'America’s Great Depression' 50th Anniversary

0:00I'd like to thank Joe Salerno for inviting me to participate in this panel. I think he was afraid with the emeritus status that I was getting bored with absolutely nothing to do. The invitation was really appreciated because with no time on my hand, it gave me an opportunity and a reason to go back and reread this great book, America's Great Depression, and then from some of the footnotes in the book to reread much of what was in Man Economy and State and Human Action related to the business cycle in here. Murray was semi-important in my career, more by influence on Fred Glahey. I only had the opportunity to meet him once, which was in about 1981 or 82, when Fred had him come in to make a presentation in Boulder on the Laffer curve and the tax policy at that time. At that time I had just begun research on what became my Hayek-Keynes debate book and was essentially stuck out in Colorado trying to learn Austrian economics on my own by primarily by

1:14by reading primarily original sources and Fred introduced me to Murray and told him I was working on Hayek versus Keynes and I got a look from Murray that I've later interpreted, well that's a nice start but you'll learn better once you get on to Mises and Rothbard in here. So, I draw a lot of my comments out of the first three chapters of America's Great Depression, but I also think one of the important things in the New Scholar's Edition is that you have four introductions that Rothbard wrote to the book as it went through various iterations, And that is an incredible source to kind of watch Rothbard's changing and thinking on the importance of the things in the book as the economic conditions change from 1963 to the onset of the stagflation in the 70s.

2:22And then unfortunately his last comment or introduction is written right in 1982 as we We were experiencing the recession that was triggered, the 8182 back-to-back recessions that I think too many of us now jump over and compare this to the Great Depression. I think there's much more relevant things in there. I'll focus in here on essentially four aspects. Joe asked for one, but I want to run out of time. So there are four things that kind of influenced my work, particularly from this book. One, there's an emphasis that Rothbard puts that we shouldn't be focusing on the interest rate when we talk about the Austrian business cycle.

3:17It's true that the cycle causes the interest rate to drop below the natural rate, but it's It's a misplaced metric, to look at that, that the problem of the business cycle is caused by created credit or extension of credit through fiduciary media. I became aware of this about 1994, Fred Glahey and I had written what's still probably one of my favorite papers was the use of abuse of equilibrium in business cycle theory and Murray had had a copy of that paper and had written, Fred, that he liked the paper and he made a comment that the only deviation I could find in your paper was the idea taken from Hayek that a cycle can begin because banks are not diligent enough in raising interest rates when the natural rate increases, he goes on to some comments in there. Essentially Hayek argues that there's an interest rate break, particularly if there's a productivity Shock, that banks extend credit and I still think that argument of the extension of credit

4:27responds to shocks, Roger Garrison will speak later, I think really does a nice job that cycles tend to occur not necessarily because the Fed initiates a credit expansion but because and he's struggling with terms, that they tend to piggy bank or turbocharge events that Rothbard in that referred us to a note in Mises' Human Action that I think is really, really relevant for today's low interest rate. The actual note reads, if banks do not extend or expand circulated credit by issuing additional fiduciary media, Media, either in the form of banknotes in the form of deposit currency, it cannot generate a boom even if it lowers the amount of interest rate charged on the unhampered market.

5:25It merely gives gifts to debtors. The inference to be drawn from monetary theory of cycle by those who want to prevent the recurrence of the boom and of the subsequent depression is not that banks should not lower the rate of interest, but they should abstain from credit expansion. When I first started doing research, I was influenced by Hayek and I thought the major focus ought to be on the capital structure, capital-based macroeconomics, but this letter kind of triggered Fred and I back. There's an awful lot of monetary related issues that still need further expansion on what's the appropriate metric for determining whether credit has been expanded, and I think it was easier when we run a gold standard than where we're now in this and my first three QJE articles were attempting to address that and that was those became kind of the foundation of testimony I just gave to Congress for one of Ron Paul's committee.

6:27A second important feature, I'll try to move forward in here, is a misperception that the Austrian business cycle theory says nothing about the depression phase of the cycle. And I've even written, and I think I've cribbed this from, again, Roger, that the cycle theory itself is a theory of the upper turning point in the cycle.

6:57Rothbard really, particularly in the first chapter or two, clearly differentiates, and I think This is an important concept that what should follow a business cycle is a term he used somewhere as a garden variety recession. Market forces will correct. Continuing depression or long slow recoveries are always the consequence of government interventions in the market, particularly labor markets, other areas in there. He has quite a list of don't-do for recovery. And those are just almost a list of everything we've done in this recovery in here.

7:42He does also, though, argue for positive things that the government can do for a recession. And those are essentially cutback government spending and cut taxes. And I'll see later those are also his preferred recommendations for Deficit Reduction. So my third point that I'll jump over fairly quickly is, well, other one, is we need to clearly differentiate shocks from cycles. That, he argues, is the very first thing, that economic theory can clearly explain shocks or fluctuations in the economy. What needs to be better explained is the business cycle, which is the overall, and the business cycle is essentially a monetary-cause, credit-created phenomena.

8:48I think Austrians need to pay a little more attention to some of the real business cycle theory. They overdo it, okay, that in their research, they actually, you want to look at it in empirical terms, they kind of come up with some empirical data that about 70% of the fluctuations in the economy could be explained just by market responses. That still leaves 30% to be explained by Austrian business cycle and that's the most important. And then the one conundrum that I think shows up, and I'll probably jump to the end of these slides here, is that in that fourth edition introduction, Rothbard writing in 1982 is very, very pessimistic about how the economy is going to recover.

9:51And here, essentially, the Reagan administration knew, of course, that the inflationary expectations had to be reversed, but where they miscalculated was relying on propaganda without substance. Indeed, the entire program of Reaganomics may be considered a razzle-dazzle of showmanship about Taxes, Spending, Behind Which the Monetarist and Crow of the Fed were Supposed to Gradually Reduce the Rate of Monetary Growth. Two minutes here, okay. So his prospect for the economy is that Reaganomics was doomed to be a fiasco in what is likely to happen. And, oops, I think I skipped that over. But since the graduateism will not permit a sharp enough recession to clear out the debt, This means that the American economy will be increasingly faced with two alternatives, either massive deflationary 1929 type depression to clear out the debt or a massive inflationary bailout by the Fed.

10:50We can look forward therefore not to precisely a 29 type recession but to inflationary depression of massive proportions. I think this is an area that needs an awful lot more research. I think there's a clue provided by Robert Higgs in some of his discussion right now on his concept of regime uncertainty, that if businessmen are unconfident about the prospects of maintaining property rights in future because of government policy, that they will postpone Postpone investment, postpone hiring. This to me points out and in this clarification he argues that the rhetoric coming out of an administration is as important as the actual government program and he focuses particularly in this one on the Obama administration that he might look some of the things they've done are not as, they're intervention and enough, but they're not as severe as things have been in other times in here.

11:58Why aren't people reacting? And because the rhetoric is much like the rhetoric in 1937 that caused a recession within a recession. Here I think an explanation could be that the rhetoric in the Reagan administration was very, very pro-market, very, very, and we got more of a recovery than would have been expected. Thanks, Paul.