The Truth about the Great Depression

0:00I'd like to continue on my my discussion of economic myths. I guess I could call these interventionist myths. And so I took on the big topic of the Great Depression for this topic. And I think what I'd like to start with is a discussion of what I call in my book on capitalism called the American way of dealing with recessions, because it was the way in which Americans in terms of economic policy with recessions or depressions really until the Great Depression of the 1930s. And that was basically to either do nothing or to deregulate, that was basically what was done by most administrations, most government administrations to deal with recessions.

0:50And a good example of that is President Martin Van Buren, who is President of the United is elected in 1836 and I'm going to read you just a couple of statements by Van Buren on his philosophy of what to do because 1837 there was a big deep recession if not a depression in the economy so bad luck on his part he gets elected in this recession was just about to begin and he said things like all communities are apt to look to government for too much especially at periods of sudden embarrassment and Distress. And he was referring to this depression. And he said, moreover, all former attempts on the part of government to assume the management of domestic or foreign exchange had proved injurious, end quote. And so all former meddling interventionism as a response to recession made things worse. And he said, what was needed was, quote, a system founded on private interest, enterprise, and competition without the aid of legislative grants or or Regulations by Law," end quote.

1:58And that was the President of the United States saying that. And so his actions were consistent with his words, as is not always the case. Ronald Reagan was a great speech maker, especially before he became President, but his actions were often different than his speeches. And the same is true of just about every President, but in Van Buren's case, he stuck to his rhetoric. and there was financial market deregulation that he supported and helped get passed for example there were there was a law in Jeffrey Hummel I read about this I didn't know about this I read about this in Jeffrey Hummel's book that I've mentioned several times there was a law actually that forced commercial banks to buy some of these worthless bonds that state governments issued to finance so-called internal improvement projects the ones that were championed by by Abraham Lincoln in Illinois, for example.

2:56They actually got a federal law forcing these banks to buy these bonds, which turned out to be useless. And so Van Buren was instrumental in getting rid of that. There were banking regulations that prohibited branch banking as there was a war in the modern era. And he understood that that was a bad idea, too. So there actually was financial market deregulation. Van Buren was an advocate of hard money. and he helped the creation, the eventual creation in the early 1840s of what was called the independent treasury system which made currency redeemable in gold and silver. There were no pork barrel spending, he didn't do what modern presidents always have done, especially beginning with Roosevelt and Hoover, his predecessor, is spend money like crazy on road building or canal building.

3:51He was opposed to the so-called internal improvements projects financed by taxes and he vetoed any bills that came across his desk to spend tax money on this sort of thing. There was no federal bailout of state governments even though the state governments were in pretty bad shape financially. The Van Buren administration cut federal spending in absolute dollars by 21 percent from 1836 The Federal spending actually declined by 21%. There were no price controls and he did what he could to move closer to free trade. He was a free trader and did what he could to open up trade and so as a result it was a deep recession but very short. It didn't last that long and that was what I think of as the American way of dealing with recessions.

4:41They didn't do much, probably because macroeconomics hadn't been invented yet. That's probably the main reason that they had no philosophical rationale for doing otherwise. And plus, they had a lot of bad experience to point to, as Van Buren did. They might not have had a theoretical framework, but they had a lot of bad experience with interventionism. And so, well anyway, Herbert Hoover, let's, I mean, I'm supposed to be talking about the Great Depression. Probably the biggest economic myth there is, is that laissez-faire capitalism caused the Great Depression, and interventionism in the New Deal cured the Great Depression. False. Not true.

5:26The Hoover administration was anything but interventionist. There was a great bit of, a lot of monetary expansion in the 1920s, the money supply increased by almost 70% during that decade, and I'll talk about the ramifications of that in a minute. But, you know, Herbert Hoover is credited with being a laissez-faire, advocate of laissez-faire capitalism, and if you read some of the things he wrote after he got out of office, they were pretty good. they could be published by the Mises Institute even and of course he used some of his wealth to help to found the Hoover Institution in California but like a lot of other politicians even I think we were talking last night even Thomas Jefferson who was philosophically was great before he was president but once he got in office the pressures of politics changed him you know he had to if he wanted to succeed as a politician he had to compromise that's what politicians do so he wasn't that good of a president in my

6:24in my eyes, but his political philosophy was tremendous. And the same is true with Hoover, but if you look at what he actually did and what he stood for policy-wise, it was interventionism. He was a progressive. He was not a capitalist, an advocate of laissez-faire. What did he do? Well, he pressured businesses to raise wages when the economy was slowing down near the end of his term. When you say government pressures somebody, I think of it as, or negotiates with somebody, I always think of it as gun under the table negotiation. There's always some sort of hidden threat there. Either you do what I'm suggesting or something bad is going to happen to you.

7:10You'll be audited or I'll sign this law that will put a special excise tax on your industry, something like that. So when you negotiate with government, it's never an even negotiation. And he held hundreds of conferences, literally hundreds, with different trade groups, industry groups, to try to get them to raise wages. And this was essentially the agenda of labor unions that Hoover was promoting. And all of this was codified during the Roosevelt administration by labor laws that changed. So, in fact, in my book, I quote Rexford Tugwell, who was FDR's chief economic advisor from 1932 to 1935, as saying that most of the ideas for the New Deal came from Herbert Hoover.

7:57They just went further and codified in law a lot of the things that he was trying to get done somehow through pressure or persuasion, bribery, threats. That's what politicians do. He also pleaded with business people to engage in work sharing, which is sort of a socialist idea of instead of having 10 people working 40 hours a week, why don't you hire 20 people and have them work 20 hours a week? He thought that would reduce unemployment, but of course the only way to reduce unemployment is through more production. That's the only way to do it. This is just rearranging the chairs in the Titanic, work sharing, sort of a socialistic idea. Unlike Van Buren and other predecessors, Herbert Hoover started the binging on pork barrel public work spending.

8:50It wasn't Roosevelt that initiated this, it was Herbert Hoover. He spent 13% of the federal budget on public works alone in the first couple of years of his administration. And of course to do that he had to raise taxes enormously. So we had some of the biggest tax increases in American history up to that point under Herbert Hoover. And Murray Rothbard's book, America's Great Depression, is a great resource on Herbert Hoover. It's basically about the Hoover administration for the most part. And if you want to read up about all the tax increases and so forth, that's where to find it. It was Hoover who started the business of government-supervised farm cartels, the business of paying farmers to not grow food, to not raise livestock, and so forth.

9:42That started with Herbert Hoover. Now, you don't have to be a PhD student in economics to understand that if the problem is unemployment and the government is taking one big sector of the economy, farming, and is paying people not to hire farm workers and to not grow food, that that's not going to be good for reducing unemployment. Paying people to not hire farm workers. That's essentially what they were doing. That's why these programs that continued in a much larger degree during the FDR's administration were a disaster for southern sharecroppers especially, low-income southern sharecroppers. When they cut back on agricultural production, they were hurt as hard as anyone during the Great Depression.

10:32There was massive unemployment among the southern sharecroppers because fewer crops are being grown and that was government policy for fewer crops to be grown because they wanted to raise the price of food. That was FDR's intention. That was Hoover's intention. They had the cockamamie idea that the Great Depression was caused by low prices. Therefore, if we could just have high prices, the depression will end. Just like that. That was basically the theory. Hoover The Federal Reserve signed the Smoot-Hawley tariff, which should be called the Smoot-Hawley-Hoover tariff, because he initiated the whole thing. He went to Congress and said, we need to raise the tariff. Okay, we're in a recession, a recession is approaching, therefore what do we need to do?

11:18Cut off trade, restrict economic activity even more. And so he went to Congress and then Smoot and Hawley, two members of Congress, sponsored the bill. And this raised the average tariff rate to just under 60 percent, 6-0, 60 percent. And as a result, there was an international trade war. The volume of international trade by the 75 top trading countries who engaged in most of the world trade fell by about 80 percent in three years. And exports fell by 53% from 1929 to 1932 in just really two years, because this was the end, 1930 really, when this kicked in, and so that was quite the disaster that Hoover was responsible for.

12:15It really should be called the Smoot-Hawley-Hoover tariff. He also socialized investment by allocating billions of dollars to something called the Reconstruction Finance Corporation that would give the government billions of dollars in and Investment through loan guarantees primarily. So the government got in the business of directing the allocation of capital. And of course, whenever the government directs the allocation of capital, it won't be economic criteria that are used, it'll be political criteria for the most part. How can we buy votes by making low interest loans to this or that industry or this or that region of the country? That's what'll happen. When I talk about this to my students, Even my example is getting dated now, I should come up with a new example.

13:01I asked them, just think about it, if in the late 70s when Microsoft was just being invented by Bill Gates, dropping out of Harvard and he and his colleagues creating Microsoft, what if it depended on government credit allocation, government capital allocation, not private capital? And we did have a government agency like the RFC, which was eventually ended in the 1950s. And they were dependent on government capital, government loans or preferred loans. And here are your choices. You're a politician. Here are your choices of who to give the capital to. A Harvard dropout who looks like the geek of the year with the big glasses and the long hair and skinny Bill Gates.

13:50and his buddies, who all look just like him, and what are they doing? They're messing around in his dad's garage in Palo Alto. Or IBM, give the money to IBM, or give the money to the company that's located in the district of the chairman of the House Ways and Means Committee. Who is likely to get that low interest loan? It's not likely to be the entrepreneurs in Bill Gates' dad's garage. I guarantee you that. And so that's how political capital allocation takes place. And this was started by Hoover. And so he put a big distortion into the capital markets by this. And it lasted until the 1950s, when it became so corrupt that it became such a big embarrassment that they ended it around 1955.

14:39They were making loans to, I think the last straw was, they were making millions of dollars of Millions of Dollars of Loans to Strip Clubs and that was in the 50s, I guess that was too much even for Eisenhower and so that ended it. But the guy who was the head of it, a man named Jesse Jones, wrote his autobiography called 50 Billion Dollars and the book is how he spent 50 billion dollars and I read that once and it was he was bragging he would say things like we even loaned money on a drove a reindeer in Alaska so I guess they're trying to buy votes in Alaska during the Great Depression that was that was an important thing reindeer in Alaska they need a capital subsidy so that was that's what Hoover was involved in and also there was monetary expansion as I said pretty pretty severe The Great Depression was a major monetary expansion from 21 to 29 that fueled the Roaring 20s, helped the Roaring 20s roar.

15:46But of course that created a misallocation, an even bigger misallocation of capital, which I think is what the main cause of the depression was. But then FDR comes along, and of course I mentioned that it's the myth I said that FDR cured the Great Depression is a myth. And you don't have to look very far to understand why this is a myth. By any measure of statistics regarding economic well-being that you could dig up, you could see that the Great Depression never ended during Roosevelt's term prior to World War II. In 1929, the average unemployment rate, the normal unemployment rate, was 3.2 percent.

16:35by 1930, it was still 14.6%, almost five times the normal unemployment rate, it was all the way up to 19% by 1938. And also if you look at other measures such as per capita GNP, it was lower in 1939 than it was in 1929, and per capita personal consumption was lower in 1939 than it was in 1929 so by any measure of economic well-being on the eve of World War II the Great Depression was still going strong despite all the New Deal programs that you've all heard about and of course World War II didn't end the Great Depression because it really is a joke isn't it to think that okay we're going to send 16 million men out of the country and then say hey no more and Unemployment. Aren't I smart? I cured the unemployment problem. That doesn't cure the unemployment problem. In fact, standards of living continued to get worse because they had rationing of meat and price controls and that's another thing with price controls, the economic statistics for the war years are really meaningless because the prices of all the goods that are measured in the GDP statistics are all government mandated price control prices. They're not market prices. So you're comparing apples and oranges.

18:02The Theory of Money and Credit

18:32to do that, well, we want people to have jobs and earn income and work and have a better standard of living, better housing, better nutrition. That didn't happen during the war. Sixteen million men were sent to the Pacific and to Europe to fight in the war. Their lives weren't better, their lives were worse. Many of them were killed. And so the Great Depression never did really end until after World War II, when between 1945 and 1947, the federal budget with the demobilization of the Army, the federal budget in absolute dollars was reduced by two-thirds. It was 92 billion to 30 billion at that range. So it went from the 90 billion range to the 30 billion range in absolute dollars. And that, of course, All that money put back into the pockets of investors and consumers, that's what fueled the recovery, not these programs, and so he never did end the Great Depression.

19:35Even though a lot of politicians to this day and scholars think he did, including, let's see if I can find this quote from the well-known economic scholar Newt Gingrich, I had one here somewhere. Where was that? I should have dug it up earlier. Maybe I'll dig it up before the end. But I did have a quote here from Newt praising FDR for ending the Great Depression and praising the treetops for that. Well, what did FDR do? What did FDR do? Well, briefly, the first New Deal on was basically a giant price-fixing scheme. The first new deal, the hallmarks of what is called the first new deal, the 33 to 35, was the Agricultural Adjustment Administration, which was a massive scheme by the government to pay farmers for not growing food in various and other ways, acreage allotments to restrict the number of acres that can legally be planted, and all in an effort to prop up the prices that farmers got and farm incomes, supposedly.

20:55So it's a cartel, a government-enforced cartel. And then there was the National Industrial Recovery Act that tried to do the same thing for the rest of the economy, to fix prices. There were price codes for all industries, and there were swarms of bureaucrats running around trying to enforce the price codes, which was another cartel price-fixing scheme. As I said earlier, the basic theory that they had was the Depression was caused by low prices, therefore if we can use price controls to raise prices, we'll end the Depression. They had it backwards, of course, the Depression was not caused by low prices, the Depression Henry Hazlitt, who we consider to be an Austrian, he certainly understood all this from the very beginning.

21:49I have one good quote from Hazlitt of how this worked out. This was from the December 1933 issue of the American Mercury edited by H.L. Mencken. and Hazlitt wrote that the American consumer is to become the victim of a series of trades and industries which, in the name of, quote, fair competition, will be in effect monopolies consisting of units that agree not to make too serious an effort to undersell each other, restricting production, fixing prices, doing everything in fact that monopolies are formed to do. Instead of a relatively flexible system with some power of adjustment to fluid world economic and Conditions, we shall have an inadjustable structure constantly attempting, at the cost of stagnant business and employment, to resist these conditions.

22:42So Hazlett, this is 1933, he immediately understood what this was going to be, what this was going to be is a classic cartel scheme enforced by the government. Even though we had any trust laws at this time supposedly designed to prohibit this, when the government does it, it's fine. It's okay. And so, and that's exactly what happened. So that was 1933. It took the main, and Hazlitt is a well-known Austrian school economist, took the mainstream of the economics profession until 2004 to understand this. So the Austrians were about 75 years ahead of the mainstream, and I say this because there was an article in the August 2004 Journal of Political Economy, which is one of the top, if not the very top, peer-reviewed academic journal on the field of economics.

23:39The American Economic Review or the JPE or one and two in the eyes of most economists and there was an article by one of the editors of the AEA co-authors are UCLA economists Harold Cole and Lee Ohanian and the article is called New Deal Policies and the Persistence of the Great Depression a General Equilibrium Analysis and you read this article and there's a lot of math and economic models New Deal Labor and Industrial Policies did not lift the economy out of the depression, instead, the joint policies of increasing labor's bargaining power, which I'm going to talk about in a minute, and linking collusion with paying high wages prevented a normal rate of inflation.

24:29Instead, the joint policies of increasing labor's bargaining power, which I'm going to talk about in a minute, and linking collusion with paying high wages prevented a normal recovery by creating rents and an inefficient insider-outsider friction that raised wages significantly and restricted employment. The abandonment of these policies coincided with the strong economic recovery of the 1940s. So it took until 2004 for the mainstream of the economics profession to sift through the cloud created by all the mathematical models and the mumbo jumbo and the lingo of economics to take a look at what actually happened. And even then they can't just take a look at what happened. They have to create a general equilibrium model to explain what happened.

25:17happened. And it's just these models, in my opinion, is why they never understood what the heck did happen. And some of the language they use in economics is a good example of why it's almost impossible to understand things like the Great Depression if you become a general equilibrium modeler. Let's see if I can Oh yeah, I wrote in one of my publications that some of the theories written up by people like these guys in the JPE, they sort of look at the economy as kind of like a Frankenstein monster, and here's what they say. The weak recovery during the Great Depression, the weak recovery is puzzling because the The large negative shocks that some economists believe caused the downturn, including monetary shocks, productivity shocks, and banking shocks, became positive after 1933.

26:18And so, now read this, I hear shocks, and in my warped mind, I think of the movie Young Frankenstein with Frankenstein sitting there being shocked into life, you know, and that's how economists talk. We try to shock the economy into life. And he talked about negative shocks caused the depression. And so they were sapping the energy from Frankenstein, laying there on the table with Gene Wilder hovering over him. But he says, after 1933, these shocks became positive. What were these shocks? Government spending, monetary inflation. So they tried to shock the monster into life. And guess what? It didn't work. Unlike the Frankenstein monster story, where it did work, It did work. And so they failed to shock the beast into becoming a living being once again.

27:08And how are they supposed to do this with various injections of government spending or easy credits? They tried shocking him and that didn't work, so they brought out the big needles and inject him and it still didn't work. I'm not making this up, they're using these words, Conjection Shock and then it was they say that they would have expected a roaring recovery

27:45maybe maybe you haven't all seen the movie but you know when Frankenstein does come to life he roars doesn't he make the big loud noise It's just ridiculous, and so you guys are Ph.D. students in economics. You're just the beginning of having to learn all this stuff, and here, good luck. Good luck to you. But I think it's because of that kind of nonsense that, you know, how many years ago, there was a calculator, from 1933, here's old Hazlitt, immediately recognized that this is a government cartel scheme. What do cartels do? They restrict output. What happens when you restrict output? You restrict employment, too, don't you? That's exactly what you do. And so you create more unemployment, not less. And these guys just discovered that because for a brief moment they got away from their macroeconomic models and looked at a microeconomics book, apparently, and said, hey, look at this. There's a section on cartels here. What does it say there? And they actually got it. They got what happened.

28:46And so the first New Deal was all declared unconstitutional by the U.S. Supreme Court in 1935. But Roosevelt did get around a lot of it. A lot of his agricultural programs that were restricting production, he just started calling them soil conservation programs. We're conserving soil. We're not restricting output and raising prices for farmers. We're conserving soil. So they did that. Then the second New Deal, what's considered to be the second New Deal, is mostly a lot of labor legislation that affected labor markets, primarily labor market legislation, and a continuation of all the spending and the taxing of all the public works. I think there were between 10 and 11 million people who were given public works jobs, but of course all that money to pay for those jobs had to be taken out of the taxpayers' hides.

29:40and so there was a big diversion of employment that caused less private sector employment because of all that money taken out of the private sector and it pumped up government employment and to do all sorts of things and so but on net it didn't increase employment and in fact it always reduces overall employment because the private sector always spends the money better, more efficiently than government does and so on net it would increase unemployment. We have the Social Security Act, which imposed a social security payroll tax. That makes it more expensive to hire people. We have the minimum wage law, federal minimum wage law, unemployment insurance taxes. That makes it more expensive to hire people.

30:27We have the National Labor Relations Act, which greatly empowered labor unions in many ways. And I don't want to go over the big long list of the ways it did so. But we also had the Norris LaGuardia Act that was signed by Herbert Hoover, but it was enforced vigorously by the Roosevelt administration. And one of the things that did, the Norris LaGuardia Act, was made it very difficult, almost impossible, to do anything about union violence. It exempted unions from the normal prosecution for various types of violent behavior. They couldn't get away with murder necessarily, but a lot of other stuff. As long as they were engaged in trying to get better wages and working conditions, the courts would often look the other way at the things they were doing.

31:18So as a result, strikes were much more prevalent and because of the boost in union power created by all this legislation, in 1937 alone, and once the unemployment rate is still almost 17% in 1936, wages went up by about 14% in 1937 alone, up in the heart of the Great Depression. And so what that means is that when you're in a depression and consumer demand is falling, what is also falling is what we call the derived demand for labor. When there are fewer customers, businesses themselves have a lower demand for labor to produce goods and services to cater to the customers.

32:08And so the only way to minimize the disemployment effect of a recession is to allow wages to be flexible. If wages can go down, at least you'll keep your job is one way of looking at it. If you can take a pay cut, at least you'll keep the job at a lower pay. Hopefully it's temporary. But what was happening was the pay was being forced up. not only by the federal minimum wage law, but by the union power, at least in those segments of the economy, not necessarily universally, but the union part of the economy was a big part of the economy in those days, in the 1930s, and so rather than allowing wages to be flexible downwards, all the government policy was aimed at pushing them up, and that of course would cause even more unemployment than would otherwise have occurred, and Richard Dr. Veteran Lowell Galloway in their book, Out of Work, do the statistical analysis that they estimate that the unemployment rate in the U.S. as a result of this legislation was

33:05about eight points higher than it would have been otherwise. So they're saying instead of 19 percent unemployment in 1938, it would have been 11 percent in 1938. For about 1940, instead of almost 15 percent, it would have been about 7 percent. And that's getting closer to normal, you know, normal was 3.2, 3.5 percent. And so even if their estimate is off, which they always are, it's still, they still show that there was a pretty big negative effect there as a result of this. And so nothing that Roosevelt did was good for the economy. The first New Deal was a giant cartel scheme that was harmful to the economy.

33:51He raised taxes tremendously, public work spending, that was bad too, took more money out of the economy. The second New Deal empowered labor unions for the most part, made it more costly to hire people, that created more unemployment. That's the cynics out there, including me, would argue that maybe that's why he was so

34:40I want to tell you how grateful they were for these jobs they got, and how if it wasn't for Roosevelt, the family would have starved and that sort of thing. Well, that's why we study economics, so you can understand why your senile old grandfather is not right about this, and that you don't go and tell your children the same story. That's why we study economics. Fairly recently there's been some research by public choice scholars like Bill Shugart and one of his students and a few others on sort of the political economy or the public choice aspects of how the money was spent. The typical assumption is that while they did spend a lot of this money, out of the goodness of their hearts they spent billions in other people's money to try to alleviate poverty during the Great Depression.

35:31So, you know, you can make the case, I suppose, that, well, certainly somebody benefited from all this. You can't spend all these billions and nobody benefits. Somebody benefits. And the question is, well, who exactly benefited? Was it the people who were made worse off? The South was the worst part of the economy during the Great Depression, especially places like Mississippi. The Mississippi Delta was an awful place economically to be in the 1930s. and but there's a lot of evidence that the main criterion for this spending get this I'm not making this up politics you know it wasn't it wasn't it wasn't the alleviation of poverty necessarily and for years there have been a lot of anecdotes about this but modern scholars economists in particular have become begun doing more systematic research but let me give you some of and some of these anecdotes that illustrate how the money was spent.

36:29This is from a United States Senate Committee on Campaign Spending. Republicans in Kentucky were told they would have to change party affiliations if they wanted to keep their government jobs. In Pennsylvania, businessmen who leased trucks to the government were solicited for $100 campaign contributions. Pennsylvania government job workers, WPA workers, were told to change their party affiliation if they wanted to keep their jobs. Many people refused and were fired. Tennessee Works Progress Administration workers were also instructed to contribute 2% of their salaries to the Democratic Party as a condition of unemployment. In one congressional district in Cook County, Illinois, the WPA instructed 450 of its employees to canvas for democratic votes around election time in 1938.

37:22The men were all laid off the day after the election. So even during the Roosevelt administration, there was a Senate investigation of how this money was used to buy votes, first and foremost, not so much to alleviate poverty where it was worst. and there's a book written by Bill Shugart and William Couch who it was I think it was it was Couch's doctoral dissertation at the University of Mississippi where Shugart teaches and it's a statistical analysis of the spending during the New Deal with all the pork barrel spending and I'll read you one of their conclusions and I think it's called the political economy of the New Deal is the name of the book it's an excellent book if you're interested in The distribution of the billions of dollars appropriated by Congress to prime the economic pump was guided less by considerations of economic need than by the forces of ordinary politics.

38:24Perhaps the New Deal failed as a matter of economic policy because it was so successful in building a winning political coalition. FDR was re-elected overwhelmingly in 1936 and again in 1940 in part due to the support of the big city machines, organized labor, and other constituencies which benefited disproportionately from New Deal largesse. So that's where most of the money went, they found, to the people who would support the Democratic Party. And then he says, insofar as the region was safe for Democrats, the administration's comparative neglect of the nation's number one economic problem, the South, can likewise be explained by politics. The South was solidly Democratic. The Republican Party, after all, was the party of Lincoln. Nobody was voting Republican, hardly at all, in the South, and so they were safe.

39:16They knew in those days that the South would vote Democrat. They're not going to vote Republican. And this was true until relatively recently, so 20, 25 years ago, that because of Lincoln, the South was Democratic. And so they felt they didn't need to spend that much money there. They're in their pocket already politically, so why waste the money? Buy votes out in California or someplace where the margins, the electoral margins are thin and we need to bribe people And so that's what Shugart and Couch found was the main determinant of all the spending during the Great Depression. And so that's pretty much my story about the Great Depression, that Herbert Hoover, if you study him, you read almost any book about him.

40:02He was a big interventionist. There's even a book about him called, I think it's called Herbert Hoover, The Forgotten Progressive, The Progressive, and where they argue that he fits right into the progressives, which were the socialistic interventionists of the early 20th century. He was just sort of the last progressive to achieve high office. When Hoover was, he was the head of the U.S. Department of Commerce in the 1920s, and when he got there, he created 30 new departments and hired 3,000 more bureaucrats. And that's not a laissez-faire kind of guy. That's somebody who thought he could centrally plan the whole economy through the Department of Commerce. And one of the books I read about him says this made him very famous, because he was sticking his nose into almost every industry in America, some way or another, and it's made him famous, got him elected president.

40:58He was an engineer, and he apparently believed that since he was successful as a mining engineer, well, social engineering ought to be a snap, you know. If we can figure out how to get all that coal out of underneath those mountains, you know, the rest of society is nothing because it's darn tough underneath those coal mines. And so he was a big social engineer. And I might as well dig out that exact quote from Rexford Tugwell. Rexford Tugwell, by the way, was a big admirer of Stalin. He wrote a book on America's economy, I think it was called America's Economy in 1930, where he praised Stalin and Soviet central planning to the treetops and urged America to become more like that.

41:45But here's what he said in 1946 after Roosevelt was dead. Tugwell, who taught at Columbia, said the ideas embodied in the New Deal legislation were a compilation of those which had come to maturity under President Herbert Hoover's ages. We, all of us, owed much to Hoover. So it was pretty much a continuation of the interventionism of the Hoover years. and let me read you one of the things he says about, is an admiration for Stalin, since I mentioned that, oh yeah, he said, American economic life is the name of Tugwell's book, 1930, and he was Roosevelt's top economic advisor from 1932 to 1945, the whole duration.

42:39He said, Russia's, the Soviet Union's worst enemies are being forced to admit that the system appears to be able to produce goods in greater quantities than the old one and to spread such prosperity as there is over wider areas of the population. That's the Soviet Union. He said, Soviet planning enabled them to, quote, carry out their industrial operations in accordance with a completely thought out program. Program. Now that's something different than what we do here, he was saying, and he says, the major advantages of the Soviet program outweigh the disadvantages, even though the available evidence suggests that there are admittedly those who suffer under it, under Soviet, this is 1930, the Ukrainians would come to mind.

43:34So even though there are those who suffer under, Tugwell said, the major advantages outweigh the disadvantages of the supposed loss of incentive under communism, the red tape, unimaginative centralized authority. So he put the word supposed in there. Tugwell said while there is a quote, certain ruthlessness and disregard for liberties and rights in the Soviet Union, as well as repression, spying and violence. So he does admit that. But still, the next line is, anyone interested in peace, prosperity, and progress must, in the coming years, devote much study and thought to Russia and the Russians. And that was two years before Roosevelt picked him as his top economic advisor. So you can understand why they were clueless, I think, as to what to do about the Great Depression, and why Roosevelt himself was surrounded by people who wanted him to go much further in terms of interventionism and and he eventually did I guess with the World War two but that's all I'm going to say about this for now we'll have time

44:45for questions and comments and brilliant commentary I forgot to include that

45:00that if anyone needs your class foot for the cause of the end of the Great Depression, goes and goes over World War II or the New Deal, then they would give you an automatic pass for the court.

45:19I don't know if you know Dr. Warnicero at all.

45:30At the end of World War II, when all Americans were celebrating the end of the war, the beginning of the peace, I'm just thinking that it came to an end at the time, after having a listen test about the idea of demobilization and cutting back the government, or going right back into the Great Depression. I teach a course in American Economic History and I usually have a couple of students who have taken or at that semester will be taking intermediate macroeconomics and when I tell them that the federal budget was cut by two-thirds in two years and the economy took off, most of them think I'm lying, I have to bring the statistical abstract in and show them the page where it says that because that totally flies in the place of Keynesianism.

46:30You're right, they must have been in a panic, and that's one of the reasons why the Keynesians, they advocated a GI Bill, because they thought if all these soldiers coming back looking for jobs can be a disaster, unemployment's going to be 25% again, so we need to get these people and put them in school somewhere, use tax dollars, trade school, college, anywhere, And so that was part of the Keynesian hysteria, I think, over the bad news of the war ending and all this money going back into private hands. And of course, even worse yet would be if those people came back and started saving some of that money, right, from the Keynesians' perspective, that they came back and got bad enough that they started looking for a job, that they started saving that money.

47:18Because the Keynesians, at least when I was in school, the textbooks always had a picture I had a picture of a bathtub in the first chapter with injections and leakages, and the leakages were bad, that was savings. You save your money, it's a leak. Have you seen that in some of your books? It's a leakage, and that's not a good thing. It's like the blood is draining from your body, and somebody please plug the leak, stop me from saving. But even that had the unintended side effect of that. I wrote an article in the free market years ago called The Truth About the GI Bill and I traced a little bit of how it sort of led to the inevitably toward federal control of higher education because the government started giving all this money to people to go to trade schools and a lot of the trade schools were phony operations. They weren't a school after all. They were just collecting government checks and educating everybody.

48:15So the government said, well, then we have to monitor what goes on at these places if it's government money. And that led to the accreditation of higher education of colleges. And so, you know, that has led to such things as, I think in this article I mentioned a then current example of, I think it was Westminster Theological Seminary, where, which their religion does not believe in the ordination of women as priests, and so the accredited federal accreditation agency came by and said your academic programs are fine, but we refuse to give you accreditation because you don't ordain women priests, and so they didn't like their religion, therefore they wouldn't give them an accreditation, and if you're not accredited you can't get, your students can't get federal loans and that sort of thing, and that could have been and so they had at the time I wrote that they were going to court to sue because this could totally ruin the place but that's what I see the GI bill as the

49:17genesis of the political correctness the whole the whole mess and so you can blame that on John Maynard Keynes if you follow what Mark is saying.

49:39Security? Oh yeah, the Securities Exchange Commission, I didn't mention everything, all that stuff. Oh yeah, there's been a lot on that sort of thing. I can dig up some references for you and give them to you, but a good reference is right outside that door, it's a book called Crisis and Leviathan by Robert Higgs, I don't know, you may already have that, I don't know, but it's a good history of the Great Depression, it has numerous chapters on that, and I think he does mention the SEC, but it's not a book on the SEC, but I know in the Journal of Law and Economics over the years there have been quite a few articles by Chicago, and the Chicago School of Scholars on the effects of the SEC.

51:06Is this same myth present in human economics, and if so, how did it get started?

51:36It's, I just shake my head at this stuff. That's why it's, I mean, these guys, this is like two of the top, suppose the top economists in the country from UCLA, writing an article in the year 2004, discovering for the first time that the Great Depression or the New Deal didn't work. That's the tone of the article anyway. And that's why it's published in this prestigious journal. It's supposed to be new, new research, you know, path-breaking research that didn't work. and so you know they don't they didn't seem to understand that because they have this mind this Keynesian mindset that all these shocks and injections is what eventually did end the depression and that Hoover's problem is he wasn't shocking and injecting enough apparently so if you have that sort of Keynesian mindset that's the way you'll think but if you understand Austrian economics or and or common sense you're not likely to think that way and so So, yes, I think it still is, but economists don't write about Hoover and the Great Depression.

52:40There's this belief among modern economists that anything older than maybe the last two or three issues of the top journals is really not worth looking at. And so, apart from people like Bob Higgs and myself and sort of a small band of people who are interested in economic history, all the top journals the prestigious journals that they don't they have no concern whatsoever for these topics it's too old it's not sexy enough even though it's it's pretty important pretty important issue Well, you had your hand up. Did you have a question?

53:29That's right. Yeah, Steve, FDR is folly, which I don't know if it's for sale out here or not, but by Jim Powell, He does a pretty good chronology of all the alphabet agencies of the New Deal with references in the back. That would be a good one. One of the big myths of the Great Depression is that the Fed was doing everything absolutely correctly between 1920s, and then Benjamin Strong died and they made mistakes after the Great Depression started. The Fed actually could have prevented the whole thing from happening in the first place.

54:32I don't buy his interpretation, myself, but yeah, that's another big myth, I suppose, about the Fed, but it's one of those things you're never going to convince the Chicago score, because they fundamentally don't believe the whole Austrian analysis of the boom and bust cycle, so... One of the reasons is that they think of inflation as the right of science, and the right of science is stable during the period that we say inflation is. That's because we see it as a non-factual question. That's a good point. They do. It's even worse now because the measurement of the consumer price index leaves so much out that we don't even know what real prices are, you know, we've got housing and things like that, so it's kind of like how when the government some years ago decided it would be a good idea to put the Social Security off budget because when it was running deficits it made the budget look bad, so don't do anything about Social Security but take

56:00it out of the unified budget so it doesn't look as bad. Changing the CPI is and the same way. That's a good point.

56:27Well, as Bill Clinton would say, it all depends on how you define Keynesian, Because, I don't know who your professor is, but people like Paul Samuelson and James Tobin, I've read them celebrating Roosevelt for putting Keynesian style policies into practice. So there are different Keynesians that are probably more prominent than your professor, Samuelson and Tobin who were big fans of FDR and wouldn't expect him to follow every exact prescription of the Keynesians. There's a book by James Buchanan and Richard Wagner called Democracy and Deficit that they published in 1976, I think, and it's sort of an evaluation of what have the Keynesians rot, and it talks about, as all public choice analysis does, they lay out the textbook Keynesian prescriptions in a recession, cut taxes and or raise spending, and then just ask the simple question, well, what are the political incentives that politicians have?

57:40Will they cut taxes? No, they prefer to increase spending instead and run deficits instead, and that's what and what Keynesians will do, even though, and they're not so inclined to cut taxes, even if that's the textbook prescription, and so I'm sure people like Tobin, James Tobin, who's a Nobel Prize-winning economist, along with Samuelson, understand that, even though they hated the book by Buchanan and Wagner, but because they made them look kind of like fools, I think, and it's a really good book though, but I recommend this book if you can find it. It's out of print now, as far as I know. It's part of the collection fund, the Liberty Fund to spend all the rest of the money they had, I guess, on his collected work, so I heard.

58:30This is one of my favorite Buchanan books, along with Cost and Choice. it's probably because Wagner at the time was an Austrian and he influenced how that book was written a lot in all costs and choices an Austrian book any other brilliant commentaries or declarations the wrong people well one reason it has to do with money one reason it has to do a lot to do with money Mark and I were I was talking about this the other day with some of the people in the room, and that the academic world is so overwhelmingly dominated by government and government money, the government universities, the research grants are overwhelmingly from the government despite a few foundations here and there that support university research, they're just swamped by government.

59:27And so if you have a government job and you work for the government, you're not going You're not going to be necessarily too blatant about writing distorted history or pro-interventionist state of history, but you're probably not going to ask the same questions in your research that somebody like Mark or me would ask in our research, just leave them lie, leave them go. And I've seen this in my career over and over and over again. One of my very first jobs was at the State University of New York at Buffalo, publishing all these articles about how devious local politicians were in their setting their tax policies and I had my dean tell me that I'd better watch it it's kind of dangerous to be criticizing and I was criticizing them in academic journals it's not as though the political hacks in New York State were reading the National Tax Journal or something like that which they weren't and you know extreme example I gave some of the students the other day was a man

1:00:26The man I know named Ed Krug, who was a soil chemist, was on a big government research team to study acid rain in the 90s. And the research team with scientists from all over the world concluded it wasn't a big problem, acid rain. That's not what Congress wanted to hear. Ed Krug, being a naive scientist, went on 60 Minutes, a CBS television show, 60 Minutes, and explained to Ed Bradley what the scientists found. And as a result, his career was ruined. He showed me once a letter that the EPA had sent around to universities warning them not to hire him, or else their grants would be pulled. Because they wanted this research to say the opposite, to justify the Clean Air Act amendments of the early 90s, and it didn't.

1:01:13They were honest scientists and said, good news, we don't need another Clean Air Act amendment. Congress didn't want to hear that. So his career was totally ruined by that. And a lot of that goes on in history and other fields. So that's my take on it, why so much history is written by statists. Although I read the stuff, because good historians will have a lot of information in their books and articles, but we just look at it all from a different lens. If you know economics, for example, you can look at some of the same historical facts and have different ideas about what they mean. So I wouldn't say don't read what they write. Most of the history books are written by leftists, but educate yourself as well as you can and still read these books and then you can write books criticizing them, you know, equip yourself to answer them.

1:02:19Yeah, at least that's his final act that got us out of there.

1:02:42The tugwells of the crew, yeah. Yeah, well, Bob Higgs, some of Bob Higgs' work, you probably read this, he had a paper on the effect of the Roosevelt administration's haranguing of businessmen and threats to businessmen on investment, that they created this whole atmosphere, even the creation of the SEC and the investigations and everything, it created a great deal of uncertainty over capital investment, why should I invest my capital here if the administration is so threatening to me this industry and so he makes the case that a lot of investors held back for years during the Great Depression years and but then as soon as these people cut this out like you said Bob makes a pretty pretty good case and he gathers as much data as he can on different aspects of the stock market and and so forth to make the case that it was good the investment took off The biggest myth, though, is that I think that World War II ended the Great Depression, because it literally did alter the unemployment status of the United States and the United States, and that's when the economy took off.

1:04:11Society, but people were sent to Europe and the South Pacific to fight in a war. They weren't given jobs. Anything else? Well, maybe we'll call it quits for now then.