave about how everything is Wilson's fault and the speech I gave about how all wars are connected to the boom and bust cycle, only combined and then a thousand times better by someone who's a real expert, who's the kind of person who I'm just cribbing.
Keynesian myths, monetary central planning and the triumph of the warfare state.
The ultimate essay on the connection between central banking and war and the boom and the bust cycle.
So please go and look at that.
It's at davidstockmanscontracorner.com.davidstockmanscontracorner.com.
We'll be right back.
Hey, everybody.
Scott Horton here.
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