 My name is Chris Coyne and I am the F.A. Harper Professor of Economics at the Mercatus Center at George Mason University and the Associate Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics and Economics. Today I'm joined by Dr. Robert Higgs, who's a senior fellow in political economy for the Independent Institute and the editor-at-large of the Institute's Quarterly Journal of the Independent Review. Bob, thank you for taking the time to talk to me today. Glad to be here, Chris. And what I'd like to talk about is a part of your scholarship which focuses on making significant contributions to both our understanding of the Great Depression and World War II. And the orthodox story that is typically put forth as it relates to these events is that significant government spending due to World War II is what got the United States out of the Great Depression. You have spent a lot of your career exploring this question from a variety of aspects and developing an alternative perspective on the relationship between government spending for the purposes of the war and for the Great Depression and the recovery from the Depression. So tell me a little bit about your work in this area and the arguments that you put forth and how it relates or differs from, I should say, the conventional story. I started out my own work on the Great Depression by focusing on the early part of it, the Great Contraction of 1929 to 1933, and then particularly the response first by the Hoover administration and then on a much wider scale by the Roosevelt administration from the spring of 1933 onward. And that work is reported in large part in my book Crisis in Leviathan. But the Great Depression can be characterized in several different ways and I've called them, first of all, the Great Contraction which I just mentioned. Secondly is what I call the Great Duration. It's the fact that this depression ran for more than a decade without full recovery and it's unique in that respect. And then finally there's the question of what I call the Great Escape. When did the depression end? What got it out of its depressed condition? And when I began to think seriously about understanding the Great Duration, I knew from my reading already that the Roosevelt administration had changed its character between the first couple of years in office, 1933-34, and the remaining years particularly those starting in 1935 and running up into the end of the decade. During the first couple of years of the Roosevelt administration, the government attempted to integrate many private business interests into its program, particularly its program to recover or to bring about economic recovery from the depressed conditions of 1933 which were very severe indeed. And also to some extent integrate private and business interests into its programs for reforming the economy. So many historians have talked about three aspects of the New Deal relief, recovery, and reform. And again, they're not all completely distinct. Some things have an element of each or more than one at least. But what happened was that opposition to the New Deal developed quite rapidly. Even though Roosevelt was a very popular president early in his presidency, not everybody liked what he was doing and not everybody liked him. And it wasn't just Republicans who opposed the New Deal program that he had supported or created. So Roosevelt was not so worried about Republicans as he was worried about Democratic opponents. So in order to avert that threat, to cut it off at the knees, starting particularly in 1935, very definitely, Roosevelt shifted his ground. He began to give up trying to compromise with business interests, to cooperate with them. And instead he began to take a more radical turn and to support measures that he hadn't supported in the first two years. And probably the two most important measures, which were in fact enacted into law in 1935, were the National Labor Relations Act, which was a large scale labor law that gave labor unions privileges and powers to organize and to retain their organizations and to cripple opposition by employers that it never existed before. The government had never given a legal basis to labor union organization nearly as strong as what it did in this so-called Wagner Act, the National Labor Relations Act of 1935. So Roosevelt supported that and he also supported the Social Security Act of that year. It created old age pensions, it created a system of state unemployment benefits, it created benefits for widows and orphans and blind and disabled people and so forth. It was a very broad scale welfare state measure. And that was the first time the United States had done anything like a broad scale welfare state program. Previous ones had always been for particular groups or very limited. But now the country was basically launched into a new era as a welfare state managed at the federal level. Previously local governments and state governments to some extent had undertaken welfare state type measures, but there again they were limited by financial constraints and by ideological constraints as well. But when the Roosevelt administration went in that direction with the Wagner Act and the Social Security Act it was it was raising its flag over kind of collectivism that the federal government had never supported in the past. And there were many other measures as well that moved in the same direction of strengthening the federal government of expanding its scope of getting it involved in and all sorts of activities for regulating private business including regulation of the issuance of securities by private firms, the regulation of labor relations, regulation of particular industries, prices and profits. And it went on and on and on. But the drift of it was that the Roosevelt administration's turn in 1935 put it much more in opposition to business interests than before. And Roosevelt himself changed the nature of his rhetoric starting then. He began to attack investors and bankers and to blame them for the depression and to blame them for the continuation of the depression and to say that in some cases there was a strike of capital. Private investment had never come close to recovering back to its level of the 1920s late 1920s and indeed it never did recover fully for the whole decade of the 1930s. And everybody understood that that was a major reason for the great duration. That was why the economy as a whole had not recovered is that private investment projects were not forthcoming particularly long-term investments. So Roosevelt began to rail against private businessmen and to blame them for the depression and to blame them for all sorts of other evils and to characterize them as economic or royalists and the claim that they wanted to establish industrial dictatorships and so forth. It was really violent rhetoric. No president had ever talked about private businessmen before in such language and the combination of the president's rhetoric and the change in subordinates he had close to him in 1935, more radical people, more leftist people, fewer business people, fewer people sympathetic to business interests, the change in the character of the administration's makeup, the change in the president's rhetoric, the change in the nature of the legislation that was enacted or proposed, all these things added up to a much more hostile environment for business in general and particularly for investors because investors are people who take large sums of money and spend it right now to create projects which will, if they're lucky, return a stream of income over a long period of time in the future that will be sufficient to justify their current outlays. Well, that means you place your money at risk. If something happens to prevent you from realizing the gains you foresee when you make the investment, then you've just thrown away good money. So a businessmen began to develop a lot of fear, a new kind of fear. They'd always said economic fears, of course. No one can be sure that consumers will buy what he wants to sell or that technology will not leapfrog over the kind of technology he's invested in or what have you. So there are always many risks whenever investments are made that are purely market risks. But now investors face a new kind of political risk. The risk that their private property rights might be overridden by a radical government that would regulate them into oblivion or tax them so heavily they wouldn't be able to make any profit on their investments or, eventually, perhaps even seize their property. This was not as far-fetched as it might seem in retrospect today because if one looked around the world, one saw perfectly civilized countries such as Italy and Germany who are precisely such things it happened. And we're being done at the time. So it was not crazy if businessmen became very, very afraid of the administration. That's not to say all businessmen turned against the administration. They didn't. The Roosevelt administration had its crony capitalist just as every other administration before and since has had its their crony capitalist. But, nonetheless, overall there was a big change starting in 1935 and becoming more and more frantic in 1936 and 37, particularly as the labor unions began to organize more rapidly than ever before and they began to use unprecedented tactics such as sit-in strikes where strikers would go in a plant or the workers there would stay in the plant. They wouldn't work. They would strike. But they wouldn't leave either. So they would just get in the way and prevent the operation of the property. So this was a kind of trespass and in many places local authorities, governors or local police mayors would not take any action to evict these workers as trespassers. And so firm operators could not replace them with non-union workers or workers that didn't want to be on strike. And so employers were just stuck. They weren't running their property. They weren't earning any income. They were being held hostage by workers that the government was sympathetic to. And these sit-down strikes spread in many parts of the country, particularly in big industries, making materials like rubber and glass and automobiles and chemicals and steel and what have you. So there was a tremendous amount of turmoil associated with labor relations in the second half of the 1930s. And the Roosevelt administration, by and large, had not only sponsored the legislation that made this turmoil possible but it befriended and become allied with the unions, particularly the CIO unions, which had just come into being in that decade. Now all this activity, the government is growing, it's becoming more radical, its regulation is increasing, the president is hostile, he's threatening businessmen practically every day when he talks to the press. This created what I call regime uncertainty. It created the fear in calculable outcomes. Businessmen didn't know what the odds were that Roosevelt would become an economic dictator but they thought he might. And so the response to this fear was a paralysis. Very few businessmen were willing to make long-term investments in this environment. And that, I believe, was a major reason, perhaps the major reason, for the failure of private investment to recover in the 1930s, particularly long-term investment. Now, when the war broke out in 1939, Roosevelt immediately took an interest in involving the United States in it. The American people, however, were not interested in going back into a world war. They had almost all become disgusted by World War I in retrospect but Roosevelt, meanwhile, was taking all kinds of actions to build up the US armed forces with an eye toward their future engagement in the war. Now, in order to have a viable armed force, the United States needed not simply troops which could be obtained and were obtained by drafting them, starting in the fall of 1940 when a new draft law was put into effect. But it had to have a military industrial sector, firms that would produce raw materials that could be made into munitions and weapons platforms, and firms that would create actual military products of battleships, submarines, military tanks, armored vehicles, you name it. And then the War Department began to bring many private businessmen into the ranks of the Pentagon or of control agencies the government created afterwards to run the war economy. There's a large number of actions the government took in 1940 and 1941 which had the effect of almost guaranteeing profits for those manufacturers and other private parties that would cooperate in the government's buildup for war. So the idea that somehow the government's investments during the 1940 to 45 period in industrial facilities was the reason for post-war prosperity is a very poor hypothesis. It doesn't stand up well at all. And it's just one of the ways in which people misunderstand the nature of the war economy itself. As you said before that the reigning understanding of that among economists has always been from the time of the war itself to the present, that it was a simple Keynesian episode. The government spent a lot of money which it borrowed and voila, multiplier effects. And so everybody was in great shape. There was a carnival of consumption as one historian described it. But this is bogus. There was no carnival of a consumption. In fact when we correct the data that are very misleading during the war because they don't take into proper account price controls and rationing and all sorts of government allocations of resources and prohibitions of various forms of production and what have you. When we take those things into account it's very clear that consumers were worse off after 1941 throughout the war. It wasn't until the war ended that consumers were able to improve their situation from what it had been when the government declared war. So there is no carnival of consumption. There is no wartime prosperity. Both private consumption and private investment fell, particularly private investment because the government took over most of the investment during the war years. And so the idea that it was prosperous because production GDP or GDP went up 70 or 80 percent during the war is just an accounting fiction. All you're doing is measuring the value of what government spent to make war. And that's a very different thing from outputs that are validated in their value by consumers ultimately or by investors who require consumer validation for their success. So the war prosperity was a myth. It didn't happen. It wasn't real prosperity.