 Okay, why don't we go ahead and get started? If you guys could take your seats, please. While you're doing that, let me just ask, have most of you seen the karaoke poster downstairs? Okay, I just want to clarify that they totally photoshopped it. That's not my signature. Just so you guys know. Okay, what we're talking about in this lecture is contrasting views of the Great Depression. So what I'm going to do is, as the name suggests, I'm going to give you the general synopsis, the explanation of why did the depression happen and then why did it linger so long. Because there's actually two prongs to that story that why was there this great economic catastrophe that most people attribute to the, or the start of it as being the 29-stock market crash. But then beyond that, why is it that there was, depending on how you time it, at least a decade of just absolute misery economically that everybody would recognize as the worst event in world history, at least in modern times, as far as economies go. And so why did that happen? And so there's the prescription or the description of what happened, and then, of course, the recommendations is to say, what should governments have done in the wake of that calamity or going forward? What should we do now to make sure something like that doesn't happen? So as you can imagine, there's very different analyses, diagnoses of what happened and then prescriptions for how should they have fixed it and how do we make sure that doesn't happen again in our time. And so in this lecture, I'm just going to give you the major approaches to this topic from various schools of thought. And as you'll, the reason for this, why do we still care about the Great Depression? Well, we could have given this lecture even before the financial crisis and it would have been relevant because that's, I mean, I even remember for myself and my own evolution from going from just being a standard libertarian to being a more, you know, radical free market person, one of the things holding me back was I say, okay, yeah, I realize there shouldn't be a minimum wage. I can see that there shouldn't be a post office and stuff like that, but I still was thinking, ah, but the one thing that was, I couldn't explain and the people brought it up, I didn't know what to tell them was, didn't we have laissez-faire in the 1920s or at least much closer to a purely free market and didn't it blow up in our face and then surely the government wasn't as interventionist back then as it is now and the Great Depression was awful and so how do you free market people explain that? So that was something I didn't know how to deal with. I had my principles and I knew what I thought was correct but just empirically I didn't know how to handle that so that's partly why it's important for you to at least be, have a general familiarity with some of this stuff. So as we'll see, the more you study it, I think the more reassured you can be that oh, actually these general principles that I have do make sense and that we don't need to be embarrassed by the Great Depression actually when you know how to look at the data properly you can see that the Great Depression fits the Austrian analysis to a T. Okay, so first of all let me just give what I would call the bad teacher's account. I basically just want an excuse to put that picture up there and make sure you're awake. For foreign people there was a movie of this title that's why I have her up there. So what I mean by here is this is the standard thing that you certainly learn in the United States that I learned growing up and perhaps even other countries I can't speak from firsthand experience but this is the standard analysis of what happened why did we have the Great Depression and so they'll say okay in the 1920s we had relative laissez-faire you didn't have a large federal government people had a much more narrow circumscribed view of the proper function of government back then in particular the stock market was highly unregulated and you had what's called margin trading and so that meant people could borrow and speculate on stocks and the problem and so they became very leveraged and so as the stock market's going up that's great because people are seeing money being made in the stock market and so they would go and trade on their margin account and so they would borrow and then go buy stocks. The problem with that was once the market started dipping it was like a snowball effect because then the brokers would say oh wait a minute this person doesn't actually have much money in the account of his own money he was trading on margin and so if stock prices dropped just a little bit that wipes out the skin in the game that he had and so there would be what's called a margin call saying hey you got to either put up more money or sell and close down the position you have and so if people didn't really have that much to begin with and they were very levered then when stocks started dipping they had to sell to unload the position and so then that was just a downward spiral so you get the idea that they're saying because of this this unregulation that it allowed a situation where you had an asset bubble and then it just people built it up as a self-fulfilling prophecy people were buying stocks because everyone thought stocks are going up and that made stocks go up even more and then for whatever reason once it started tapering off then there was just a mass stampede for the exits so it's the same type of phenomenon that happened in the housing market more recently it's the same principle so that's something that I remember being taught in my history classes to what caused the great depression or what was one of the contributing factors as to why did the stock market boom and then bust and then they say okay so that explains where the crash came from it was because there was no prudent regulations on the markets and people were just motivated by greed and you didn't have the government as umpire coming in and eradicating or eliminating risky practices so that's how the bubble happened and then there was a crash and then why did the crash turn into what we now call the great depression why did the economy just linger for years and years and years in this misery and the standard story you would hear is oh it's because the government didn't do anything Herbert Hoover was a strict constitutionalist he didn't think it was the federal government's role to help fix the economy and so he sat back and did nothing and then depending on the particular spin you will hear you'll hear one of two explanations again what I'm going over right now is the what most Americans are taught in school and what I'm you're going to see shortly I think is a completely erroneous explanation but this is what most Americans were taught so you say okay so that's why we had the crash that's why the economy was mired in depression so what fixed it what solved it and you'll hear one of two things some people will stress that oh it was the election of FDR so Herbert Hoover was the Republican who was in office he only served one term from he was elected one of the 28 election and then lost in the 32 election and then FDR won in 32 and was inaugurated in early 1933 and that's when he brought in what's called the New Deal so I'm assuming most of you have heard of that but that was a wide range of activists government interventions in the economy and it was billed as giving a new deal to the American and so that in contrast to the old failed approach or arrangement between citizens and their government under Herbert Hoover that was the the idea of that phrase okay so they'll say that fixed it or if you're talking to someone who's kind of conservative and doesn't like FDR they will say no what got us out of the depression was World War II okay now before I forget let me just point this out what's ironic about that rhetorical move coming from people who don't like FDR you know people who are conservative Republicans and so they understand the danger in allowing it to appear as if it were the New Deal that saved the economy is they'll say no no it was World War II but the problem is they're contradicting themselves like there they're admitting then that it's big government spending outside of the depression alright so they're really not uh launching a selval against Keynesian economics even though they might think they're doing that in fact guys like Paul Krugman will say yeah ultimately what got us out of the depression is those spending on World War II okay so that's the standard account that most people will will give you regardless of their political ideology if they're just random Americans as opposed to people who have studied this carefully or who you know are readmeses.org daily okay let me go over Paul Krugman's account now he is very representative of the Keynesian mindset okay so the things he has been stressing and again the reason I even know what does Paul Krugman think about the Great Depression is because in 2009 2010 this stuff was very relevant that Krugman and guys like that were pointing to the lessons of the 1930s to say we need the Obama administration to run huge deficits and then when Republicans in Congress were trying to say hey okay now that we have recovery which officially happened in the summer of 2009 that the U.S. economy was considered now to be in official recovery they were saying let's cut spending or let's shrink these deficits a little bit because these are unsustainable and so you had people like Krugman, Christina Romer and others saying whoa whoa whoa that's not at all what we want to do because when we study history we see that Herbert Hoover was alarmed by the budget deficit in his day and tried to balance the budget in 32 and we all know that led to literally the worst year in history in terms of U.S. economic performance and then FDR in 37 also implemented what Krugman would call a contractionary policy and again if you look at the official statistics the U.S. went back into official recession at that point there was a recovery in the mid-30s and then it sank back into outright depression again in 37-38 and so according to Krugman and people like that it's because they tightened up and they tried to enact more contractionary measures so clearly they're going to say the lesson from history from anybody who's not an ideologue is to conclude trying to balance the budget in the midst of an economic downturn is a stupid idea but anybody want to cut spending in our time when clearly it led to disaster back in the 30s so why does he say that it's incumbent upon the fiscal authority to solve these problems he said well back then they ran into the double fold problem that conventional monetary policy was hindered by the liquidity trap and a gold standard now let me just stop for a minute and make sure you understand just so you don't get caught flat footed strictly speaking the new Keynesian position even people who advocate big budget deficits when there's a recession strictly speaking if they're accurate and consistent with their models they can only say that when interest rates have been pushed down to zero or short-term interest rates okay so even Krugman officially and I say that because I doubt in practice he would ever actually be against running a bigger budget deficit but at least officially his position is according to their models that they use is to say we agree normally if the economy is in a downturn and unemployment is too high the first thing that happens is the Federal Reserve should cut interest rates or the central bank should cut interest rates and you don't need to run a budget deficit that would be wasting resources we agree politicians can't allocate resources the way people in the market can blah blah blah you just lower interest rates to stimulate aggregate demand to restore full employment but if your economy is so bad so that that conventional mechanism goes to the limit namely pushing the policy interest rate down to zero percent nominal rates so you can't push it down anymore at least under normal circumstances then that's where you need the government to then run a budget deficit to boost aggregate demand through fiscal measures alright so there's the monetary versus fiscal and I'm just making sure you understand that's the official Keynesian position and so if you say oh you guys are just always the government spending more money they will bristle and say no we don't you're not reading us carefully we're saying because there's a liquidity trap that's when the government needs to run fiscal stimulus or enact fiscal stimulus okay so back in the 30s he's gonna say that was the problem that nominal interest rates had been pushed very low and so the Federal Reserve was pushing on a string that was a term that they would use and the other big thing he said is back then they had a gold standard and so the Fed even if it wanted to be more expansionary did have that additional check in place you know and thank goodness nowadays we don't have that archaic limitation on the wisdom of the Fed to be able to help so that's again Crootman's worldview okay as far as what specifically happened like where did this come from he'd say oh well there was this speculative bubble again because of unregulated people in the market and then when that all crashed you had what is called a private debt at overhang and so people individually are trying to pay down debt to fix their corporations trying to fix their balance sheets and then creditors are not spending that money right so people who are in debt are restricting their consumption to save more to pay down their debt but you have to credit because the economy is so awful the creditors who are receiving those payments aren't increasing their consumption and so the idea is on that the community as a whole is spending less and so even though individually it makes sense for everybody what they're doing that should help that household become better financially if everybody starts doing that or lots of people start doing that then you get the paradox of thrift if the community collectively tries to save more ultimately that pushes down income so much that people save less than they meant to originally so that's the standard of the Keynesian story and then as to what actually got us out of it he says it was because of the huge deficits that the U.S. federal government ran and he said but what got them to do it politically in other words FDR was too timid in the 30s because either his own advisors were too timid or because he had Republican opposition or just the American public wasn't ready to embrace this medicine that the Keynesian thought they needed but of course there were other problems with it but the one good thing to come out of the Japanese bombing Pearl Harbor was that at least it gave the U.S. politicians the backbone to start running deficits big enough to fix the economy alright so that's the that's his explanation and that's also the tie and I don't have it here for you but have you guys seen Krugman's famous thing about calling for an alien invasion some of you have okay I guess the tying with this again strictly if you want to be really fair Krugman wasn't calling for an actual alien invasion rather he was saying if only we thought erroneously aliens were going to invade that's what would fix the economy okay so just you don't want to misrepresent the guy and so again it's the same thing here so strictly speaking it's not that he's glad for World War II and all the death and the struggle it's he's glad there was something that the U.S. government to run such huge budget deficits because they would not have had the political will to do that to you know plant trees or to build bridges or something but they were the American public was willing to tolerate huge deficits to defeat you know the Nazis and the Japanese Empire so that's Krugman's position okay what about Milton Friedman and Anna Schwartz okay so this is what would be called the monitorist position that would be associated with the Chicago school so here it's a little bit nuanced so I'll go ahead and tell you what it is but then I'll warn you about something okay so first of all I told you when I was younger and I was studying this stuff and I was getting into free market economics and I just stumbled upon Milton Friedman's explanation of the Great Depression that was part of what made me agree that okay this you know embracing free market economics isn't crazy because now the Great Depression does seem to be not a market phenomenon because you've got this giant Milton Friedman explaining that oh it was really the Federal Reserve's fault okay so there is that element and so you will see a lot of people like people who read National Review and guys associated like with the Heritage Foundation or whatever they will latch on to Milton Friedman's diagnosis of what went wrong in the 1930s because it fits their overall worldview that oh yeah it was government mismanagement you know the bureaucrats made stupid decisions and that's what screwed up the market but you got to be careful because and guys like Krueger have busted Friedman or Friedman Knights on this point is to say well wait a minute what Friedman's actual objection was at least in this instance was he was saying the Fed didn't inflate enough okay so specifically just to make sure you guys understand the historical context what happened is there's different ways of assessing how much with the money suppliers or the quantity of money and so the monetary base is what the Fed and other central banks and other countries directly controls it's like the actual currency and circulation and then the reserves that commercial banks have with the central bank whereas broader aggregates things like you might have heard these terms like M1 and M2 that also can include the checking account deposits that the public holds with the commercial banks alright and so the central bank can't directly control that when there is what's called fractional reserve banking I don't want to get bogged down on this too much but you kind of have to understand this point so the idea is when you in a fractional reserve system if you have a hundred dollar bill a piece of paper a green piece of paper that's clearly money that's a hundred dollars if you go to a commercial bank and deposit it you can make loans pyramided on top of that let's say now there's a thousand dollars not in green pieces of paper but in people's checking account balances that's ultimately being backed up by that hundred dollars that's in the vault okay so I give the bank a hundred dollars my deposit, my checking account balance goes up by a hundred so if I go to the ATM and check it the number is a hundred dollars bigger than it was right because I gave a hundred dollars to the bank it better go up by a hundred I'm going to think they stole it from me okay but as you know I don't just have all the checking account balances backed up a hundred percent by green pieces of paper in the vault that it's only fractionally backed up so what that means is at any time the money in the vault is supporting much more in terms of the customer's checking account balances what they're walking around town thinking they have at the bank and so measures like M1 and M2 will capture that broader concept the problem is what happens if there's a panic and lots of people run to the bank because they they're worried that their bank is going to go under what are you going to do you're not just going to be content to say oh I have a thousand dollars on deposit with this bank down the street because if the bank folds and you go to try to take the money out it might say it's not there because the bank went under or you write a check and the merchant might say we talked about that bank just went out of business yesterday so of course naturally what do people do they run to the bank and try to get their money out so the problem from a macro perspective with this phenomenon is that that meant in the early 30s certain measures of money like M1 and M2 shrank by about a third because it's not that the Federal Reserve had an active policy of trying to contract the quantity of money but because the public was taking their money out of the commercial banks and so it's the opposite of what I said that if you took a hundred dollars out of the bank in your mind you didn't change the quantity of money you just went from having a hundred dollars with the bank to having it in your wallet but now if that hundred dollars is no longer in their vault that could mean that's up to a thousand dollars let's say in customer deposits that they no longer legally are allowed to maintain and so they would have to as people paid off loans the bank couldn't renew the loan or they couldn't lend it out to somebody else they would just have to let the total volume of loans shrink so they would collectively are trying to take their money out of the banks to hold it in the form of paper currency rather than on deposit collectively that forces like M2 to shrink and so that means now there's a third less money in the economy in a very legitimate sense and so prices tend to fall and you did see it there was significant price deflation from like 1929 to 1933 so Friedman and Schwartz he says the Fed should have been much more activist to counteract this trend that the Fed should not have just sat back on its heels that they should have done more open market operations to pump more reserves in to counteract the public's desire to go withdraw this money and hold it in the form of actual currency and the Fed didn't do that alright so so again it's saying the Fed just sitting back letting the market do what people naturally were going to do under that circumstance led to disaster and so Friedman perhaps ironically is saying the Fed should have inflated more to offset what people were doing left to their own devices so that's the sense in which you want to be careful if you're going to try to construe this is saying the government intervention caused the problem okay another main point that Friedman and Schwartz made about this period and you have to understand when their book so this account that I'm talking about came out and was called a monetary history of the United States and so when this came out Roger do you know when that came out was in the fifties you don't know? okay so does anybody know? okay I think it was in the fifties that this book came out a monetary history of the United States it overturned what the conventional Keynesian analysis had been so I want you to understand this was a revolutionary doctrine because the Keynesians remember thought that the Fed was impudent and so they weren't mad at the Fed for not inflating enough they were saying it couldn't of it was pushing on a string right nominal interest rates had been pushed down to basically zero and so you know there's nothing the Fed could have done that's why you needed the government to be running budget deficits that was the standard Keynesian story and they thought there was what you know loose money in the thirties because interest rates were so low that had been the standard Keynesian account in the thirties and forties so when they came along again I don't remember the data on top of my head I think it was in the mid fifties with their book 1963 okay well they were working on it in the fifties that's what I meant alright so that's that overturned what the standard Keynesian analysis had been their theory was revolutionary at the time and also again you can see why politically certain people would have liked it because it it was it was saying oh no we didn't need huge budget deficits you know we didn't need that if the Fed had just been not falling asleep at the wheel then it would have been able to steer the economy and so there was no need for the federal government to come in and spend a bunch of money on public works okay so you can see politically how this fit in and why certain people liked it but I'm just giving you the technical analysis okay but so part and parcel of that was Friedman was saying look the fact that there were low interest rates didn't mean that there was easy money or that there was loose monetary policy it's because since the quantity of money was shrinking and prices were falling people were expecting the purchasing power of money to increase and so in that environment the purchasing power component of the gross interest rate would also be lower okay so in other words if you wanted to lend money and you wanted to get because of time preference a rate of interest of 2% a real rate of interest of 2% but you expected prices in general to fall by 1% then you might be content to just lend out a nominal rate of interest of 1% right because you're going to get the 1% nominally but then everything's going to get 1% cheaper so in real terms you're getting that 2% return that you want okay so that's the point they were making that you can't just look at nominal interest rates in the fact that they're fairly low and conclude well the central banks pushing down interest rates what more can it do they're saying well no actually the low interest rates are a symptom of the fact that money is too tight in this environment if that sounds contrived you could go the other way Mises points out that the Keynesians were also wrong in their analysis of the interwar Germany because they were looking at there were large interest rates were very high and so they were nominal interest rates and so a lot of people were concluding like Joan Robinson and people I think were saying oh well obviously the German central bank is not contributing to this hyperinflation because look at how high interest rates are and as well no the way you have tight money is you raise interest rates but the point was well no in an environment where prices are rising rapidly just because the market rate of interest is high by historical standards in an absolute sense it actually might be very low once you consider in the context of the price inflation people are anticipating and so actually you could have a very loose monetary policy with interest rates being very low in real terms even though again the nominal interest rate might be high compared to what it normally is so that's the point they were making and so this is what modern day what's a quarter called market monitorists are saying Ben Bernanke has had a tight policy don't be fooled by the fact that interest rates are really low they're saying that that's the same mistake that the Keynesians made in the 30s so that's why I'm emphasizing this because people nowadays are using it to argue that the Fed needs to do more now just like Friedman thought the Fed needed to do more in the early 30s ok Murray Rothbard's account that was the best photo I could find of him ok so his story takes the history and business cycle theory that you guys have heard I think Roger gave the talk today on that and just applied it historically to the 1920s and early 30s alright and so at the end of this lecture I'll give you some reading suggestions if you want to look up on any more of these strands that I'm developing so his story just a most of Rothbard's book is about the 20s and the Hoover administration he doesn't even get into FDR at all but Rothbard is trying to explain is the unsustainable boom as to why do we have to have that bust so again I'm sure you guys heard this but it bears repeating in the Austrian approach when you're trying to explain the business cycle the issue is not geez what does the government need to do once there's a downturn and unemployment's really high what does the government need to do to fix the economy no the real task for the statesman somebody like Mises or Hayek would say is what wise policies do you want to have in place to avoid having an unsustainable boom that the boom is the bad time the boom is when mistakes are made, mail investments are made and then ironically it's the bust where things are getting rearranged to where they ought to be alright so during the bust period what we call a recession or a depression if it's really bad that's actually where entrepreneurs come to their senses and they actually have reality strike and then they start adjusting the allocation of resources to best fulfill consumer preferences in light of the fact that oh man we've been just living beyond our means for several years now during this unsustainable boom so that's a complete departure from the way a lot of economists look at this stuff and it's really amazing how some of these guys really do say we're not setting up a strawman here that look it doesn't matter why the housing bubble happened the important thing right now in 2010 or 2009 is to boost aggregate demand and then later we can figure out what went wrong in the you know two thousands but right now the important thing is to get people back to work right again people were saying that just saying it doesn't matter you would say well wait a minute what if the things that you're doing to put people back to work just sow the seeds for another unsustainable boom which is of course what the Austrians say did happen alright so it's so here Rothbard's focus is to explain so the book is America's Great Depression and so what he does is go through and just try to document and apply Austrian business cycle theory to the specific circumstances of the US in the 1920s and explain why it was an unsustainable bubble show how the quantity of money grew at a large rate and that's what fed the stock market bubble and then ultimately led to the crash okay so I didn't mention this in Friedman's account part of the story is to say during the 20s he would agree that yet the fed had something to do with the stock market boom but he goes the other way with it and he says in the 20s there were various times when the market started to tank and then that's when the fed would come in and do a burst of inflation monetary inflation and then pick things back up and so Friedman's explanation is to say for the reason the 29 crash happened there were some historical factors Benjamin Strong was the guy who had been at the helm and then he died and oh there was a power vacuum and he gives a lot of interesting trivia about the personalities involved but the Friedman Friedman night explanation is that for various reasons the fed failed to come to the rescue and keep the boom going or keep the rising asset prices going I don't know if you would call it a boom the 29 and that's why there was a crash okay and so the idea being if only they had just kept injecting extra monetary stimulus whenever things started to downturn there would have just been perpetual expansion there would have been no need for there to be any correction at all and it was only this completely unnecessary fed tightening that then led to the crash and then the outrageous unwillingness of the fed to inflate to counteract the monetary deflation that then led to the great depression okay so that's Friedman's story so Rothbard it's the complete opposite Rothbard saying no it was expansionary fed policy in the 20s that started pushing up this unsustainable bubble and yeah if you want to say why did it crash it's because the fed stopped pumping it up but the answer that is not to say oh so if only the fed had just kept pumping it up forever and ever we never would have had a crash it just would have made the crash that much worse okay and then so be careful here let me stress so this says Hoover engage in unprecedented interventions to turn the necessary depression a small d into the great depression okay so let me so again this is Rothbard's account so there's two things going on here and I'm saying this to make people understand strictly speaking if somebody says oh so you Austrians think or Murray Rothbard thinks the fed caused the great depression strictly speaking the answer to that is no the standard Rothbardian, Massessian account would be the Federal Reserve caused the asset bubble in the late 20s which then you could say meant there had to be a stock market crash and it happened to be 29 and for sure that happened you could even say the fed's expansionary policy required that there would be a severe depression with a small d in the early 30s but no the Federal Reserve per se didn't require a decade of agony what the decade of agony came from the fact that the federal government then responding to that crisis then implemented all sorts of incredible interventions that distorted the economy and so that's what made things so awful for so long okay so it's a two-pronged thing by the same token in our time I wouldn't if somebody says oh so you saying that and then Ben Bernanke caused the great recession and that's why the economy is so bad right now again I would say strictly speaking no it's Alan Greenspan and then Bernanke caused the housing bubble and so that's why there had to be a crash and that's why yeah things were awful and in the fall of 2008 there would have been a really bad global recession and lots of banks would have gone under and so forth but had the government just stayed back and done nothing and just let things sort out or even better cut taxes and deregulated and did all sorts of things like that went back on gold or let people just issue private currencies right I can I can dream we've been talking about Martians I can talk about that right if they if they did that well then yeah it would have been awful for whatever six months but then the economy would have hit rock bottom and then there would have been sustainable growth after that so certainly six years or five years later we would not still be sitting around with people unemployed and saying man why is this economy so sluggish no that wouldn't have happened right it was all the incredible things at the first the bush administration and then the Obama administration did to just prolong the agony okay so that's the the Rothbard account okay now one of you had asked me a few days ago it came up to me and said hey I'm reading Rothbard's America's Great Depression and I don't understand this this issue about overproduction you answer it and I said for you I'm going to do it in the lecture and then and then I checked and I said you're going to the lecture right I didn't want to know that would have been awkward but he fortunately said he was okay so this let me just mention this so what Rothbard does early on in this book America's Great Depression is he reviews some of the standard explanations for why there was the Great Depression and he just goes over why they're silly okay so these are arguments that people often would trot out just in general to explain a downturn and so one in particular was to say there's a general glut or there's a general overproduction and so prima facie that sort of has a logic to it because what you observe particularly back then in earlier when there was still relatively hard money is opposed to like when there was a hyperinflation and then so you have an awful economy with prices exploding but historically recessions or downturns or depressions or panics and busts were associated with falling prices right so the booms associated with rising prices and then the prices would fall and that's why the purchasing power of money was over long stretches of time fairly constant and so it was understandable that like from a business owner's perspective what was a recession and so people aren't spending enough we produce too much stuff I got too much stuff on my shelves I wish I hadn't bought so much I wish I hadn't bulked up my inventory so much I overproduced because clearly my customers can't afford to buy all this stuff and now I gotta slash prices to move this merchandise out of here so that's the individual business person's perspective perhaps if he's struggling during what is a downturn and so it was understandable some people then extrapolated and said oh so what happens in a macro level when there is a bust is that the economy during the boom got so productive our late workers got better maybe we had new technological discoveries so much in capital and so forth and our factories just started cranking out so much stuff that we produced too much stuff and now collectively our people can't afford to buy it all and so that's why the whole thing has to crash and prices have to fall and we gotta scale back our operations because we're just producing too much stuff alright so Rothbard points out no that's crazy he's saying there are there always is scarcity at least you know this side of paradise and so it's not the case that we have been able to satiate human desires or wants in terms of material items there are always goods at any given time that oh we could use more units of this particular good or we can always come up with things saying oh if only we had more resources we had the technological know-how we could make more of such and such and that would make somebody happier compared to right now alright so there's always economic scarcity and so he's saying what happens in a bust period is that they invested in the wrong lines so yes certain lines of production expanded too quickly and then they didn't have the complementary factors to bring it to the finish line alright so let me just give you an exaggerated example if all of a sudden we used a bunch of resources to crank out thousands of new hammers but we didn't build anymore nails you can see how that wouldn't work right you'd get into that a few years things might look good the factory cranking out the hammers would think oh times are good but collectively if there's not nails to go with it those hammers are kind of useless alright even though looked at in isolation oh it's good to have more hammers you see how there would have to be a balance there and so that's sort of a metaphor for you know an unsustainable expansion in the Austrian sense that it's just not compatible inter-temporally that the plans don't line up and you end up with you have too much of some types of capital goods and not enough of others and the whole thing doesn't mesh and so that's why the system needs to kind of reset and recalibrate okay so that's but you can see the problem there you wouldn't say oh the issue with building too many hammers it's not that oh there was over production no that's not the issue it's that we put too many resources into hammers and not enough into nails we should have produced fewer hammers and more nails and then we would have been fine right it's not that we ran out of houses we wanted to build it's that you know having too many hammers and not the corresponding nails or the corresponding carpenters or what have you that that's it was an expansion too much in one particular line okay Robert P. Murphy's account that's my bad side alright so here by the way you're gonna see it so I did Rothbard and then I'm gonna do mine and then I'm gonna do Bob Higgs Bob Higgs and I are totally consistent with the Rothbardian we're just stressing different aspects or we're touching upon things that Rothbard didn't get into in his books right so don't construed as that we're disagreeing with Rothbard whereas what the three of us are saying Rothbard myself and Higgs definitely contradicts just about everything Krugman says and then certain portions of what the Freeman account was okay so something that I did in my book and again at the end I'll show you a slide I'll give you further reading on this stuff so I did a book the politically incorrect guide to the Great Depression and the New Deal it came at the publisher came to me in late 2008 after Obama had won the election because people were comparing him to FDR and saying oh Obama's the next FDR and they were comparing George Bush to Herbert Hoover okay and actually what's funny is actually that made sense that comparison but not for the reasons they thought they thought George Bush was like Herbert Hoover because they were both do-nothing guys who respected the free market whereas I said no he's like Hoover because they both intervened and didn't mind their own business okay so one thing that I did is I said okay the both the Keynesians and the monetarists remember the monetarism is associated with Milton Friedman they are they have their different explanations but they're ultimately blaming the unwillingness of the authorities to act with sufficient vigor okay so as we'll see in a minute budget deficits did go up under Herbert Hoover and they did go up under FDR especially compared to the historical peacetime norm but the Keynesian argument is to say oh but it wasn't enough it was too little too late and the same thing with Friedman the Federal Reserve did try to stimulate it's not that they actively contracted but their point is oh it was too little too late so I said okay let's go look at the 1920 and 21 depression so that's a real thing many of you probably never heard of it because it was over within two years that's the name probably suggest to you and it wasn't a big deal and boom it led to the roaring 20s and so historically people forget about it but if you go and look under either of those criteria for that depression you'll see the government did the opposite so they slashed spending tremendously something like by 60% or something over the course of a few years government spending was slashed that much that might seem inconceivable to you because it was right after World War I and so the government had been spending an unprecedented amount and then they slashed the budget quite significantly after peace was won okay so under the Keynesian account you would think then not just that they failed to increase spending sufficiently but that they were actively cutting spending significantly that well gee how come that didn't give us how come the 1920s weren't the great depression by the same token I don't have the slides here to show you I've got it in my book if you want to go look at that what the Fed did in the 1920 and 21 depression was they jacked interest rates up to what was then a record high and they collapsed you know various measures of what the Fed could control and yet and price also price deflation in a 12 month period was far worse in the 20 21 depression than in any 12 month period during the 1930s whatever the explanation was as to what the government did wrong in the early 30s that then set us up for a decade of depression was all the more so done in the early 20s and yet far from the 20s being worse than the 30s not only were the 20s not bad economically that we call them the roaring 20s alright that's actually historians point to that as one of the best periods in US history where you know there was electrification and people were getting washing machines for the first time and stuff like that so it would be harder for the data to be worse for the Freedmenites or the Keynesis so what they do just if you're curious the way they handle that is to say well things were different that was a different kind of depression that the depression of 1920 and 21 wasn't because of a financial panic it was just because the Fed raised interest rates to quality price inflation and so that was just a standard adjustment there wasn't this banking crisis that there was in the 30s so that's the way they deal with it they don't deny the basic numbers they just say well it's a different situation okay as far as people arguing that the new deal or FDR got us out of the depression I'll show you in a second the historical data and say what would things have to look like if FDR kept us in the depression because we know he came into office in early 33 and by anybody's account we were still in the depression eight years later and so what would he have to do for us to think that oh no he made things worse okay because the fact that in other words would the depression have to still be with us would we still this day have to be in it so the mere fact that the depression at some point finally ended doesn't mean FDR solved it the various criteria you could go through you'd say okay well did the depression end more quickly under FDR or did the U.S. depressions have done it historically and the answer is no not at all or did at least things keep getting better under him gradually no not at all or did at least the depression improve in the U.S. compared to say Canada no it didn't alright so in the book I go through various ways to just show if you just entertain the notion that actually the new deal made things worse it just jumps out at you as yeah that's a much more compelling explanation one thing I don't think I have it on this slide that I pointed out there's a problem with the standard story to say oh the reason that we the stock market crash of 29 didn't just lead to a quick panic and bust and then a year of awfulness and then back to normal the way historically depressions usually with a small D usually happen in U.S. history that yeah there was a bad crash people got thrown out of work but then a year later 18 months later things were recovering to explain that by saying oh it's because Herbert Hoover was unwilling to do what he needed to do that makes no sense because by everyone's account Herbert Hoover was it at worst is not interventionist is all his predecessors right it wasn't like Kelvin Coolidge or Harding or anybody else had a new deal and then Hoover got rid of it you know I'm saying like Hoover just even if it were true that Hoover did nothing well he so did all his predecessors in this in this context right so that makes no sense it's a bit like saying why did that plane crash oh because of gravity right and yeah you could say that makes you but the question is but gravity applies to all the other planes too so you're not really giving me a good explanation so the same thing here on its own terms even if you don't know anything about economics the account to blame the great depression on Herbert Hoover's inaction just doesn't make any sense whereas if you can argue oh no actually what Herbert Hoover did was the opposite of his predecessors that he broke tradition and he started doing things that none of his predecessors well then at least that prima facia would make sense and that is what Herbert Hoover did even you know by the objective data and by his own account if you go read Hoover's memoirs he proudly says hey don't blame me for the depression I tried all kinds of stuff I did a lot more than any of my predecessors did right and the irony didn't hit him of you know so he was simultaneously saying I don't know why I got hit with the worst depression in history I was doing a lot of stuff that my predecessors never tried you see how you know you want to just okay okay Bob Higgs account wait for it that's not Bob Higgs in case some of you don't get the joke okay so what he did in his work is he emphasized this phenomenon called regime uncertainty and so what he put his finger on is he pointed out that it's not just the aggregate measures of of total spending either by the consumers or by the government if you look at private investment you can see that that was just awful during the 30s and it took a long time for private investment to regain the level it had had like in 29 and so if you think that it's actually private investment that sows the seeds for future economic expansion and provides for economic growth well then that's something you know if you're going to look at macro variables that's really one that you want to be interested in in terms of seeing what's the prognosis for the long-term growth prospects in this economy that if businesses collectively in the aggregate are just they're barely replacing their plant and equipment they're just letting stuff run down like there were periods where there was even negative net investment meaning the new investment was lower than depreciation so stuff was wearing out and businesses weren't even just maintaining their level of total equipment they were just letting it shrink down because they thought things were so bad and so Higgs was trying to explain that and one of the things he hit upon was this thing called regime uncertainty and so what that meant is that it's not enough just to expose look back at all the things and I fell into this trap too until Higgs pointed out but it's not enough just to look back and say in fact what did what happened under the new deal because if you do that you could say okay yeah there are awful things going on and they raised taxes and all sorts of ridiculous things but you might say but none of that could really explain just why did businessmen clamp up so much why didn't they invest at all just because on the margin you know tax rates went up such and such why would that make it but the thing is at the time they didn't know what was coming right this was completely unprecedented to them and Higgs has a thing that I reproduced in the book in my book there was a survey I don't know who is like by Forbes or something like that of entrepreneurs at the time saying what do you think of the president meaning FDR and a sizable proportion of them thought he was a dictator right and that might seem like oh they must have been right-wing nut jobs or something but well no around the world that's where dictators were coming you know we're taking over other western democracies and FDR remember was serving more than two terms okay which was you know violating the precedent that had been it wasn't constitutional at the time I mean he had the ability to do that legally but that was just totally a break with what presidents had done because they didn't want to you know Washington famously serve two terms and retired because he didn't want the Americans to think he was the king okay whereas FDR apparently had no problem being the king right it's good to be the king so so like I'm saying doing all these things that we in other words we all know that's what the history books tell us that FDR greatly expanded in the minds of Americans what the federal government's role in the economy would be well in the flip side of that is if you're a business person who has the government coming in and bossing you around and doing things that as far as you were concerned it wasn't allowed to do and then he's serving multiple terms and everybody else around the world in terms of major governments is literally a dictator you can see why that would make you concerned about the future and you would clam up alright so that was his regime uncertainty the idea being you couldn't even if right now as of the rules of the game in 1936 if you thought okay why don't you just run the numbers and now because of you know wage rates are higher because unions are more powerful and da da da da da why don't you go ahead and now expand your business the point is because you don't know the rules might change again if the rules change drastically from 34 to 36 well geez they might change again next year so I'm not going to invest now I'm going to wait till this pans out so that a lot of people like that explanation for what's been happening under the Obama administration you know if pity the fool who has a large company and you have to provide health insurance to employees because the rules keep changing like every month you really you literally don't know what you have to do to comply with the law at this point and you don't want to do a bunch of stuff because you might think maybe next year they're going to exempt me okay so of course Higgs says that World War 2 spending did not end the depression and I'm going to show you in a minute here just some great points that he made along those lines so on the face of it just the idea that war would fix an economy is just horrifying it makes no sense economically but also just a child could understand you say hey Jimmy the economies around the world are bad we need to put people back to work so how about we build a bunch of bombs and start killing people and blowing stuff up little Jimmy would say that's a bad idea that's not going to fix things and yet ironically there are economists who argue that with a straight face so there's that aspect to it I'm going to walk you through in a minute and show you some of the arguments he made but before I do that let me just go over here so this is Hoover versus FDR he propped up wages and farm prices so did FDR and the New Deal had big tax hikes and deficits I don't have a slide here for you guys but and this is something that Rothbard pointed out I've reproduced it in my book the tax hikes of the Hoover administration in 1932 are outrageous when you just see how much they jacked up taxes okay so the point being a lot of the stuff that we associate with the New Deal actually had it start under the Hoover administration and that's just not that's not merely me saying that trying to salvage you know my free market principles there was I have a quote in the book an official who was in the New Deal who said later on a quote to the effect of yeah at the time we wouldn't have admitted it politically because it would have hurt us but everything we did in the New Deal actually had its predecessors it's precedent in the Hoover administration that we just amped up all the things that they started okay so let me just give you a few figures here this is federal spending by fiscal year so 28-29 it was here 29-30 it's going up and up so you see federal spending under Herbert Hoover was rising even though you might have been led to believe that Herbert Hoover was a crazy budget cutting Austrian and then you see that surplus or deficit as a share of the economy you can see 30-31 it went into deficit and then a huge budget deficit in 31-32 alright so part of what's happening when Krugman and Christina Romer were saying oh in 32 Herbert Hoover tried to balance the budget what they don't tell you is the reason the budget was so much out of balance was that yes revenues were collapsing because the economy was awful but also they had increased spending thinking that that was going to prime the pump right so it was not really that they increased spending but they did it for it wasn't Keynesian reasons because the general theory hadn't come out yet but it was for reasons that we would recognize as government supporting the economy and also like I say the the way Hoover tried to balance the budget was primarily through tax hikes just outrageous tax rate increases and fairly modest spending cuts and so it's not surprising that that destroyed the economy not because oh no aggregate demand fell but because you don't raise taxes to help the economy okay famous public work does everyone know what that is Hoover Dam I wish I could tell you that all that was started in 1930 because Herbert Hoover wanted to boost the economy that's actually not how it happened I mean it is the Hoover Dam it's it was before it wasn't built in response to prime the pump and create jobs during the Great Depression but nonetheless it is Hoover Dam okay this might surprise you this quote the president's conference has given industrial leaders a new sense of their responsibilities never before have they been called upon to act together and this is from a labor union so you're probably thinking oh this is about FDR right no editorial the American Federationist in January 1930 all right so this is right after the stock market has crashed Herbert Hoover is going to do all sorts of things to save the economy and a major labor union publication is praising Herbert Hoover all right so again this is showing the historical narrative was invented by the Democratic Party you know Roosevelt campaign to paint Herbert Hoover as this do-nothing guy people thought he was great back before he had a chance to ruin everything and then once the economy was awful that's when they decided he wasn't their buddy okay here's unemployment figures so you can see my point FDR gets elected in late 32 inaugurated early 33 and you can see unemployment is still pretty awful and then it jumps back up to 19% average in 1938 okay so five years later to have the unemployment rate at 19% that's not the new deal getting us out of the depression all right that's pretty awful okay so the point is again just what would the numbers have to look like for people to realize adding on all these regulations to the economy is not the way to implement a speedy recovery okay let me read this one quickly to you guys we're running out of time in Sydney Hillman's garment industry the code authority employed enforcement police they roamed through the garment district like storm troopers they could enter a man's factory send them out line up as employees subject them to minute interrogation take over his books on the instant night work was forbidden flying squadrons of these private coat and suit police went through the district night battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night okay so when you talk about the NRA and all of the um the measures they took to sort of cartilize business it wasn't just suggestions emanating from the White House and everybody complied they enforced this stuff through techniques like this okay and so when you're trying to understand why were business why was business investment so awful it was partly because there were literally goons from Washington kicking in your doors and and searching your your place of business okay so last few things here did world war two get us out of the depression let me summarize two main points that Higgs made and then we'll you guys can go to dinner okay so the U.S. unemployment rate let me put it to you this way prima facia it does look like if you just look at macro statistics it does look like the world war two got us out of the depression and by us I mean the U.S. back then so unemployment was up to 25 percent it came down then as we saw it went back up to 18-19 percent and then it came way down what in the early 40s and that's when the U.S. entered world war two so it certainly looks like the unemployment problem was solved by world war two but as Higgs points out the way that happened is the government drafted men and sent them over overseas right and it wasn't even one for one right in other words like if they drafted 100,000 people and sent them over the ranks of the unemployed didn't even fall by 100,000 they would only fall by like 80,000 I'm making that number up but that's the point it didn't even fall one for one so it would have been more efficient just to just literally grab them and move them somewhere okay so that's again the metric of unemployment if the way you're solving it is just by taking people and shipping them off into a war a good way to measure economic progress let me just make one more point here for you guys this is the GDP these are the GDP figures okay so again you can see why if you're just looking at the gross figures for GDP you might think oh yeah it was world war two that fixed it because here's GDP falling this is 3233 the depths of the Great Depression then it starts recovering when FDR comes in oh the new deal seems to be working oh shoot FDR tried to balance the budget in 3738 and then all thank goodness Japan bombed the US because that gave them the willingness to spend money and there you go okay so there's two points that Higgs makes to counteract this okay one point is as I'm sure many of you know GDP just counts total spending including government spending so if you disaggregate this into private and government spending it looks like that so even using their own figures you can see in the war years private consumption and investment was lower than it had been even the depths of the Great Depression and this is with population increasing and of course you know technological innovations what have you over that period so that's astonishing so that means even on the government's own terms their own figures the standard of living in 33 and 34 was worse than it had been at the absolute depths of the Great Depression okay so that so then you know if you can you can see that it's kind of fishy then to say oh look at the great economic recovery caused by the war what actually by their own figures you can see people on the home front were an utter privation but this is still even overstating how good things were because there were price controls and I think this is a point that Higgs just on his own and you know developed and had in the published literature so here's the what happened in the monetary base you can see it just explodes from 1940 to 1945 and so had the government not instituted price controls presumably prices would have taken off as well so these figures back here these are real GDP figures so they're supposedly adjusting for changes in the purchasing power so if the government just doubles the money supply and spending basically doubles nominal GDP but prices all double well then real GDP would be the same because nominal GDP would be twice as high but the GDP deflator would be twice as high and so it all cancel out so the way they approach this they shouldn't get caught with this little trick but if the government is not letting prices go up then if spending rises because the feds inflating and the government spent all kinds of money on war material and then consumer prices are not allowed to go up by law that will artificially goose these numbers and when he publishes I ask Higgs over email I said wait a minute are you saying they're not in your judgment adequately accounting for the effective price controls or are you saying they don't even deal with that and he says I'm saying they don't even deal with that they print these numbers as if they're real GDP knowing full well there are price controls in place during those war years as if that's not a big deal alright so that was the his point there further reading my book on the Great Depression Rothbard's classic Higgs' work on depression war and cold war has that's a good one if you just want to grab one that has a bunch of his points and then this by Lionel Robbins it's Austrian ask and it just gives you it's like a man on the street kind of or boots on the ground kind of a first hand eye witness account of him seeing that at the time and how central banks were actually inflating okay thanks everybody