Authors Forum: A Primer on the Great Depression

0:00Thank you, ladies and gentlemen. I am thrilled to be here for a lot of reasons, and one is that I was privileged to have the opportunity a moment ago to tell Tom Woods, in person, that his book, Meltdown, was the first that I bought and read on my new Kindle 2. It was fantastic. And the other reason is it gave me an opportunity to reminisce with my old friend Jeff Tucker about things that we did 20-some years ago. I think I was the first person that Jeff Tucker was ever arrested with in 1986 in Managua, Nicaragua. We were briefly detained, arrested, our film confiscated.

0:48For all I know, he's been arrested many times since, but I was the first person to be arrested with him. I'm probably the only person here today who is promoting not a book, but rather a pamphlet. And in fact, I'm not sure exactly where it is, but we shipped enough, I think, to give to everybody. I hope I'm not incorrect about that. At most, it may be a dollar. So if any of you want to file an anti-dumping lawsuit against me, we are, if not giving it away, at least selling it below cost. or you can go online at fee.org and find Great Myths of the Great Depression that's actually the title of it and see it there and buy it for a dollar and even if you only want to read a few pages you have to buy the whole thing so I suppose you could file an anti-bundling lawsuit against me too but the purpose of that little essay now in its I think seventh or eighth edition

1:42is not really to reveal startling new original insights to convey to a broad lay public what I think are the real explanations of the Great Depression. To counter the conventional view that what happened in 1929 and persisted through the thirties was somehow the failure of laissez-faire. I felt for a long time that there are a lot of great scholarship, a lot of great books out there that need to be more widely disseminated, but there also needed to be something short and Sweet that a person from the broad lay public could connect with and understand the true origins of this crisis. It's especially important right now in light of what we're going through and so many allusions to the 1930s being made these days.

2:28So I'll summarize at least 12 years of our history into the next roughly 12 minutes by saying that the Great Depression is best understood not as one big giant lump of an event but rather as an event that has some distinct phases. And my former professor at Grove City College, Dr. Hans Senholtz, used to talk about the four phases of the Great Depression, but the first one being the financial or the monetary phase. This is what explains why it began, began first in fact as a recession. It's the later elements, the later phases that explain why a recession became much worse and persisted for as long as it did. The financial or monetary phase explains that the crisis had its roots in improvident monetary policy of the 1920s, from the newly minted Federal Reserve System that had been created just a few years before.

3:45I can hardly think of another federal agency that has more fully failed at least its public mandate or mandates over the years than the Fed. When you think of the things that we were told over the years that this agency would do for us, they include such things as providing just the right amount of currency, ironing nd yet in the years since we've had one Great Depression, at least a dozen recessions, now we have a dollar that's worth about a nickel of what it was worth when the Fed first started, that screams manifest failure to me. And you see this in the policies that preceded the Depression and were coincident with it. You see it in what Murray Rothbard thoroughly documented as a very substantial, by some measure, 66% roughly, expansion of money and credit from 1924 to late 28, early 29, followed by a contraction of the money supply that the Fed presided over and helped to engineer by some one-third.

4:49So I like to tell audiences, if you're ever wondering about why the economy seems to go through this rollercoaster, take a look at what they're doing with the money and credit supply. It too looks like a rollercoaster. You can't have a 66% expansion of the money supply and then a 33% contraction and expect a flat economy or good outcomes. And those who argue that the deflation was the proper prescription to remedy the ills of the inflation, Remember Dr. Senholtz saying, well that's a little like running over a man with a truck and then deciding that the way to help him out is to put it in reverse and back up over it. That explains 1924 to the late 1930s. Some people mistakenly look at October 24, 1929 and say, well that's what caused the depression, Black Thursday, the collapse of the stock market.

5:40But they're looking at a mere symptom. The market had already turned around and peaked out in August. in August. We had many bad days by late October, and that's in great measure because the smarter folks who look at things like monetary policy and trade flows and what Congress is doing and what have you, they saw that the Fed had changed its policy dramatically, were jacking up interest rates, contracting the money supply, and the pressure of their selling causes the market to begin to turn down. It's not until the masses of people stampede and see the and the handwriting on the wall that you have to crash. It's explained best by the rollercoaster monetary policy. If nothing else had happened, 1930 might have been a year of recovery, might have been a year of mere recession. In fact, in the spring of 30, unemployment was only about where it is today, 8% or so, not yet a depression.

6:30The stock market had regained half the ground that it had lost since the big crash. But something else happened to take a bad situation and make it far worse. and that is the second phase of the depression we call the disintegration of the world economy. The passage of the Smoot-Hawley Tariff in June of 1930 that raised tariffs to an all-time high and virtually closed the borders. Even if foreigners hadn't responded by raising their barriers by retaliation, which you must expect, even if they hadn't, this would have been crushing to world trade because you cannot close the door to imports without, sooner or later, closing the door to exports. And American export industries were crushed, particularly agriculture, because if forerunners can't sell here, how can they earn the dollars that they need to buy here?

7:22Thousands walked off American farms, which had a very negative spiraling downward effect on rural banks. And by 1932, we were in full-scale, deep, double-digit unemployment depression. But even before we get to the third phase, I like to throw this other event in here because chronologically it happens before the third phase, even though it's not a world trade matter. In 1932, we had this yawning federal budget deficit, obviously, because people weren't working, businesses are closing their doors, not paying taxes, and government spending was not retreating to meet the shortfall. So you had this yawning deficit, and Hoover and the Republicans decided we've got to close that. Let's try it by raising taxes.

8:08They passed the Revenue Act of 1932, which doubled the income tax. In the midst of depression, the top rate went from about 23% to something like 63%, 64%, 65%. More than doubling at the top rate. Other taxes as well, excise and some others, were raised as part of that bill. Then you had an election. Herbert Hoover gets re-nominated, couldn't possibly win in that kind of circumstance. He runs against the charismatic, silver-tongued orator, Governor of New York, Franklin Roosevelt, who promises that if elected, he's going to reduce the intrusions of government. One of the virtues of this little pamphlet, I think, it kind of draws out so that the ordinary citizen can understand that Franklin Roosevelt properly assailed Herbert Hoover, Not for being a laissez-faire president, as the history texts do, but for being an interventionist.

9:00Do you know that in the Democratic platform of 1932, it actually called for a 25% reduction in federal spending? John Nance Garner, Roosevelt's running mate, accused Hoover of, quote, taking the country down the path to socialism. They assailed him for raising tariffs, raising taxes, properly so. If I had been around in 32 and a voter, I probably would have voted for Franklin Roosevelt, thinking that he meant what he said, but of course upon election he did precisely the opposite. The third phase of the Great Depression we call the phase of the New Deal, and there's a lot about that phase we could talk about, I'll just cite two of the landmark New Deal laws that had an incredibly depressing effect on the economy.

9:46The National Industrial Recovery Act, motivated by the notion that there was too much competition Competition in the economy. You've got plummeting prices, of course. You've closed markets with a high tariff. You're contracting the money supply. So you've got plummeting prices. Competition's the culprit. If only we can crush competition, then we can stimulate higher prices and that'll spread prosperity into ever-widening circles. So this was a law attempting to organize or cartelize American industry around federally issued codes and price controls. The famous case involving a guy named Jack Magid, who was a tailor, and he pressed a suit of clothes for the price of 35 cents, he was prosecuted because the New Deal NRA code price was 40 cents.

10:36Now think of it, midst of depression, you're lucky if you have anything to pay to have your clothes pressed, here's a guy willing to do it for 35 cents, he gets prosecuted because he didn't charge you 40 cents. ...incredibly depressing, raising the cost of doing business across the board. But if that's something, what do you hear? The AAA, the Agricultural Adjustment Act, it's motivated by the notion that we have too much supply, prices are too low, let's get prices up. It levies a new tax on agricultural processors, okay, on an industry already deeply depressed, and uses the revenue to supervise a program to destroy perfectly healthy cattle, sheep and pigs, and Pigs and plow under perfectly good fields of corn, wheat, cotton and other crops.

11:21The idea is restrict the supply, raise the price, improve the economy. Never mind that those who sell at the higher price maybe have less to sell or that even if this could have helped them, it could only have done so at the expense of everybody else. This is redistribution by gunpoint, this is by destruction, this is hardly a prescription for recovery, but that's what we did. We were freed of the worst of FDR when the Supreme Court threw both of those things out in the middle part of the decade and the economy showed some signs of life until 1937 when we had another very swift collapse, unemployment soaring again to the neighborhood of 20%. That's explained by things like Roosevelt's high taxes, the undistributed profits tax he got through Congress on corporate retained earnings.

12:07In the meantime, he was pushing up taxes everywhere he could. He inherited a top income tax rate in the 70s, but he takes it to 91, ultimately. And the typical history text will not tell you that he proposed one of 98 percent. Didn't get that because some congressman said, wait a minute, I come from a state that has a 3 or 4 percent income tax. How are we going to get ours if he gets 98? But also, but then Roosevelt came back and then by executive order imposed a 100 percent income tax rate on all incomes over $25,000. It was only there briefly, Congress overrode it, but that's what he attempted to do. And also the monetary policy of the late 30s became once again restrictive and in the face of previous inflation of money and credit.

12:57Then you have the Wagner Act, by far the most depressing factor that explains 1937, granting of enormous new powers to labor unions, taking labor out of the ordinary courts of law, creating the National Labor Relations Board and bestowing upon us ever since this unbelievably, incredibly stupid system of federal involvement in labor matters and imbuing labor unions with a new militancy that dramatically raised the cost of business and scared away and by the way, many investors who might have given us a lift in 1937. Well, I hope I've said enough about that little essay to make you want to get a copy, whether it's free or a dollar, I can't remember, but it's goodbye in any case. Thank you very much.