The Sociology of Panics and Crashes in American History

0:00Thank you, Mark. Actually, I can just sit down now because the other speakers have covered all the main points, but I just have questions. I want to use sociology in the broad sense in which Mises used the word. We're not concerned about what the sociology field does. They do little things like finding out when there's a depression, if there's more divorces. This is interesting, but it's not what we're interested in. We're interested in larger issues of political economy. In fact, at one point in Mises' career, he was using the term sociology to mean roughly what he later called praxeology. So I'm using this in a broad sense, and as you can find in Weber, Mises and Hans-Hermann Hoppe's writings.

0:50And this means I can take into account a set of what we might call costs with business cycles or depressions, boom and bust, and I like to think of these costs as being categorizable into economic, institutional, political costs and ideological costs. And then I in turn want to concentrate more on the last two. The economic costs are pretty obvious. People lose money, stockbrokers jump out the window, people are ruined, they have to rebuild Older fortunes, migrations, things like this happen which are important to the people involved and in social history. But the economy tends to correct itself. Left to its own devices, the market has this wonderful way of overcoming things that central banks and other government policies throw at it. What's cumulative and what's much harder to fix are the ideological and Political and Institutional Consequences of These Crises.

1:54This is the whole point of Bob Higgs' book, Crisis and Leviathan. And this is kind of synergistic, because once there's a crisis, once there's a depression, a business cycle, then you get a lot of ideas competing for attention, and bad ideas tend to drive out good ideas for a complex number of reasons. And then the bad ideas lead to bad policy, arguably. Bad policies then lead to further bad outcomes down the road, which then lead to further bad ideas and bad policies to fix those in this big circle which Mises characterized in his essay, Middle of the Road Policy Leads to Socialism. And it's much harder to correct these things once one crisis has led to this kind of pattern of so-called solutions and the next crisis has led to a further broadening of this approach so that once you've got a Department of Energy to solve this temporary problem of the 1970s, it's hard to get rid of the Department of Energy even though no one can say that it does anything useful at all.

3:00Okay, well, how do we define, characterize these depressions? This is actually the other speakers have done this, so I'll be very brief. Essentially, you would expect to see, unlike droughts and famines and traditional disruptions of economic life, you'd expect to see something like the following. and Expectancy, Easy Money, Industrial Expansion, raising of wages, at least in some sectors, then rising prices, credit contraction, crash, unemployment, liquidation of some of these enterprises. And Karl Marx noticed this in Volume 2 of Del Capitale. He says, well, when there's easy money, certain things happen. and he kind of lays out this pattern and he doesn't think it's very interesting because Marx just says, well, there's all sorts of problems built into capitalism, why analyze this one?

3:52It's his attitude. So a number of people are aware of the pattern, which I'm going to argue, as you say, is entirely modern. How have historians tended to deal with this when they even see this sequence of events? In some events they say, well it was a speculative mania. Somehow the people doing business were seized with this mania to speculate. That tells you nothing. I might want to speculate, but somebody's got to make some money available or I'm not going to speculate very far. I might want to import five tons of tulips into doing a tulip mania, but if no one lends me the money, I doubt I'll get very far with my own funds.

4:39Now, actually I was reading one writer in the 1890s trying to come to grips with the business cycle of the early 1890s and he said, well, part of the problem was too many idiots loaned money to Argentina, but that was only one part of that particular business cycle. So none of this was theorized in a satisfactory way until Ludwig von Mises published The Theory of Money and Credit in 1912, in which he built on the insights of the early Austrians, Menger and Boehm-Bawerk. And then this analysis is continued by Hayek, among others in the 30s, and restated by Mises and Human Action in 1949, and by Rothbard and so forth. and so on and so forth. So finally we have a useful theory. But again, what do historians generally do?

5:29The historical profession generally is made up of people who had one survey course in economics, which was Keynesian theory, 80 years ago or 20 years ago, and then they write about economic questions. They have no idea what they're talking about. And then the exception are economic historians, who actually are trying to study the history of economic life. Sometimes they do good work, They tend to be undermined by knowing theory, but knowing theories that aren't very good theories, so that's a problem. So I said a bit earlier that business cycles are entirely modern. You don't expect to find a business cycle as we've described here in the Middle Ages and so forth. You might find something analogous.

6:14You might find an inflation or a debasement of coinage, But you don't find this exact credit mechanism until you've got the invention of the proper central bank. So I doubt you're going to find precisely this pattern until we have the Bank of England coming into being around 1700. And then we begin to see this pattern in its fullness. I mean, there's been a relationship between banks and kings for a couple of hundred years by that time. But if the king just actually borrows gold from the bankers and then taxes the future taxpayers to pay the bankers back and it's all done in real money, you don't necessarily have, you have a lot of maybe bad consequences, but you don't have the business cycle as we know it.

7:00Now there's an interesting relationship between business cycles and war, and it's not a law of history, because there aren't any really. But a business cycle will often follow a war, depending on how the war was financed. On the other hand, when you've got a business cycle, due to other causes, it will give politicians a motivation to maybe see war as a way out. And there's a number of cases that come to mind. 1893, the Panic of 1893, has some organic relationship to the Spanish-American War. and the Great Depression of 1929 gave a number of governments an interest in risking war in the context of this lingering, very lengthy depression.

7:50Now, again, from the literature you find that there's business cycles in the modern sense in Western Europe 1836 and 37, 1839, 1845 through 47, roughly, and then various things in the 70s and the 1890s that are sometimes described as the Great Depression because there's so much of this pattern in those decades, sometimes referred to as the Great Depression by these historians. But my duty today, my title, is to stick with American history, so I'll have to do that. Well, it's interesting to try to look at these, do a thumbnail sketch of these in terms of their consequences, the cumulative sort of political and ideological consequences.

8:38So we find that in the, that the depression of the middle 1780s, which is a consequence of the way the American Revolution was financed, We find people suddenly saying, well, a stronger federal government, a different constitution would solve all this and keep these states 19, which was of course studied in Murray Rothbard's book of that title, again has something to do with the Bank of America, the Central Bank, and the way that the War of 1812 was financed, among other things.

9:32And this led to a debate, once the panic set in and there was a depression, led to a substantial debate about economic policy, and for once it was actually constructive. I remember once you actually got some good ideas in circulation with people like William Goodge and Condé Regé and the hard money Jeffersonians of the period that Scott Trask has written a dissertation on. And what's interesting is that this debate in which you had the formulation of sort of a sound money theory takes place somewhat before the British debates, the more famous British debates between the banking and currency schools. and Rothbard found this rather interesting and names all these people in his book. Now, the Panic of 1837. Again, sometimes there's a panic and the historians talk about the panic and then they kind of lose interest in the later depression.

10:23I know one of the earlier speakers mentioned that the, I think it was Dr. Salerno, mentioned the depression really becoming significant in 1839, but historians like to talk about 1837 when some banking complications set the thing in motion. There's an interesting paper, kind of a classic article by Jeffrey Rogers Hummel on this, in which he tries to disconnect, and I think does disconnect, this business cycle from the idea that it was somehow and then somehow directly caused by Andrew Jackson's destruction of the central bank and then sort of putting all the money in the state banks. Well, that doesn't really quite tell you why the state banks should then be recreating this problem in enough states to contribute to a major economic cycle.

11:18And Hummel attributes the motivation of the state governments and the desire to fund these big mercantilist projects of internal improvement like canals and so forth. So the inflationary credit or credit money, money substitutes are not going to the farmers and the workers and so forth in these states in which this is taking place. So again, we'll fast forward. There's some literature on the Panic of 1857. A lot of the discussion boils down to a discussion of changes in the silver to gold ratio, arbitrary ratio set by Congress and so forth. And I guess what I'm saying in effect is that we really lack full-scale studies on a number of these business cycles from an Austrian standpoint.

12:10We have Rothbard studies on 1819 and the 1929 depression. So there's a whole set of business cycles or depressions that would be good dissertation topics for any scholars in the audience or people who may know scholars who are looking for a topic. A further point would be that historians often get rather obsessive about what was the content of the money supply. Was it gold? Was it silver? Was it paper? Was it some combination of all of these? and ignore the whole fractional reserve mechanism, which seems to me to be the critical thing from our standpoint for how this process gets set in motion. In a way, it might not matter as much what the reserves are, it matters if you can inflate above a reserve, that would be the crucial thing.

13:03Now, during the late unpleasantness of the 1860s, the U.S., that is, the North, effectively went off the gold standard and you have a new national bank created and the paper money and the green banks and this whole interesting inflationary process associated, among others, with General Sherman's brother. So, in effect, the U.S. is off the gold standard, except in California. They tried to pass the paper money in California, and the Californians wouldn't take it. California, effectively, was a separate country as far as monetary policy went. There was some violence involved, I think, when they refused the paper money. It's such an interesting precedent. Now, so now you have these greenbacks in circulation, and this is fairly complicated, because they never quite make up their minds to just retire them so there's a sort of a cyclical pattern in which they begin to retire them but then they let some of them go back out and circulate and we won't have time for all that and I have to admit I don't thoroughly understand the sequence yet but nonetheless there's enough inflationary banking practice to set off the panic of 1873 and again this is more interesting to me in terms of the consequence

14:21is because this helps stimulate the populist movement, and while there's a direct line of descent from the Jeffersonians to the Jacksonians to the populists, you have to say by the time you get to the populist movement, they've lost all theoretical rigor, they no longer understand the concept of hard money and you begin to get all these bi-metalist theorists who don't seem to grasp that if there were two metals, the market would set the ratio between them, they want some arbitrary ratio and they want an inflationary ratio, Coinage of a Lot More Silver, not totally unconnected with the fact that a number of the spokesmen for coining a lot of silver happen to come from states where silver is being mined. So there's another sort of moral hazard of the kind Dr. Garrison was just talking about, whether it's intellectual error or political intrigue.

15:16So we begin to have some ideas put in the public sphere by the populist movement that there should be an income tax, there should be government regulation or ownership of railroads, all sorts of things to correct previous policies which should not cause a crisis or this inflationary coinage of silver. So this creates part of the backdrop for the next panic in 1893. And now we've got actual real-life socialists because we have the German immigrants and other immigrant groups and they've brought us a few anarcho-communists and a lot of socialists. The socialists now add their complaints and their solutions to the proposed remedies the populace and trade unionists already have for this depression.

16:05But what's really interesting are the right-wing Leninists. Marx, and the right-wing Leninist is a term that Murray Rothbard used to use, and he had in mind, for instance, people sitting around the Pentagon who would say, well, we have to control what happens in Vietnam because of natural resources. We just can't possibly expect to wait and buy them on the market. We have to control them. And this is, of course, what the Marxists said. The Leninists said, well, the Americans are going to war over these economic motives, and so they actually were in agreement. They just had a different The whole thesis of overproduction and under-consumption is formulated by a number of conservative American economists close to the banking industry or Theodor Roosevelt.

16:59and Under-Consumption is formulated by a number of conservative American economists close to the, oddly enough, to the banking industry or Theodore Roosevelt and here we could name Conant, Jenks, and Hadley who formed the whole theory that somehow industrial capitalism is different than earlier capitalism and there's this overproduction and it can only be solved by finding foreign markets through an aggressive foreign policy and so on. And so on. So Lenin doesn't have to invent much. All he has to do is read Hobson, who in effect has borrowed these ideas, and then just tack on to kind of Marx's corollary that, well, of course, capitalism would be that way, but then socialism is inevitable. Just add a little footnote.

17:44So this leads us, because these people are very influential and they do get their ideas out, They, again, participate in forming the Federal Reserve system, which is a point of that article by Rothbard. But they're also influential in presenting this argument that we have to, by some compulsion, go out and use military persuasion in the broader world to find these foreign markets, So we can unload these mysteriously overproduced quantities of goods and credit and so forth. So you have the sort of inverted Marxism of the American neo-mercantilists influencing McKinley.

18:32And again, this is one of the connections between the Panic of 1893 and the Spanish-American War in 1898. I've had a couple things to say about that in the cost of war book and the reassessing the presidency book and so on. So, how's my time? Okay. All right, so let's fast forward and just say that all of this got off to a grand start and in the name of freeing Cuba from Spanish oppression, we just by some trick of fate acquired the Philippine Islands and Hawaii in the same couple of months, which then were the ideal jumping off points to the markets of Asia, which were imagined to be the great markets that were going to help with all this overproduction, and so forth.

19:24And then we, of course, I suppose a few people actually did do business because of this, and there was some actual business stimulated, but it's like Bastiat's seen versus the unseen. and would think other business would have taken place without acquiring the Philippines and so forth. And it did leave us with two interesting targets. Should we ever come into conflict with an Asian power that was developing the same philosophy that it had to have markets and acquire them by political means, so we had these two wonderful vulnerabilities that we acquired this way. Okay, let's fast-forward then and say that there's a business cycle of some kind around 1907 and this contributes to the debate and our friends like CONET are able to orchestrate the founding of the Federal Reserve System and they can point to this most recent depression as a reason why we have to have this central bank.

20:26And then we'll speculate further that Woodrow Wilson brings the United States into World War I and I won't say any more about that other than a number of bad precedents were set during World War I for economic policy through the War Industries Board and the notion of compulsory cartelization and corporatism becomes a very popular idea because of the wartime planned economy and these ideas all come back when the New Dealers come to town many of these people have served in the War Industries Board people Bernard Baruch and others okay so let's fast forward and say that the Republican administrations that succeed Wilson our moderate corporatists they they kind of advocate all this cooperation in business and that business and trade unions and government should somehow all get together in the tent and make policy and bypass the old competitive market which is cruel and unpredictable. And they carry on with a degree of inflation with this new mechanism, the Federal Reserve system, and Rothbard of course discusses this in considerable

21:39detail in his book, America's Great Depression. So the upshot is that we finally reach this This tipping point where the contraction has to take place under Hoover, who again is another corporatist who's kind of caught and takes the political blame for the depression. Oddly enough, Rothbard thought it interesting that the motivation for the final sort of The wave of inflation running up to October 1929 seemed to have come at the request of Sir Monty G. Norman, governor of the Bank of England, who needed some backup for British inflation, which was going on at the same time. I don't know, this is an interesting thing. Nonetheless, the depression sets in and Hoover begins to try to cure the depression with with various modern progressive Republican corporatist ideas, which then of course, as we might expect, are counterproductive, prolong the Depression, bringing the Democrats to power on a platform that Grover Cleveland could have run on, which they then immediately repudiate and adopt Hoover's policies, extend them, expand upon them, and add some strange policies of their own. And John T. Flynn, in his book, Roosevelt Myth, has a wonderful section called The Dance of a Thousand Crackpots.

23:00referring to what happens when all these planners and theorists and people like Henry Wallace and George Sewell and all the socialists and corporatists come to town. And you have to remember that all through the 1920s, The New Republic magazine, probably the most evil magazine in the English language, was praising Mussolini to the heavens. The New Republic said, Mussolini is wonderful, he's a pragmatic fellow, he's not sentimental, He's not deluded by superstitions like natural law or the laws of economics. He just gets stuff done and he's pioneering this wonderful thing, corporatism, which is this new economic model that shows you how to avoid the perils of communism and capitalism alike. So corporatism is definitely part of this atmosphere and so on.

23:49So again, to make a long story. Oh, here's more costs, though. I've been talking I guess mostly about the sort of what I'm calling bad ideas leading to bad policies and so forth and then this whole thing kind of feeding on itself. There's also the decision to go off gold, which is taken by all the major powers in the early 30s, so we go off gold and then the last sort of real restraint to the inflationary processes removed now have to rely on the good sense and goodwill of someone like Alan Greenspan, or whoever takes his place. We're kind of dependent on their good sense and good will and their political motivation and so on. Now with the New Deal, you find the second New Deal running out of steam.

24:39Roosevelt's re-elected even though the unemployment figures are higher than when he first came into power. He's not cured of depression. In fact, if anything, there's been a sort of secondary depression within the depression. Things are, in fact, bad. But Roosevelt's a jovial, genial, upper-class sort from the landed gentry of New York. And he has his cigarette holder and his dog, Fala, and he creates this feeling of confidence, or so all the conventional historians tell us, and so he buoyed up the people's confidence. This has been a great deal for the economy, however, and they also begin to run up against, not just the Supreme Court, finding a few of these laws invalid, they also begin to run up against a working coalition of Southern Democrats and Midwestern Republicans who begin to stall some of the New Deal legislation, so the second New Deal begins to run out of steam, and at this point they begin thinking rather characteristically that maybe foreign markets are the only way to get the economy going again,

25:43In 1937 or 1938, there's a conscious decision more or less taken in the New Deal administration that over the threat of economic competition, and say in South America from Italian and German business, that we may just have to go to war. And this is before there's even a war available to be in. They're already, you know, considering this is a real option that may be the only way out so we can be able to secure foreign markets, which again are thought of as being one of the keys to prosperity. Another cost, perhaps, of the Great Depression, of course, might beivid the level of theory where certain ideas are adopted as explanation of the business cycle and have been having a pretty good run ever since.

26:30Time? One minute? All right, let me summarize this very quickly then. So then, rhetorically, depressions have been abolished by the New Deal. and now I have these automatic stabilizers and workers' compensation and on the other hand there's been four or five of these depressions in my lifetime which they'd like to call recessions, possibly it sounds better, I don't know. There was one in the Reisner which I don't remember particularly well, but then there was the financing of the Vietnam War by LBJ and others that the actual price effects were felt under Nixon. Something around 1982, something around Bush Sr. inherited or was in office during, helped elect Clinton, now the current one.

27:15So clearly, we do still have business cycles. I think they brought the bottom test, however, I'm not going to argue that an empirical, it was empirical evidence, not a test, but an interesting empirical confirmation so you can know if you're really at the bottom of a deflation The final point then would be that the 20th century was a century of organized mass murder, horrific warfare, bureaucratic invasion of the life world, or colonization of the life world, and inflation. You don't need a weatherman to know what institution it is that provides the explanatory link between all those evil phenomena.

28:11It's the state, it's the unrestrained, unlimited modern state, and particularly in its capacity here, allied and controlling the banking system. So our task ideally is to help make the 21st century workout somewhat differently by addressing this and related questions.