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Alright, introducing Thomas E. Woods Jr.
He is the author of the new book Meltdown, a free market look at why the stock market collapsed, the economy tanked, and government bailouts will make things worse.
He's got his bachelor's degree from Harvard, his master's, his MPhil, whatever that is, and PhD from Columbia.
He's also the author of Who Killed the Constitution?
The Fate of American Liberty from World War I to George W. Bush with Kevin R.C.
Gutzman.
Sacred Then and Sacred Now, The Return of the Old Latin Mass, 33 Questions About American History You're Not Supposed to Ask, the New York Times bestseller, The Politically Incorrect Guide to American History, How the Catholic Church Built Western Civilization, The Church and the Market, A Catholic Defense of the Free Economy.
He's also a contributing editor to the American Conservative Magazine, a fellow at the Ludwig von Mises Institute, and again, the brand new book is on the shelves right now.
It's called Meltdown, a free market look at why the stock market collapsed, the economy tanked, and government bailouts will make things worse.
Welcome to the show, Thomas Woods.
How are you, sir?
I'm just fine, Scott.
Glad to be talking to you.
Yeah, well, I am sure glad to have you on the show here today.
I'm also glad that you have such a good telephone coming in loud and clear.
That's good.
So let's start right at the crux of the matter as far as I can tell.
The conventional wisdom, I learned this as a little kid, I think basically everyone in this society learns as a little kid, that the Great Depression was caused by the wild excesses of free market, laissez-faire capitalism, that it could not contain itself, there became all these speculative frenzies, and Joe Kennedy smartly got his money out when his shoeshine boy said he was getting into the market, he knew something was wrong there, and the wilds of free market capitalism just sowed the seeds of a terrible disaster until the New Deal and then World War II was able to save us.
This is not only is it something that pretty much everyone in American society seems to accept to the degree that they know about economics or the Great Depression at all, but it also seems to me, Tom, to be the lens through which everyone in the political class right now is examining our current financial crisis.
So I would like to start this interview, if possible, with giving you an opportunity to address the widespread understanding of what caused the Great Depression and how the New Deal worked in terms of effectiveness and particulars, how it was set up, what it did, and how much better or worse it may have made things.
Right.
Okay, well, as you say, the conventional wisdom is that we had this laissez-faire economy in the 1920s, and then that just gave rise to the Great Depression.
And I understand why people hold that view.
It's what they're taught all their lives.
I would be shocked if they believed anything else.
You have to really seek out the truth of this matter.
When you look at the 1920s, there is a major aspect of the economy that is not laissez-faire at all, and that is arguably the heart of the economy, the very heart of the economy, money, banking, and interest rates.
Now, if those things aren't totally free, then I'm sorry, but you cannot describe this as a laissez-faire economy, because what, in fact, you had in the 1920s was something somewhat similar to what we've had in recent years.
You had, in this case, a freshly created Federal Reserve System that, over the course of the 1920s, inflated the money supply pretty substantially.
During the 1920s, it was something like 7.3% inflation per year, and I don't mean price inflation.
Price inflation was pretty much nonexistent in the 1920s, so superficial economists concluded that everything was healthy, everything was wonderful.
So, in fact, now, I mean, I know you've probably spoken many times to your listeners about Austrian business cycle theory, so I won't bore them unless you want some clarification, but just – Well, no, I do.
I do, because – see, and I even want clarification on the laissez-faire thing, because, again, going back to my basic childhood education on these matters, dollar bills have George Washington on them, and government is kind of this neutral player that provides the money that we all use in our free market economy in order to trade around our goods and services with, and that kind of thing, but you seem to say that the fact that you have George Washington on your bill, the fact that it's a government dollar itself means that any argument about the excesses of the free market must be dismissed, because there you go, there's your big hole in the free market.
So if that's really what you're getting at there, then I think you've got to really explain why it would be that something that we all just take for granted, government money that we pass around, and that's why we trust it and everything else, if that's really such a hole in the free market as to make it not a free market anymore, that you can just dismiss the argument after that.
Right.
Well, I'm not simply saying that the existence of – that the fact that it's government-supplied money inevitably means that it's going to be a crummy money.
It could be.
It is theoretically possible that government could give you decent money.
My argument is that the government can manipulate the money, because it has a monopoly over the money, because it has legal tender laws, so that if I make a contract with you that you're going to deliver some good to me, and you're going to pay me in gold, if green pieces of paper are legal tender, then you are absolutely free to pay me in something other than what we contracted for you to pay me in.
So it makes it very hard for alternatives to the government money to spontaneously come into existence.
My argument is that the Federal Reserve System in the 1920s, it does more than – I mean we see the federal government creating more than just money.
It's not just that we had a money where your bill could be exchanged into a 20th of an ounce of gold.
If that were the case, we wouldn't have this problem.
If the government were honoring that in which the paper was simply a substitute, a money substitute, a substitute for some fixed amount of gold, we wouldn't have this problem.
The problem comes when you have a government monopoly central bank like the Federal Reserve System that can take that money, can create whatever amount of it it wants to at will.
And in the course of doing that, by flooding the economy and the banking system with additional reserves created out of thin air, it can influence interest rates upward or downward.
It can push interest rates below where the free market would have set them.
And yes, I am suggesting that it cannot be blamed on the free market when interest rates are pushed lower than the free market would have set them, because that's not the market's fault.
The market was trying to set them at a particular level, but the Fed's intervention sets them at a lower level.
And what the Austrian economists argued is that when you look at the structure of production, when you look at the stages that let's say raw materials go through before they become final finished consumer goods, some of those stages are in the way, way remote past.
It takes a long, long, long time from those things to finished consumer goods.
For example, mining.
When you start mining, it's going to be a long time before you finally get that silver figurine in the store.
Or when you're harvesting, it's going to be a while before that turns into a bagel.
So in other words, there are stages of production that are far distant in time from finished consumer goods.
And the Austrians argue that when you push interest rates lower, you affect the relative profitability of the different stages of production.
That the further off in time a stage of production is, the more you affect its profitability by lowering interest rates.
Because obviously, the longer you take out a loan for, the more pain you feel paying interest.
I mean, anybody who has a 30-year mortgage knows what I'm talking about.
The first year, you're paying almost all interest, because that's a very, very long-term loan.
So if interest rates come down for you even by 1% on a 30-year mortgage, that has a huge effect on your monthly payment.
It would have a much smaller effect on a one-year mortgage if there were such a thing.
So the point is that it's the stages of production that are farthest removed in time from finished consumer goods that become artificially and apparently more profitable.
And so, in effect, it encourages, therefore, the Federal Reserve's intervention into the market encourages more expansion in those stages of production than, in fact, consumer demand can sustain.
And now, there's more to it than that.
I mean, there's a time problem.
There's the fact that at the very time that investors are investing in long-term projects, consumers are buying more and more of present goods.
See, normally, when interest rates come down, it means you and I have saved more and that we're going to defer some of our consumption for the future.
But if interest rates come down just because they've been forced down artificially, we're not deferring our consumption.
And yet, investors are engaged in future projects, even though we want to consume right now.
They're engaged in product development when what consumers want are more of existing products in the here and now.
And so, it's this mismatch, and it's the fact that when interest rates are low because you and I have saved more, it means we haven't consumed everything we've produced.
There are resources available now in the economy to sustain investors through their investment projects.
But if interest rates have come down just because the central bank forces them down, that doesn't magically, by some magic wand, create more goods.
There are just as many goods in the economy as there were before, but now there are a lot more investment projects and a lot different lines than would have occurred on the free market.
And so, they can't all be completed.
The resources have not been brought into existence to complete them.
That's how Mises explained it in Human Action, that investors are basically misled into thinking that the economy is richer than it is.
It has more saved resources than it is.
So, inevitably, even if the Fed doesn't suddenly raise interest rates, even if it doesn't do that, inevitably, this shortage of resources will make the boom turn into a bust.
And that basically describes what happens in the 20s.
Now, we often hear that downturns are caused because there's underconsumption or people aren't buying enough.
Well, if that were true, then the downturn should be concentrated in consumer goods industries.
Toothbrushes, hats, magazines, sweaters.
But it's actually consumer goods industries that do relatively well.
If you look at the sectors of the economy that do the worst in the bust, it's always those sectors farthest removed from the consumer.
In fact, if you look at Japan, they had a classic Austrian boom-bust cycle in the 80s and 90s.
And look at those sectors that did the worst in Japan.
It goes in order from farthest from consumer goods down to consumer goods.
I mean if you look at – it goes mining, manufacturing, wholesale and retail, and services.
That's the order of farthest from consumer goods to closest to consumer goods.
And the reason why is because there's more credit involved.
There's basically larger loans at stake and bigger plans at stake.
Every year, because the payment is taking place over such a long time, then interest accumulates.
And this is what makes the longer-term projects more interest rate sensitive.
The same way your 30-year mortgage is very interest rate sensitive.
The interest rate comes down half a percent.
Your monthly payment is much lower.
And so as I say, when you look at the Japanese example, it is exactly what you would expect from Austrian business cycle theory.
In order of these sectors of how far they are from consumers, that's the order in which they did badly.
Services did the least badly because services, like a massage, you get instantly.
There is no time dimension involved.
So that's my argument about the 20s is that this is what Murray Rothbard argued in America's Great Depression.
It's what Bob Murphy is going to be arguing in his important book coming out in April about the Great Depression.
That this is the way to think about it.
That it's a Fed-created boom that inevitably ends in a bust.
And who were the people who saw the bust coming?
And here's a big deja vu because Ludwig von Mises in 1928 at a time when everyone said permanent prosperity was here.
There's no more business cycle.
We have great scientific minds running the Federal Reserve.
He said, look, sooner or later the bust has to come.
F.A.
Hayek said the same thing in 1929.
Meanwhile, Irving Fisher, who has been described as the greatest American economist.
In some ways he is the spiritual father of modern mainstream economics.
What was he saying?
He was practically wiped out in the Great Depression.
He was telling people going into 1929, going into October of 1929, and even thereafter, that everything was fine.
When I was a kid, I had heard the phrase that some famous guy, whoever it was, had said right on the eve of the crash of 29, that we have reached a permanently high plateau.
And it's going to stay this high and there's no reason to think that it will ever go down again.
And it was only when I was reading your book that I found that, oh, this is the father of all modern American economics who said that.
Yeah, I mean, isn't that kind of interesting?
And so you would think that when you have people who consistently call these things, they would get some credit.
I mean, in the 1990s we had a similar situation where we were told that we had moved into a new economy.
That was Greenspan's term.
We have a new economy and booms don't necessarily lead to busts anymore.
And meanwhile, the Austrians said, well, look, I mean, obviously there's something wrong with these tech stocks.
I mean, please, they have no earnings.
Their business models are bizarre, half of them.
There's no way this can persist.
And sure enough, there's a dot-com crash, which may not have been hard enough.
I mean, it was Greenspan's attempt to inflate our way out of that one that led to the current situation.
And so notice that none of this has to do with the free market.
I mean, when you interfere with interest rates, I mean, this – and it's not like there's just one number, like one interest rate in the economy.
There's a structure of interest rates.
And when this is systematically meddled with, well, of course, what do you expect?
Of course you're going to see – you're going to see discoordination.
You're going to see people – as long as there's more and more money being pumped into the economy, it seems in the short run as if you can do no wrong.
Everybody's doing great.
The stock market just goes up and up and up.
You start getting delusions of grandeur that everything you do turns up smelling like roses.
Maybe I should get more real estate.
Maybe I should buy more stocks.
Whereas Austrians like Fritz Machlup and others actually said that if you see a stock market that is just uninterruptedly just going from boom to boom to boom to boom and up and up and up and up and up, this is actually not a sign of health is what Machlup said.
And Jesus Huerta de Soto from Spain more recently said this is not a sign of health.
It's a sign of a phony economy.
There's no reason that these types of consistent gains at this level, at this rate, can be posted.
What's really happening is you're seeing the stock market is reflecting this boom in capital goods.
The stock market is a market entitled to capital.
So that's where you're going to see a lot of this boom manifesting.
All right.
Now let me ask you this because it is established – it sort of went without saying in this discussion so far, but I think more and more people do understand that the Federal Reserve was not part of the New Deal.
The Federal Reserve actually preceded the crash of 29 by 16 years.
And so it's at least plausible for you to right then begin making an argument that the bubble for the First World War, the bubble for the Roaring Twenties was what precipitated the Great Depression.
But how did they get the Federal Reserve Act passed in the first place?
There must have been some sort of banking crisis.
In fact, there was, right?
In 1907, two or three years before the Federal Reserve Act was written in 1910, there was a major problem.
And so the Federal Reserve Act itself was a response to the wilds and excesses of the free market.
And so I guess you're just arguing that it didn't work that well.
Man, you're a good devil's advocate, my friend.
I do actually talk in Meltdown about the panic of 1907 because when you look at it and what really happened, it's quite something.
Because what really took place was in New York, you had a small series of bank failures.
You had the Knickerbocker Trust Company that failed.
It could not deliver depositors' deposits on demand.
And then a couple of other institutions failed.
And then it began to spread here and there.
New York was hit harder than other places, but began to spread.
There were various other bank failures.
And one thing I point out in Meltdown is that when you even look at what free market economists say about this, it's really disappointing and surprising.
Because I cite a guy named Gene Smiley, and I have nothing but respect for Gene Smiley on every other issue.
Smiley wrote a great history of the American economy in the 20th century that I rely on a lot.
But he also wrote a book called Rethinking the Great Depression, and he talks about the panic of 1907.
And he says the panic of 1907 and the failure of these banks to deliver their depositors' deposits on demand just goes to show how much we needed a lender of last resort.
We needed a special sort of government-sponsored institution that could step in and help out these banks when they found they were in trouble with their depositors.
Now isn't that interesting that he just assumes that the lesson he draws from this, even as a free market economist, is that this goes to show that the banks needed some kind of institutional bailout mechanism.
Well, and if I can chime in here, I've had people look at me like I'm from outer space for saying that the FDIC is not a solution to anything, insurance for your bank withdrawal.
That just is a permission slip for the banks to commit even more fraud than they would otherwise.
And the problem is that they have the ability to create new money at all.
And people look at me like I'm from outer space, or with the libertarian argument again.
Oh sure, all we need to do is just repeal everything all the way back.
Well, in terms of deposit insurance, which comes later, at least just to finish this point, going into the Federal Reserve Act, you can clearly see that the Federal Reserve System is obviously not the only way to deal with banks that get in trouble.
How about bankruptcy?
How about making it illegal for them to do these things?
In other words, there were ways of dealing with this other than a gargantuan, unaccountable national bank, basically, like the Fed.
But in terms of deposit insurance, what does this even mean?
Basically what we're saying is no matter how corrupt your bank is, the taxpayer will bail you out.
So it leads to a system in which the banks have every reason in the world to make absurdly risky moves because they know they get to keep the profits if the projects turn out well.
But if they don't, well, one way or another, everything will be settled.
We've got deposit insurance.
So it leads to this perverse result that I think, as Peter Schiff put it I think the other day, we have this bizarre situation in which Americans put more time into researching what plasma TV to get than they do into where they should put their money.
I mean, doesn't this seem a little odd?
Isn't this a little strange?
Well, the whole thing about banking and money and how it works is a mystery.
I mean, if you watch mainstream media, on the average day, we're in the middle of a crisis now and things are a little bit different.
But for the most part, nobody ever really talks about what the central bank is doing or how it works or anything like that.
It's basically assumed that you've got to be really, really smart to be into that.
You have to be into the financial sector for a living to be interested in that.
Otherwise, it's a bunch of people at their giant marble temple who are the masters of the universe up there.
They know what they're doing.
And it's mostly, speaking as a regular American citizen here, I'm under the impression that it's supposed to be none of my business, really, how monetary policy works or why it should be important to me at all.
Yeah, and I mean, there is definitely a condescending air about the arrogant SOBs who are running the show here.
Look, you peons shouldn't be worrying about this.
You should leave this to the experts.
Which experts would those be?
Would those be the experts like Alan Greenspan, who told us that a housing bubble was impossible?
Are you talking about that expert?
Or are you talking about Ben Bernanke, the Fed chairman who said that by the end of 2008, the housing bust would be all over, even though we've got record foreclosures now?
Or would it be Ben Bernanke who said that about 18 months ago, he said that his regulators had investigated the mortgage market and found that it was in better shape than ever?
I mean, are these the experts you're talking about?
Because in my view, we could stand to hear a lot less from people like this.
But you're right.
There is this impression given, and it seems to me deliberate, that the Fed is based on some secret teaching you could never possibly master.
You could never really learn about this.
This is too complicated for you.
And frankly, that was kind of a secondary reason for writing Meltdown, was to explain to people, not only can you understand this, not only is it not something you need to dabble in the occult to figure out, but you have to know about it.
It is essential for you to know about it right now, especially if you value freedom, the free economy.
Even if you're not necessarily a conservative or a libertarian, you just happen to not want the move that we're making, obviously, toward a fascist type of economy, where we've got central direction from the center, where if you want to have credit allocated to you, if you want to prosper in your business, you darn well better have friends in Washington.
If you just feel funny about that, you've got to learn this stuff.
Well, and now, what about the liberals, too?
Because if we're trying to appeal to the best of what makes liberalism liberalism, it's the desire to see not just the average guy, but maybe even a person from the lowest circumstances in our society have a decent shot at life.
And the history that we learn is that the capitalists basically, particularly if we're talking about the 1920s and 1930s, you have all these robber barons in their top hats while people are starving.
And they didn't care about any of that.
And FDR was the hero of the little guy who stood up against these millionaires and billionaires and said, hey, listen, a little bit of economic justice here for the little guy, too.
And I'm here to tell you, Tom, if it's just a matter of trying to help conservatives get their arguments right, good luck with that.
You need to be able to, and I know you can, I want to give you an opportunity to explain to a liberal why, in your view, what FDR did on behalf of the little guy, whatever his motives, whether pure or cynical or otherwise, was counterproductive.
Because, after all, this is a guy who formed a coalition of everybody in this country almost and was reelected over and over again.
This was democracy at work here.
So you want to refute that, you've got to not just appeal to the people who are tempted already to agree with you, but explain why the people who believe what they believe got their cart before their horse or whatever it is.
Well, Scott, I'm happy to report I got an email the other day from the guy who's going to narrate the audiobook version of Meltdown.
And he told me that when he first got my book, he looked at it and said, oh, here we go, another right-wing propaganda piece.
He said, by the time I got finished with it, I was completely convinced by your argument.
So he was not – I mean, he was inclined to be unsympathetic.
But he looked at the thing and he said, this seems to account for what happened.
So if you're just a propagandist or if you just want to say rah-rah for the Democratic Party or rah-rah for the Republican Party, I don't have much for you.
But I can lay out this case.
Now, in terms of the New Deal, obviously one could go on and on.
I've written a lot about the New Deal in other books and a little bit about it in Meltdown.
But just think sensibly about it.
I mean, you first have to understand what went wrong.
Why was there a bust?
Because only then can you assess whether FDR was doing the right thing or not.
It isn't just that people didn't spend as much all of a sudden.
We had a problem with spending.
We've already refuted that.
The economy, the consumer goods sectors weren't hit all that hard compared to the capital goods sector.
So it's not a matter of consumers weren't spending enough.
But yet, that's the whole premise of the New Deal.
Spend, spend, spend, spend, spend, spend.
Let's have the government spend.
Let's encourage you people to spend.
As if spending per se could solve the problem.
What you in fact need is this.
And here I want to actually make an analogy with our current situation.
Because I think it's easier for people to understand this.
In the current situation, we had the housing bubble.
And when we use the term bubble, what we mean is a sector of the economy in which prices are artificially high.
They can't stay that way.
This can't go on forever.
It's phony.
They're phony high prices.
They're going to come down.
And this bubble is blown up by the Federal Reserve System.
And very few people seriously deny that.
The Fed's easy money policy basically made everybody feel like you should go out and buy a $600,000 house and have a big media room and an exercise room and all the rest of it.
Well, now that that bubble is bursting, people are now realizing that if they were counting for their retirement on selling that house and pocketing the equity, they're in big trouble.
And especially if they've been borrowing against the equity in their homes, if they've been consuming more because they've been misled into thinking they're richer than they are.
So first of all, point number one, I do not see, I fail to see what is so-called progressive about an institution like the Fed whose bubbles mislead people into thinking they're wealthier than they are.
And therefore trick them into consuming more than they would if they'd been able to see the economic situation clearly.
There's no way you can persuade me that there is anything even slightly progressive about that.
But let me continue because it's not just the housing market that's affected by the housing bubble.
Think of all the things that go into a house.
Think of all the things that have to be trucked and shipped across the country to go into houses.
So trucking and shipping, almost everything is in one way or another connected to this housing bubble.
Well, the number of framers, the number of people who had decided to quit their other job and go into construction for a living.
That's exactly right.
They were misallocating their labor services, and they didn't realize it until the bust came.
And then beyond that, we have the fact that, again, because people are seeing their 401ks and their other assets being artificially inflated, again, they have an inflated sense of their wealth.
So sure, in that economy, maybe it does make sense for there to be a Starbucks every three inches where I can buy a $5 cup of coffee.
But in this post-bubble world, it may be the case that people now, they want to pinch their pennies.
They say, a $5 cup of coffee, what are you, insane?
So Starbucks has had to close a whole bunch of stores, and that's all to the good.
Because the problem, it does not come with Starbucks closing the stores.
The problem comes with them opening them in the first place because in bubble conditions, people do stupid things.
That was a bubble project.
That was a project that could endure only so long as we keep creating phony money.
That can't go on forever unless you want to have hyperinflation.
So in other words, the point that I'm making is that what has gone wrong during the boom period is that the manipulation of interest rates has led to investment in lines that don't make sense, that can't be sustained, and that for the sake of economic health need to be discontinued.
We need those resources that are being poured into those money-losing Starbucks to be freed up so they can support genuine wealth-generating projects elsewhere in the economy.
So what we need then is not just spending per se.
I mean, that's an explanation that shouldn't satisfy a third grader.
We don't need spending per se.
We don't want to prop up the economy as it exists right now.
It's unsustainable as it exists right now.
It's not producing the products that people are actually demanding now that they know their real level of wealth.
So we need resources going out of Starbucks, going out of Cold Stone Creamery, going out of plasma TV creation, and going into – and again, I don't know because that's why we have a price system to figure these things out – going into the production of things that are sustainable, that people can buy with their income.
That's what we need.
We need that adjustment to occur.
Now when the government just simply comes in and starts spending arbitrary amounts of money that it takes from the productive sector, from those few wealth-generating activities still out there, they have to pay for the government's arbitrary projects.
All that does is interfere with this adjustment because then the economy can't figure out – well, see, the government's suddenly spending a lot of money on desks, and it's spending a lot of money on doorbells.
So we get a shifting of resources into these things, but that's not sustainable.
Those projects are going to be over soon.
So all this does is discombobulate the market at a time when entrepreneurs are trying to figure out which projects are sustainable and should continue, which ones should be liquidated, and all this extra public work, spending, whatever, all it does is deplete our savings on politically motivated boondoggles.
None of this can possibly contribute to economic health, and it's no coincidence that the soonest we ever got out of – when you look at a depression that was over really fast, you look at the depression of 1920 to 1921, the economy got back to setting production records very quickly because the government passed no stimulus package whatsoever.
To the contrary, they cut the government budget, thereby releasing resources for use by real wealth generators.
The Federal Reserve hardly did a thing, and therefore this adjustment was allowed to take place.
Cleaning out all the bad investments encouraged by the previous Federal Reserve boom was allowed to take place in an unhampered way, and you had a prompt return to prosperity.
So it seems to me if you're a progressive and you genuinely believe – you're not looking to score political points, you're not just full of envy that somebody's got a yacht and you don't – but you genuinely care about the well-being of the poor, you would want this adjustment to occur as rapidly as possible.
And you would have to know that the only people who can know how the adjustment should occur, what industries need to fail, what industries need to be expanded, are entrepreneurs who through trial and error employ resources in various ways until they see what works and where equilibrium is restored.
And so if you want a quick recovery, that's what you should do.
If you want people to be miserable year after year after year, well, then you should try all the stimulus packages and all the bailouts that Japan tried with no results.
Now, see, this gets back to the Great Depression and the fact that it lasted so long is mostly, I guess, interpreted as just kind of an – or goes to show how bad it really was that even the New Deal and all the public works and all the welfare programs and everything, even they weren't able to lift us out of the terrible depression that the capitalists had caused.
Which gets us to the New York Times again, I think, this morning, that great public's work project, World War II.
And it seems to me, you know, I'm just kind of puzzled and I'm often puzzled when I read the New York Times, but it seems like if war was good for the economy, we'd all be rich right now because, boy, oh, boy, are we at war a lot and spending at least as much as they spent on World War II and on Vietnam and all these things.
In fact, didn't Vietnam cause a bunch of economic problems in the 70s as the results of that and all that?
So I'm confused.
How is it that World War II was great for the economy, but all the other wars seem to be bad for it?
Well, we've talked about this in the past, and I'm very happy to talk about it again because it is the central fallacy of all this.
Because you will get people, even conservatives, some of them will say, yeah, you know what, you're right, FDR didn't get us out of the depression.
Good thing for World War II, that finally got us out of the depression.
And my view is that I don't want to concede that point because, first of all, it's not right.
But beyond that, it basically makes the whole case for all these stimulus packages because the argument would then be, you see, World War II shows that if the stimulus is big enough, then it can get us out of the depression.
So just to make a long story as short as possible, I talk about this in Meltdown.
And by the way, let me just point out that I actually have a free chapter, a link to a free chapter of my book Meltdown up at my website, which is TomWoods.com.
But the reason I talk about this in a book on the current collapse is because this fallacy is so persistent, it's still being talked about in the midst of this current collapse.
It's got to be answered.
So part of the answer is basically this, is that, first of all, we have to understand that war per se, war destroys things.
Destroying things doesn't make you rich.
And creating things for the sake of detonating them doesn't make you rich.
If it did, then we should just build a lot of missiles and detonate them.
And we won't even need an enemy.
We'll just detonate them out in the Nevada desert or something.
Then that will make us rich.
We'll build tanks and just drive them through the desert.
And that will be great for our economy, if this line of argument is correct.
So first of all, you have the fact that about 12 million Americans were drafted into the armed forces at one time or another during the war.
So yes, unemployment goes down.
But big whoop.
Are we supposed to give the president credit for that?
Because people are – what if we, today, kidnapped all the unemployed people and shipped them to Sweden?
We could solve our unemployment problem.
But that's obviously not a healthy, sustainable way of doing it.
So who cares about the unemployment?
I think they're totally meaningless and pointless.
You know, Krugman in the Times this morning actually does say it brought the unemployment rate down just with a straight face and then goes on from there.
I mean, it's amazing.
Absolutely amazing.
Now, about 40% of the economy during the war, one time or another, was either involved directly in the fighting in terms of the – for example, the men themselves who were fighting.
Or they were civilian employees of the armed forces.
Or we're talking about the military establishment itself.
So two-fifths of the economy is devoted to the war.
So obviously it doesn't make you more prosperous.
If 40% of your economy is devoted to doing and producing things that the other 60% can't buy.
Nobody buys a tank or a missile.
So right away you know that can't possibly make you wealthier, especially when who's funding this?
The 60%.
So to add insult to injury, the 60% now have to pay their own money to have an outcome in which there are fewer consumer goods for them to buy.
So we have – right away there should be something fishy about this.
But the fishiest thing of all is given that you've got millions of men, a huge, huge chunk of the labor force, young men drafted into the armed forces.
Who's taking their jobs at home?
Because some of them were in fact employed gainfully.
Who's taking over their jobs at home?
Well by and large women, many of whom have no work experience.
Very young people with no work experience.
And very old people.
So now suddenly therefore during the 1940s the economy, the U.S. economy is suddenly subject to one of the most severe human resource constraints it has ever endured.
And yet we're supposed to believe, if we believe these phony baloney GDP statistics from the 40s.
We're supposed to believe that when the U.S. economy is undergoing the most extreme resource constraint in its history, it also posts the greatest advances in production in American history.
The greatest growth spurts that we've ever seen before or since.
Well how phony baloney were these statistics?
Are they still a matter of consensus today that they were accurate?
Well now thankfully, thanks to Bob Higgs and his book Depression War and Cold War published by Oxford University Press, we are starting to get a crack in the consensus.
Because what Higgs points out is that first of all GDP is a fishy statistic to start with for a variety of reasons.
Partly because it counts government expenditures as if they're an unmitigated boon to the economy.
And there are other things too.
They leave a lot of stuff out.
They add in stuff that should be in there.
But in this case it's really, really deceiving.
Because when you look at the economy in the 1940s, it was very severely controlled by the government.
So that it could get the resources it needed to fight the war.
And that meant that you don't have real free market prices in many, many industries in the U.S. because the economy is controlled.
The government is demanding things and naming its price.
Prices are only meaningful if they are reached through the voluntary consent of buyers and sellers.
If they're just arbitrarily given by the government, they don't tell us anything.
So I give the example in my book.
I say suppose the government suddenly said from now on we declare the price of eggs as $10 an egg.
And we the government are going to buy a million eggs.
So $10 an egg times a million eggs is $10 million we're going to spend on eggs.
According to GDP we're supposed to add that to the GDP.
$10 million.
What does that tell us about the real condition of the economy?
Nothing.
It's a totally – $10 million in that case is a completely meaningless number.
So if you add up a whole bunch of meaningless numbers, you get a gigantic meaningless number.
Now there's much more to the argument than this, but the point is that these statistics are obviously unreliable.
Because the same statistics tell us that in 1946 we had one of the greatest depressions on record.
Well, then too.
But didn't the New Deal and the war controls – I mean were they completely repealed at that point?
I thought the whole story was that Ike Eisenhower, unlike Robert Taft, when Ike Eisenhower got elected, that he didn't repeal the New Deal at all.
He just reaffirmed it all.
And it's been all New Deal since then.
Well, it's true.
Now Eisenhower – my argument about the recovery of 1946 is simply this.
That number one, there's no more war, so there's no more of the dislocation occasioned by war.
Secondly, the federal government is going to scale back its ambitions.
There isn't any longer this sense that we're just going to have a ceaseless number of programs coming out that it's hard for investors to anticipate.
I mean that is part of the 20th century of American history in which the government actually does still do this.
But in the New Deal you were hearing FDR denouncing businessmen and bankers every two seconds.
So nobody quite knew what to do.
That all came to an end.
It's true that by the 50s when you get Eisenhower, he doesn't repeal any of the New Deal.
It just grows more slowly.
Okay, well by that point, for most people, that's good enough.
I mean you don't have anything like the horrendous National Industrial Recovery Act that cartelized all of industry.
I mean you can basically more or less adapt.
You can say, all right, look, these things are permanent features of the American economy now.
The minimum wage and blah, blah, blah.
Okay, they're going to increase relatively slowly under Eisenhower.
But the market is resilient enough basically to deal with that as long as there aren't crazy jolts.
The problem of the 30s were these crazy jolts.
Suddenly there would be a 100% top income tax rate completely out of nowhere.
And as Higgs points out, we have this problem called regime uncertainty that investors were holding back from investing because they didn't know what the regime in Washington was going to do next.
I mean are they going to nationalize this?
Are they going to tax that?
Better just hold on to your money.
Put it in safe investments and just ride things out.
So basically the New Deal and the wartime controls that were repealed – or I guess the New Deal kind of became the war.
Like Tom Fleming's book, The New Dealer's War, where it all kind of merged together.
But then a lot of the wartime controls were repealed at the end of the war.
And so I guess that's Higgs' argument is that that's what unleashed, even though it wasn't a complete repeal back to before Theodore Roosevelt or anything like that.
It was still enough of a repeal and constraint on the economy that a lot was unleashed.
But okay, so what about this?
I'm trying to think of the way I learned this in school and the best arguments and things, which is that they got all the factories moving again.
They got people, even if it was older people and women who didn't have much work experience and what have you.
They were able to make some money, save up some money, which of course increased their ability to demand things and whatever.
And that basically it was that the war was a giant kick in the rear to the economy basically to get it going again.
That's just not true at all?
That giant increase in government-sponsored demand?
No, because the government doesn't have anything to demand with.
I can sit here all day long and say I demand a TV, but unless I produce something and I earn the proceeds of producing something, my demand is totally pointless.
We have unlimited demand.
You and I can sit here screaming that we want a yacht all day.
But the point is you have to produce first in order to get the wherewithal to demand things.
Just simply saying, well, we're going to pay you to produce.
Then we should get out of the current depression by just building factories that produce popsicle sticks and then we'll burn the popsicle sticks.
You cannot have a healthy economy that is based on complete arbitrariness.
And that in effect is what war spending is.
You can say we needed the war spending to win the war.
Well, okay, no kidding.
If you want to win the war, you need war spending.
But from the point of view of the consumer, a tank is a completely arbitrary thing for the government to spend money on.
And the idea that this will just kickstart spending back into existence, look, there'll never be any shortage of spending.
Once the monetary unit comes to have enough purchasing power, people will start partying with them.
They'll start buying.
Once the economy is producing things they can buy, they'll start buying.
During World War II, they couldn't buy most things.
Either consumer goods were rationed or some goods were not available for purchase at all.
So sure, they're piling up a whole lot of unspendable income, but that doesn't actually increase their well-being.
All right.
Well, now here's the elephant in the room, too.
And this is more the current era than Great Depression argument, although I'm sure it's a lot of the same argument.
Criminal, corrupt, sick, evil Republicans in the White House, in the Justice Department, on Wall Street.
They're the ones who came up with all these credit default swaps, and Phil Graham, the Republican senator, repealed the Glass-Steagall thing, which kept different kinds of banks from all joining into one big bank, and all these kinds of things, right?
Well, for one thing with regard to that, I mean, I think there actually is something to that.
But, I mean, you know, when it turned out that Bill Clinton signed that 1999 bill and Joe Biden voted for it, it obviously is not just a matter for Republicans by any means.
But secondly, I would say that, well, in terms of credit default swaps, or let's say even just the very phenomenon of securitization, securitizing various forms of debt from mortgages to credit cards, student loans, auto loans, whatever, this is a failed experiment.
It's that, unfortunately now, the Treasury Secretary wants to prop it back up again.
He wants to prop up the mortgage-backed security market.
No, no, look, I mean, the free market is the most efficient way to allocate resources, but that doesn't mean it's absolutely infallible.
And I think this is clearly a mistake.
It shouldn't have been done.
And it was premised, though, especially the explosion in mortgage-backed securities is premised on the idea that the housing bubble was not really a bubble.
It was a genuine increase based on real factors.
And where do we get that idea from?
Well, Fed economists told us that.
There were Fed studies that said this is not a bubble.
This is based on real factors.
All the experts are telling us this is not a bubble.
So, I mean, it's not like this just came out of nowhere.
People are just responding to what government and its crummy experts were telling them.
Yep, this is a real expansion, so sure, let's trade mortgage debt now.
So hang on.
So if there hadn't been a housing bubble in the first place, these types of crazy assets would not have expanded to the extent they did.
But as I say, now that it's clear that these things give a false sense of security, they're too complicated, they tend to misprice assets, they fail to detect the existence of bubbles, let them go and let the institutions that traded in them go.
Let them go down so that we don't get a repeat of this.
But in terms of regulation, my basic view is this, that in the ideal situation, we would have a perfectly free market in which we would have either the market would do the regulating or private regulating agencies.
Because, I mean, who could possibly take the SEC seriously now after the Madoff thing?
Give me a break.
How can you possibly think that, oh, they just need more money?
They've been getting more money year after year after year.
How can you possibly be that superstitious?
I don't know.
But we have oversight of that kind.
But what we have now is the worst of all worlds.
Because right now what we have is a banking system in which the deposits are insured by the government.
And then at the same time, we have phony deregulation that says, oh, by the way, now the banks can do riskier things.
Well, look, if the banks are genuinely going to be allowed to fail if they fail, if they're not going to be bailed out with the so-called lender of last resort, the Fed, if they're not going to have reserves pumped into them, if they're not going to have government taxpayer-insured deposits, then let them do what they want.
And let people investigate these banks and decide if they want to deposit with them.
Fine.
But that's not the system we have.
So if we have a system where you and I are on the hook for a bank's stupid decisions, and then we have so-called deregulation that says, oh, by the way, you can make even stupider decisions, how is that deregulation?
It's totally dishonest to call that deregulation.
Real deregulation would be to say we're going to have a free market in banking.
And you sink or swim.
And that's it.
That's deregulation.
Instead, we get this phony baloney deregulation.
I like Bob Murphy's example.
It's like saying that we're going to deregulate the post office, and now the post office will still have a monopoly, but it can now charge $25 a stamp.
Well, look, as long as we're going to have a government monopoly of the mail, well, then yeah, we're going to have to regulate it because it's a government monopoly.
But obviously real deregulation wouldn't be to say to the post office, hey, suddenly you can charge anything you want for a stamp.
Real deregulation would be to say, okay, anybody can enter the mail market.
But that's never the option we're ever given.
It's always either a government-run system or a phony baloney deregulation.
So when we're talking about Citigroup and AIG and Lehman Brothers and Merrill Lynch and all these corporations, are you acquitting them?
You're saying these men were all fooled by Alan Greenspan into thinking they were making good investments and they weren't a bunch of fraud-committing criminal parasites?
No, they absolutely were.
No, they absolutely were.
My point is simply that almost every bad financial trend you can imagine, there is fuel to that fire added by the Fed.
It can't help itself.
It inadvertently encourages every bad thing.
So it's far worse because of the Fed than it would have been otherwise.
It's far worse than it would have been if we had a completely sound banking system as opposed to the super, super duper leveraged one we have right now.
In no way do I want to exonerate these people, all of whom fully deserve to be out on their rear end.
You have no argument for me on that.
Well, see, this is really the crux of the matter, too.
I imagine most people who are liberals would hear an argument like this and say, oh, yeah, everything is government's fault and you're acquitting these evil Wall Street banker types.
But what you're saying is you want to deregulate the thing.
That's your whole emphasis is 100 percent opposition to any bailout or political favor to any company that overextends itself and particularly the Citigroup.
Like, I think you'd come to my barbecue, right, if they were allowed to finally go out of business.
Oh, absolutely.
I think we should stand up and cheer.
Yeah, that's exactly right.
They all should go out of business.
And again, I cannot imagine that there are progressives out there who would support these bailouts.
I just can't believe that, especially when the average guy with his little business that goes under gets nothing.
Oh, yeah.
I don't think they do.
I don't think they do, but I think they would assume that you do.
And so it's nice to see that you're actually as good on the issue as any of them.
Oh, yeah.
I mean, if anything, better.
Well, I don't know.
At least it's good.
We'll put it that way.
Yeah, total opposition.
Yeah, yeah, yeah.
I mean, it is larceny.
But, see, I think, if anything, I'm harsher than they are because there are at least some people on the left who will buy into the economic rationale, such as they are, that are given for some of these bailouts.
Well, too big to fail and this and that.
My view is none of these economic rationales is persuasive.
And so that leaves only one alternative.
It doesn't have an economic rationale.
It has a political rationale.
It has a wealth-enhancing rationale.
The government wants to bail out its friends.
And what we see is that there's a revolving door group of people who are in and out of government, banks, Wall Street, who are just going in and out all the time.
It doesn't matter if it's Barack Obama, John McCain, Joe Schmoe.
It doesn't matter.
It's the same group of people.
And they all richly deserve the fate that the free market would have swiftly handed to them if only it were given the chance.
All right.
And I guess I'm sorry to keep you so long, but I wanted to let you address one more point.
And this is something we kind of skipped over at the beginning.
We talked about the prevailing opinion that something had to be done after the crash of 1907 and the creation of the Federal Reserve Act.
But it's sort of all important who wrote the thing and how it was that the American people came to accept it, isn't it?
Yeah, yeah, it is.
I mean, when you talk about the Fed, I mean, it has been for so long off the table, I mean, really off the table.
Other than Ron Paul, it never gets mentioned in politics.
It's hardly ever mentioned in the media except for purposes of praising it or for criticizing it for not inflating enough.
So even when they criticize it, they can't even get that right.
So when you talk about it, it almost isn't enough to make you sound like – they try to make you sound like the crank.
Even though when you look at the economics of the Fed, I mean, this is crankishness times 100.
So when you explain to people that in 1910, as you hinted at earlier, the Federal Reserve Act was written but actually written by the bankers themselves, it sounds like, oh, come on, what kind of crazy theory is that?
But this isn't a theory, and it's not even anything that's particularly a secret.
It's just everybody knows this, or anybody who's bothered to look at it knows it was drafted at Jekyll Island, Georgia in 1910.
So the problem is that Americans – and I talk about this also in Meltdown – Americans, unfortunately, are in thrall to this sort of social studies class model of how government works.
So their view is that if they even think about the Fed at all, they seem to assume that it came about like this.
All of a sudden, the American people spontaneously cried out for banking reform, and then their public-spirited representatives, eager to pursue the common good, anxiously drafted legislation that was informed by the best economics of the day, and it was designed to manage the money supply in the interest of everyone.
I mean, that's sort of like what people probably assume happened.
Now, nothing in what I just said is true.
I mean, there's not a stitch of that that's true.
And so that, I think, sometimes is – everybody has something different that jogs them into thinking differently.
And I know for a lot of people on the Fed, when they hear this, and they say to themselves, could this really be the only time in human history when an industry drafted the regulation to regulate itself, and that it did so just for the common good and not to benefit their industry at the expense of others?
They ask themselves that, and they say, I don't know, I guess I'm a little skeptical of that.
And a lot of people who, in any other context, are critical and skeptical of the statements of bankers and businessmen, but when it comes to the Fed, well, we assume, oh, no, no, these are the experts.
They're running our money supply for us.
These are the experts who know what they're doing.
Well, you know what?
Maybe we should take that cynicism toward big business and banking and apply it to the Fed.
Well, and especially when you look at the list of people, it seems to me just like if a bunch of hardware store owners were meeting at Shoney's for breakfast on Sunday and agreeing that everybody's going to raise the price on hammers and saws and rip everybody off, assuming we're not talking inflationary period, but a conspiracy to fix prices artificially high.
They go to jail for that.
And that's really exactly what happened at Jekyll Island, Georgia, was you had the head of all the major banks, the Morgans and the Rockefellers and Cunlub and company and all these different banks, and they were there at a price-fixing conspiracy, which it's funny because that's not a crazy term when you're talking about private actors, right?
People get charged in court with that all the time, a price-fixing conspiracy.
That's like the charge, right?
But in this case, they had the chairman of the Senate Banking Committee, Nelson Aldrich, and Andrew Mellon, the Assistant Secretary of Treasury, with them.
And what they were doing in their price-fixing agreement was they were writing up a law that would permanently cartelize the banking industry and give basically the partnership.
The way it works is the banks get to create as much money as they want out of nothing, and the government gets to create as much money as they want out of nothing, and they all agree to protect each other at our expense, right?
No, that's exactly what it is.
Unfortunately, Scott, I've got to run.
I've got another show coming up.
All right.
Thank you very much for your time on the show today, Tom.
I really appreciate it.
My pleasure, and I hope people go check out TomWoods.com, get a free chapter of Meltdown, send me a note, and thanks again, Scott.
Okay, thanks, Tom.
And the book is Meltdown, a free market look at why the stock market collapsed, the economy tanked, and government bailouts will make things worse.
The website, he said TomWoods.com.
I guess that works.
I'm looking at ThomasEWoods.com, and of course, we'll have a link in the blog entry.
Also, check out his other great books, including The Politically Incorrect Guide to American History and We Who Dared Say No to War.
