Why You've Never Heard of the Great Depression of 1920

0:00Ladies and gentlemen, thank you very much. If the unthinkable should happen and Oprah should feature my book, I think we'll be able to stimulate a little bit of that depressed real estate market in Las Vegas with some of the proceeds, but I really don't think that's going to happen. I'm not very pro-Obama in this book, so I don't think that's going to happen, but it's quite all right. I'm happy to make an honest living. That's okay. I'm not looking for a get-rich-quick scheme. I'm happy to do that sober type of labor that Andrew Mellon talked about. Well, today I've got two parts. The first part is history and the second part is theory. I want to talk about an episode in American history everyone should know about, but hardly anyone does.

0:45And then secondly, I want to explain why it shouldn't surprise us that this episode turned out as it did. Why it was not a mere coincidence that the U.S. economy recovered so quickly in 1921 as opposed to other periods in American history. And a little bit of what I say in that section will seem perhaps elementary to some people in the room, but I hope might serve as a good introduction to those of you who are new to these ideas in the midst of this crisis looking for answers. I can, I hope, give a good foundation for future reading and learning. There have been copies of Meltdown out here that have since been replenished. So make sure and make your stampede out there afterward so as to contribute to the Tom Woods lighter luggage fund indirectly by your purchases. Thank you very much.

1:42So right, let me start with just with a description of what was going on in 1920. Now, just immediately beforehand, I was talking to John Cochran of Metropolitan College of Denver and Professor Cochran was telling me that it's either Richard Vedder or Lowell Galloway who refers to the episode in American history, 1920-21, where we had very depressed economic conditions as a stroke of luck. And what's meant by that is that toward the end of his second term, Woodrow Wilson had a couple of semi-debilitating strokes.

2:28Now, look, this is, you go find veteran Galloway, I'm just the messenger here. I didn't make this terrible statement up. But that because of that, and because in effect his wife was more or less running the country in the last year of his presidency, and there was very little activity going on domestically, very little was done by the government to arrest the economic decline. And by the time March 1921 came around, because that was the inauguration month for Warren Harding, the economy was actually starting to turn around and then by the summer it had turned around and the recovery was on its way. And so because Wilson was not able physically to help us out and solve the problem, the problem went away.

3:18Now that seems a little crude to me to think of a man's physical misfortune as the good fortune of the country. So I hereby rebuke that terrible insensitive statement. However, it is nevertheless instructive because we're told today routinely that if you experience an economic meltdown, or a recession, or whatever the term is they're using, you can't get out of it without some type of government counter-cyclical policy, without some type of fiscal policy, monetary policy. Otherwise, yeah, I mean, they'll concede that maybe in 50 years it might turn around, but, you know, a lot of us will be dead by then, basically. So we need the government to intervene. Well, it seems to me if I can just point to one historical episode in which that was not the case, Then we win. So it turns out this is such an episode.

4:11In 1920-21, the first year of what was about an 18-month downturn, the first year of that was actually worse than the first year of the Great Depression of 1929. When you look at it from the point of view of the statistics involving unemployment and production, you had production falling by 21 percent, GDP figures, you find a 24 percent reduction, There is unemployment going up from about 4% to about 12% very rapidly. So terrible conditions. And as I say, the president who succeeded Woodrow Wilson was Warren Harding. Now, we're all taught to hate Warren Harding because, I mean, in fact, in some ways, he was actually a very, very mild type progressive.

4:57He favored a kind of a world court. He had some sort of progressive inclinations. But by and large, we're supposed to hate Harding basically because he wasn't an activist president, you know? He wasn't trying to run people's lives, he wasn't killing people. You know, what a big bore this guy is. And also, he was corrupt. Well, it turns out that the corruption, more or less, okay, morally he had some problems. No one's going to dispute that. But at the same time, most of the corruption involved his subordinates. And in two cases, he rebuked subordinates so severely for their misdeeds that they went out and committed suicide afterward. What could he have said to them, for goodness sake? I mean, it's unbelievable. And in fact, when you think of the scale of some of the scandals, yeah, OK, yeah, they're scandals.

5:45There's somebody profiteering by selling off government hospital supplies. Well, if only that were the problems we were dealing with now, right? Hospital Supplies, people profiteering on them. I think we would all kill to have that be the scandal these days, but that's why we're supposed to detest Warren Harding. My secret suspicion is the reason they detest him is that by doing nothing, he was so successful that he's a rebuke to everything that historians believe in. They don't know what to do with this guy. What he achieved is not supposed to be possible, according to the textbooks. He's not supposed to have been this successful. So let's just smear him out of existence. Well, I've actually become, I've kind of warmed up to Warren Harding, just on the general principle that anyone the establishment hates, I'm at least gonna give the benefit of the doubt to.

6:36Now, sometimes they hate the right people, once in a blue moon. So it's not an apodictically certain law, but I've become kind of warm to this guy, read some of his speeches and I thought, Hey, I mean, he kind of, kind of gets it. And I'm actually gonna share some of this with you in a couple of minutes, but don't worry that I'm going soft. Like, Woods has been, I think, studying the year 1921 a little bit too long here, if he's getting carried away with the speeches of a U.S. president. So don't worry, okay, this is all relative. In terms of presidents, I relatively like this guy, but don't worry, I'm still as pure as ever. Well, as I say, we have these indicators Telling Us the Economy is Turning Down. Well, what does Warren Harding do? Well, first we have what happens starting with Wilson and then Harding.

7:24We see that federal spending starts to come down. There's actually a cut in the US government budget. Now, I talk about this to some degree in my book Meltdown here, but I want to elaborate on that here and give some additional information. So the budget is cut. So in other words, instead of a stimulus package, so called, they actually cut the budget. And this is the opposite of what the textbooks today tell you. The textbooks say, oh no, that's the worst thing you can do in a depression. No, no, no, because that's going to compromise aggregate demand. We can't have that. You've got to keep the government spending going. Yeah, that's what we're told. So they cut the government budget. They did the opposite of what the textbooks tell you. One might hope that a silver lining to the crisis will be that some of these textbooks The Federal Reserve cuts the government budget, but surely the Fed must have been pumping money into the economy.

8:26There must have been some monetary stimulus going on. To the contrary, the Fed does not actually begin engaging in open market operations until 1922. ever in its history. It starts in 1922. So that's not happening. The Fed is largely passive during this crisis. So we've got federal spending going down, $6.3 billion in 1920, down to $5 billion in 1921, down to $3.2 billion in 1922. And the result is, by the summer of 1921, we already see the indications of a turnaround and a robust recovery beginning. Now, it's no surprise that economic historians treating this period have found it difficult to explain how this is possible.

9:19This can't be. Now, I've found some interesting ways that they've handled it, but first we'll deal with the honest ones. There's a Keynesian economist named Robert Gordon who honestly admitted that government policy The government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive. Despite the absence of a stimulative government policy, however, recovery was not long delayed. Now let's move on to the next episode. That's his treatment, by the way. Let's not draw any lessons from this. Let's not wonder if maybe we should tweak our theoretical models. Let's just pretend this never happened and go on.

10:05He admits it. We have another economic historian who very briskly concedes that the economy rebounded quickly from the 1920 to 1921 depression and entered a period of quite vigorous growth. Next chapter. I'm not making this up. I've got footnotes to these particular people. This is their treatment. They admit it, but no consequences, nothing we're not going to learn from this, we're not going to elaborate on it, and that's the end of it. Now here's by the way, here's my favorite though, this is the all-time, this is the all-time Lulu forever. This is from a book called The Presidency of Warren G. Harding. Now here you've got a president who for all his moral foibles has in effect done the impossible.

10:53He has ignored all the modern-day economic advice that thankfully wasn't around back then. He was ignoring his commerce secretary Herbert Hoover who was urging government intervention. He's going, yeah, yeah, yeah, why don't you go jump in a lake? And he achieves the impossible. And yet, here's how a mainstream historian deals with this. And you know how much economics historians know. I mean, it just knocks your socks off, man. Whoa! Do they know economics? That's sarcasm, by the way. So he says this. In the long run, so implicitly conceding that, yeah, OK, he got us out of that depression. In the long run, the administration's tax and economic policies proved ill-considered. And I should point out what the tax policies were. It was lowering taxes.

11:43They actually cut the national debt by about one-third in the 1920s. They cut taxes pretty substantially. The top rate had been 70... in the 70s percent, 77 or so, went down to about the top rate of 25 percent, which is still higher than it was before World War I. and during World War I at the beginning, but all the same, still a cut. So there were tax cuts that occurred and now we're told by this historian that that was really not a good idea in the long run. Normalcy, as Harding called it, consisted of pre-war solutions to post-war problems. Don't you love how they treat freedom and the free economy as being a sort of a quaint relic of the olden days that, you know, stupid simpletons always Harding wanted to return the country to an earlier era, the tax cuts, along with the emphasis on repayment of the national debt and reduced federal expenditures, combine to favor the rich.

12:54Yeah, because the poor don't benefit from that at all, right? No benefits are derived from that. Many economists came to agree that one of the chief causes of the Great Depression of 1929 was the unequal distribution of wealth. Now, by the way, if that were true, there would be depressions non-stop in every country on earth forever. Because in practically every country on earth, You'll find the top 1% owns 25 or more percent of the wealth. Well, that's because these are the people who actually go out and do the creative work, who are the geniuses, who are the marketers, who market the geniuses. Well, naturally, I mean, if you're a janitor who's sweeping a floor in an office building in Hoboken, you're going to earn multiples and multiples less than somebody in charge of a company that is producing farm equipment that makes eating possible for 100 million people.

13:52I mean, how is that a surprise to anybody? But according to this, that causes depressions if there's unequal distributions of wealth. So let's continue with this. So 5% of the population had more than 33% of the nation's wealth by 1929. There are places and times in history where it's been far, far greater than that and there's been no depression. This group failed to use its wealth responsibly. Instead, they fueled unhealthy speculation speculation on the stock market, as well as uneven economic growth. Well, I don't know what uneven economic growth even means, and then fueled unhealthy speculation on the stock market. Gee, you think that might have a teensy-weensy bit to do with the Fed's monetary policy? I'm just wondering. You think that might have something to do with it? No, it's because the rich people were allowed to keep more of their money.

14:40So what this historian is saying is, when he says that the administration's tax policies proved ill-considered, what he's saying is, it was ill-considered to let people keep more For your own good, to prevent depressions, we just need to take three quarters of your money. Now, that you could say that with a straight face. Talk about a court historian whose job it is to shill for the powers that be, inventing bizarro rationales for why it's really in your own good for us to loot you. It's just, I mean, how could you sleep at night? I mean, you can't possibly believe this, right? I don't know what political connection this guy had, or perhaps won after he wrote this book, but my gosh, yeah, we've got to take your money away for the benefit of the economy.

15:30So, I mean, at least the mafia doesn't try to say that, you know? We're taking... this is protection money, and that's all it is. We're not taking it from you because we're afraid that if you keep it, you're going to wreck the local economy. Now, incidentally, in a book I cite in Meltdown called America's Search for Economic Stability, we have this confirmation of what I'm telling you. There's very little activity by the Fed. So we read, despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction. And yet the contraction went away. Do we draw any conclusions from this? No! No, sir! Nope!

16:16Then, at the end, we have, this guy's been talking about inflationary monetary policy and how it's just the thing for a depressed economy. That is the whole idea of expansionary monetary policy as we see it today, to create an excess supply of money that spurs increased spending. But this was 1921, long before the concept of counter-cyclical policy was accepted or So we had a whole bunch of stupid heads in these days who didn't know that their overlords at the Fed can get you out of depressions, but why don't you then add, but somehow gee, they did get out of it, though, didn't they? And very quickly to boot. Now let me say a little something about Warren Harding, because again, I'm not looking to worship a president. I'm not going to wave incense in front of his image.

17:02I just want to say that it's interesting to listen to what he said, because we are never going to hear another US president say anything like this. Well, okay, maybe, maybe, maybe, maybe, maybe. But it's a huge, huge, huge maybe with an exponent in it. But let me quote for you first of all what enlightened opinion had to say about Harding's oratory, because I'm going to be quoting from his speeches. Harding was made fun of for his poor speaking skills, which by the way are not that poor. H. L. Mencken writes the worst English that I have ever encountered. It reminds me of a string of wet sponges. It reminds me of tattered washing on the line. It reminds me of stale bean soup, of dogs barking idiotically through endless nights. It is so bad that The sort of grandeur creeps into it. It drags itself out of the dark abyss of pish and crawls insanely up the topmost pinnacle of posh, etc., etc., and he goes on. Upon Harding's death,

18:11the poet E. E. Cummings said, The only man, woman or child who wrote a simple declarative sentence with seven grammatical errors is dead. Nevertheless, listen to his thoughts Now, he doesn't get everything 100% right. I wouldn't say anything like, you know, there isn't a single misplaced word in his remarks. But, listen to this all the same. Here's his acceptance speech as he accepts the Republican nomination in 1920. I would be blind to the responsibilities that mark this fateful hour if I did not caution the wage earners of America That mounting wages and decreased production can lead only to industrial and economic ruin. Can you imagine a presidential candidate saying wages might have to come down?

19:01And by the way, for anybody in this room who's kind of put off by this emphasis on wages have to come down, you're thinking, what are you, a bunch of scrooges? I mean, how are people supposed to make ends meet? The way wages are supposed to come down on a free market, or pardon me, are supposed to go up on a free market, is not by just artificially forcing them up. I mean, I may as well say, let's repeal the law of gravity so I can go fly. I wish life were that easy. The way you do it, and I explain this in 33 questions, which we've sold out of, but in 33 questions I've got this chapter, how did American wages rise? And the quick answer is that you leave businesses alone. They take their profits and sometimes they borrow and they use these funds to invest in machinery that makes production more abundant and at lower cost so that the goods created in the economy are created in greater and greater abundance

19:53so that the dollar wage that you earn is now stretched farther and farther and farther because today it requires far fewer hours of labor to earn the money necessary to buy a whole range of necessities than it did in 1950 or 1900. And this is how wages are increased. Now, we don't typically see falling prices that much in our economy because the Fed is always keeping prices up. But if it weren't for the Fed, we would see consistently falling prices. And that's how real wages are actually increased on a free market. There's no shortcut to that. That comes through investment. There is no shortcut to that. But all the same, let's get back to Harding. I just didn't want to let that pass. Gross expansion of currency and credit have depreciated the dollar, just as expansion and inflation have discredited the coins of the world.

20:40We inflated in haste, we must deflate in deliberation. We debase the dollar in reckless finance, we must restore in honesty. Deflation on the one hand and restoration of the one hundred cent dollar on the other ought to have begun the day after the armistice, but plans were lacking or courage failed. Why did nobody shoot this guy? Right? I mean, I'm just amazed he got away with this. We will attempt intelligent and courageous deflation. and strike at government borrowing which enlarges the evil and we will attack high cost of government with every energy and facility which attend republican capacity. We promise that relief which will attend the halting of waste and extravagance and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be is an example to stimulate thrift and economy in private life.

21:38The exact opposite of what we're being told now. We've got to blow $800 billion that doesn't even exist on a whole bunch of money-losing projects to keep the economy going. Yeah, I've got to bash the patient in the head with a hammer to keep him conscious, too. Or likewise, what we're all being told is, go out and spend, buy that plasma TV, empty your wallet. Harding says the exact opposite. Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn't been a recovery from the waste and abnormalities of war since the story of mankind was first written, By the way, that's not such bad oratory, is it? I don't see that that's so bad. Why are we making fun of this poor guy?

22:43Now, here he is in his inaugural address. Now, we all read certain presidents' inaugural addresses, the presidents before whom we are expected to wave the incense. These are great men who get gigantic, larger-than-life monuments which I always believed are not befitting of a republic, needless to say, of any free people. You have a gigantic image of some guy, basically, looking down upon you like you're not even worthy to be in this statue's presence. Well, we don't read Warren Harding's inaugural. Here's what he said. We can reduce the abnormal expenditures, again, reduce them, and we will. We can strike at war taxation, and we must. We must face the grim necessity with full knowledge that the task is to be solved, and we must proceed with a full realization that no statute enacted by man can repeal the inexorable laws of nature.

23:38Our most dangerous tendency is to expect too much of government, and at the same time do for it too little. We contemplate the immediate task of putting our public household in order. We need a rigid and yet sane economy, combined with fiscal justice, and it must be attended by individual prudence and thrift, which are so essential to this trying hour and reassuring for the future. And finally, the economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations and price upheavals. The normal balances have been impaired. The channels of distribution have been clogged. The relations of labor and management have been strained.

24:26We must seek the readjustment with care and courage. Our people must give and take. Prices must reflect the receding fever of war activities. Perhaps we shall never know the old levels of wages again, Because war invariably readjusts compensations, and the necessaries of life will show their inseparable relationship. But we must strive for normalcy to reach stability. All the penalties will not be light nor evenly distributed. There is no way of making them so. There is no instant step from disorder to order. We must face a condition of grim reality, charge off our losses and start afresh. It is the oldest lesson of civilization. I would like government to do all it can to mitigate. Then in understanding and mutuality of interest and concern for the common good, our tasks will be solved.

25:17No altered system will work a miracle. Any wild experiment will only add to the confusion. Our best assurance lies in efficient administration of our proven system. Are you as stunned by this as I am that a president is saying these things? He actually has a brain! It is unbelievable. He's saying exactly what needs to be said, you know, again, with a couple of tweaks here and there, but it's quite astonishing. And meanwhile, by the way, in the 1920s, you had the case of Japan, which did not have a Japanese Warren Harding, I'm sorry to report. Japan did not have the swift recovery that the United States had. Japan had, as it indeed had in the 1990s again, a prolonged depression.

26:04In 1920, the Japanese government, in effect, tried to keep prices artificially high, pump up the bubble, keep bubble conditions going. Benjamin Anderson, one of the economists Jeff Tucker talked about, said of Japan, The great banks, the concentrated industries and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices and held the Japanese price level high above the receding world level for seven years. Now we just heard from Harding, we're going to see prices and wages start moving down. Japan refuses to let that happen. During these years Japan endured chronic industrial stagnation and at the end in 1927 she had a banking crisis of such severity that many great branch bank systems went down as well as many industries. It was a stupid policy.

26:53In the effort to avert losses on inventory representing one year's production, Japan lost seven years. The U.S. by contrast, says Benjamin Anderson, was different. We took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again. The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the cost of production and on the free play of private enterprise. It was not based on governmental policy designed to make business good. So that's a lesson from history. Now on the subject of economic theory. Why is it that this should make sense? As I say, the experts are puzzled. The experts try to ignore this episode. The experts even try to say that probably by cutting spending and taxes, we probably sowed the seeds for the Great Depression.

27:49The Great Depression Why should we expect this outcome? What I want to do is just say a couple of things briefly about so-called fiscal stimulus and then monetary stimulus. In fact, I think I'll actually do them in the reverse order. Of course we should expect these things are only going to prolong the agony of a depression. For the monetary part, Let me not assume that everybody in the room knows Austrian Business Cycle Theory. A lot of people are coming to this for the first time in recent months or in the past 18 months or two years. And so I don't want to assume that you know that. Or if I say there have been misallocations of resources, how did that happen?

28:34So let me give the really, really stripped down Reader's Digest version. And for those of you in the room who are experts who are saying, I can't believe he didn't talk about the, well, you're right, and I deserve that rebuke. But I'll happily take an extra 15 minutes, but Doug French will never let me speak at one of these again, so just please just be patient with me. Let me just give the stripped down version, it basically goes like this, what Hayek was arguing in his important writing in the 1930s was that interest rates actually play a role in the economy. They're not just arbitrary numbers, they play a coordinating function. And when they are permitted to play this coordinating function, what they do is they coordinate production across time. So that is to say, when we save more and interest rates consequently decline, that is the very time that it makes sense for businesses to produce goods and to engage in projects that are going to bear fruit in the future, because when we save more, we're basically saying, I'm going to consume this portion of my income in the future. Well, that's the future that businesses are investing for. And why are they investing now? Because the interest rates are low and the

29:43The longer-term their production project is, the more interest rate sensitive it is, so it's going to give a disproportionate stimulus to longer-term types of investments. So the interest rate then coordinates this, my desire to consume in the present versus the future, and businesses' production processes oriented toward the present versus the future. Secondly, the very fact that I'm saving, that I've earned my money and have not returned back into the economy to take that money and claim all the resources to which, in a sense, I'm entitled, I'm actually leaving some of those resources out there in the economy, well, my deferral of consumption, my releasing of resources into the economy provides the material wherewithal to see all the new business projects undertaken by investors through to completion. So again, now the interest rate is coordinating this as well. In effect, the supply of Real Saved Resources in the Economy.

30:37And what Hayek said is that when you tamper with the structure of interest rates as the market sets them, you are introducing discoordination into this coordinating structure. So now, if the central bank, like the Federal Reserve, simply says, we're going to force interest rates down through our open market operations, the problem here is that in this case, the public has not necessarily indicated they want to consume in the future. What do they want to consume right now? They might want to consume even more right now. But yet, businesses are still being encouraged to engage in long-term investment. So people are demanding more of existing goods right now, but yet investors are being misled into engaging in long-term product development for new products in the future. It's a time mismatch. Likewise, just because Ben Bernanke or Alan Greenspan says, hey, we're going to force interest rates down, that doesn't release any more resources into the economy.

31:27So you have an unchanged resource pool to fund a whole bunch of new investment projects. Well, how are you going to do that? They can't all be completed. So there's going to be a bust that comes. So this is the super-duper, really fast overview of this. So that's why simply saying, let's create more money and let's jolt that money into the banking system and keep interest rates down, that's not a solution to a depression. That's the cause of the depression. That's what gets people onto these unsustainable investment trajectories. And if you continue to do it, all you're doing is encouraging people to continue building things that ultimately can't be finished, or won't be profitable, or there won't be sufficient consumer demand to in effect rationalize these investments at the end. So that's a super-duper-duper stripped down version of the theory. So there are implications here about what you should do during a depression. Again, stop the money creation.

32:22Now, Mises' example that he uses in Human Action of the master builder who's building a house, but he's under a misleading impression of how many bricks he has. He thinks he's got 20% more bricks than he has, and let's say he can't buy anymore. He starts building the house, but he's building a different kind of house than he would have built if he had known the real supply of saved resources in his microeconomy. So he's building a house that he won't be able to finish. So, if we say to him, well, in fact, let's think of it this way. What would be the best way to get this builder out of his predicament? It would be to alert him, you're building a house that you won't be able to finish. And alert him as soon as possible. Don't wait till he's at the last brick and say, ah, that was the last brick. Because now he's got to demolish the whole building. Now he's squandered all those resources.

33:07Now he's wasted all that labor time and he has made society poorer. So we see, first of all, from this example, that the boom period, The period where he's building the house, he's got employment, everything looks great, that's where the damage is done. The recession period when he realizes, whoa, whoa, I'm doing something unsustainable, I'm wasting resources, I'm wasting labor time, that's the return to health. And so likewise, now let's think of that in terms of the economy as a whole. If producers are engaged in projects, the economy as a whole is on a series of investment trajectories that are unsustainable in the long run. It's better that it find that out right now and that it not find it out in the distant future. So, in effect, the analogy I've used is when people say the solution is let's pump more money in the economy, let's put interest rates way down, let's put them down to zero.

33:59In fact, zero is too high. We're even hearing from some people, zero is too high. Whatever that means, whatever they want to do with that. But when they say that, what they're really saying is that the way out of the master builder's dilemma is that we should just get this guy drunk. You know, just liquor him up so he doesn't notice the dwindling supply of bricks. He just keeps on. He's having a great old time. But does that hold off the bust? The bust is inevitable. So likewise, by saying, oh, just keep pouring in more money, that doesn't change the fact that you've got an unsustainable structure. And when Alan Greenspan did exactly this in 2001, when he started, you know, with all these rate cuts and we're going to just get things going again, and he refused to let that recession take its course and that healthy process whereby these unsustainable investments are stopped and they stop impoverishing us and those resources are reallocated into sustainable projects, he wouldn't let that happen

34:55and that's the first recession on record in which housing starts did not decline and it's right at that time that people therefore drew the false conclusion, the Fed-fueled conclusion The conclusion that, you know, everything goes bust in a recession, apparently except housing. Housing prices never go down. A house is the best investment you can make. You should make a living flipping houses, because that's an easy way to make money. All those myths get started right at that time, because Greenspan is trying to hold off the recession by keeping the master builder liquored up. But now the master builder is on the last brick, and so the recession is all the worse. So we shouldn't look back at 1920 and say, what a big surprise! The Fed didn't try to keep the bubble going and yet somehow the economy got out of it. No, no, it's because the Fed didn't try to do that that the economy recovered.

35:43It's precisely for that reason that the economy recovered. Now secondly we have the fiscal stimulus argument. Now this one really I think you would have to be a professional economist who is basically just a full-time reader of Keynes. All you do is read John Maynard Keynes to believe in fiscal stimulus. and Fiscal Stimulus. I think the average person immediately detects there's something fishy about this. There's no way this can possibly work. Because basically the argument is, we're going to take $800 billion and just blow it on a bunch of money-losing projects, and that will turn the economy around. Now there are some Republicans, not all of them to their credit, but some of them, their response was, well, you know, if we had drafted the stimulus package, well, we would have blown that $800 billion on different things.

36:32That's the problem. The problem is the very idea that you can conjure up $800 billion. I mean, where is it coming from? I mean, why aren't we doing this all the time? And of course, they do have a kind of answer to that. But in effect, when you think about what the consequences of that are, first of all, remember that what the government is going to spend this on is money losing. They are projects that will make losses. And why do I say that? Well, the private sector would already be doing them If they were money-making ventures. These are money-losing ventures. That's why the government is doing them. And of course the government, because it gets its revenue not by selling you a product, it gets its revenue by seizing it from you, and it has no way to calculate profit and loss. Is it producing something that's adding value? Is it producing something that's destroying value? It has no way of knowing.

37:19Every spending decision it makes is totally arbitrary, because it's completely isolated from market exchange. So it's going to blow this money on, again, money-losing ventures, and that's supposed to make us wealthy. How can that be? Well, and then, of course, there's the opportunity cost. What would have happened to these funds? Even if they're borrowing them, okay, well, where would those loanable funds have gone to? Well, maybe something more worthy than this. Now, one argument that's made is that, by the more sophisticated fiscal stimulus people, is, well, our economy is filled with idle resources, and what we need to do is stimulate them back into activity again. That's what we need to do. Now, to the idle resources argument, I have a couple of thoughts. And the first one is derived from, though not the same as, an example that Peter Schiff uses in his book Crash Proof.

38:08Schiff gives the example of a restaurant owner who happens to live near where the circus comes to town. And the circus comes to town, and so all the clowns and the trapeze artists and the circus patrons all start going to his restaurant in great numbers. Now, this is not the brightest restaurant owner in the world. So he doesn't notice that a lot of these patrons are, in fact, wearing clown suits. So he thinks he's just enjoying an incredible upsurge in demand for his food. So in response to this demand, he builds a new addition onto his facility, or he builds a new location. And then the circus leaves town. And then he realizes he's not really as much in demand as he thought. This was sort of an artificially circus-induced boom that he was enjoying. Well now the question becomes, yes, now he's got idle resources. That addition is idle.

38:58Those additional employees he's hired are idle. That additional location is idle. Should we want to have a stimulus package to stimulate these resources back into use? No! They shouldn't have been built in the first place. It was a miscalculation based on an artificial boom. It's a waste of resources that needs to be liquidated. Those waiters and waitresses standing around all day not getting any tips and working for whatever the wage is, they should be redeployed elsewhere. In fact, you'd be doing them a favor, basically. They would want that. They need to be moved out of that. They are idle resources, those individuals, but we don't want to stimulate them back into activity because we would be wasting the scarce resources of society. We should instead be reallocating those resources where the market demands them, where we're producing things that are urgently demanded by consumers.

39:45Now, secondly, I would ask sort of the question, why are the idle resources idle? This question Why all of a sudden, why have all these businessmen, who are selected by the market for their skill at anticipating consumer demand, why have they done such a rotten job that they're all saddled with idle resources, that it's not even worth putting them to work? Why has that happened? As Ayn Rand would say, blank out, there's no answer given to that. But the Austrians would say, the reason you have all these idle resources in the first place was because of the central bank induced boom. and the induced boom that misdirected capital into projects that would not be sustainable in the long term. And now entrepreneurs are realizing their error.

40:30So we don't necessarily, again, want to stimulate these idle resources into activity. We want to redeploy them. We want a restructuring of the economy. But instead you get a stimulus package. It distorts this process. It makes it harder for the market to figure out what's real demand, what's phony demand, what's sustainable, what isn't. It keeps construction companies at work doing government make work when these companies themselves and their employees need to be either taken out of business and then their employees need to be redeployed elsewhere in the economy. So again, the stimulus only discombobulates the market further and makes it harder for market actors to make these adjustments. And then ultimately, and then my last little point would be, just to take one example from the stimulus package, apparently two million Americans are going to get their homes weatherized under the stimulus package.

41:21Now this is supposed to again stimulate idle resources back into activity. Well, okay, so we've got some resources in the financial sector that are idle. We've got some car production that's idle. We've got a lot of various types of unemployment. Do we have enough unemployed weatherizers in the country that a stimulus package could put them and only them back to work? Well, of course not. What in fact will happen is that you'll be drawing employment from private employers who were producing good things for consumers, but now they'll be bid away from private actors. And then when the economy starts turning around, private actors will find themselves having to bid against the government for laborers, So there's no way, even if any of this stuff made sense, to tailor the package so that the exactly correct kinds of capital and kinds of employment are specifically drawn back into use, even if the theoretical objections weren't there, the practical obstacles are impossible to meet, in effect.

42:25So, okay, and by the way, by the way, let's say there were two million weatherizers out of work, let's say it's one weatherizer per house. Let's say they were out of work, and there were two million people needing their homes weatherized, then why do we need the stimulus package? I mean, if wages and prices are allowed to fall to their equilibrium level, then people who need their homes weatherized will find the suppliers of weatherizing services on their own. And so the stimulus package is superfluous. I do elaborate more on the stimulus sort of thing in a couple of articles on my website, tomwoods.com. I have an articles page, so I'll refer you there for that. But let me close by this, because here's a question I get a lot. I've been doing a lot of talk radio in support of the book. I've been doing public appearances. And the question I often get is, look, you know as well as I do that the things you're proposing make perfect sense, and we know equally well the government's never going to do any of them.

43:17They're going to do the exact opposite, bail everybody out, whatever, interfere with prices and wages one way or another. They're going to keep pumping in money, they're going to do these stimulus packages. We know they're going to do all that. We know it. So, what can we as individuals do? Well, in terms of what you can do with your money and finances, well, I would refer you to an expert on that. I don't want to get in trouble if I say something that goes wrong, so that's not my field. But in terms of, you know, what can we do though, given that the government obviously doesn't really care what we think, I don't care what we think, and that should be obvious by now. I mean, September 2008, the Congressional bailout package was about to be passed. They were getting, congressmen were getting like two thousand to one calls against. And the first time, by the way, you know, they rejected it. And every piece of hysteria imaginable, you know, was heard in the media.

44:06That, oh my gosh, how could these stupid rubes possibly be against what their betters have told them is necessary for the economy? And parenthetically, by the way, wasn't it interesting to read the ex-chairman of AIG saying, oh, just the other day, saying, by the way, the bailout hasn't worked, and I think it probably would have been best to let AIG go bankrupt. Isn't that funny? Turns out the stupid rubes were right after all. Well, as usual. Well, in any case, in any case, you know, so we look at the situation we're in, they're not going to do any of the right things, they're going to do all these bailouts and everything else. So what can we do as individuals? How do we get out of this? And the answer, it seems to me, is that given that our government, you can petition them all day long, and ultimately they're still going to vote for the bailout, maybe we can get to a point where people will actually vote those people out.

44:54I don't know if that will ever happen. I was shocked that basically nobody was voted out after that. Everybody was against the bailout, they voted for it anyway, and then they all went back to work. I don't know. Something's going wrong. Something's kind of screwy here. But what can we do? I actually don't know the answer to my own question, believe it or not. I actually don't know what we can do in the sense that I only know what I, as an individual, can do. And the only thing I am even remotely good at, my wife can attest to this, the only thing. I mean, I'm not a good fix-it man. I mean, that's putting it mildly. I'm a good break things man. But I have no skills, really, other than writing. That's really all I can do. Therefore that's what I try to do and that's all I can do and try and spread the message the way I can through that. Other people are really good organizers. They can organize events. They can organize groups.

45:40They can get big rallies going and those people, the division of labor is demanding that that's what they do. Other people maybe don't have the time even to do this, but they may have some wealth. They can donate to worthy causes to push this forward, but each of us has some role to play. Because if each of us actually sat and did a kind of examination of conscience and said, What is it that I can contribute to this? Even if it's making a little donation, even if it's making a donation of my time, it's whatever. It's spreading the word to my neighbors. If everybody did this, it doesn't mean we would win. But we would at least be satisfied to know that we did everything we could. And I mean, that may be small consolation, but it's not nothing.

46:26That at least we fought against evil, we stood up against evil, I mean we faced evil in the face and we refused to be cowed by it and instead we spread the truth. There is something incredibly enlightening about reading Austrian economics because you finally realize that although I'm being told that this is all a big mystery that only the experts can understand and I better just stick to my own activities, The Elegance and Simplicity of it all is so moving, is so compelling, you're just drawn to it. We need to draw more people to it. And as I say, we won't necessarily win. We certainly can't make promises about this. But nevertheless, the truth does have an attractive power.

47:11And yeah, the Internet can be used by the other guys too. But who in his right mind wants to spend all day on the Internet reading about canes? Who in his right mind wants to spend a week of his summer at a Keynesian Institute? Whereas we have to turn people away from our Mises University over the summer, because when you read our stuff, it makes sense. The light bulbs go on. So, ladies and gentlemen, we're often told, you know, you don't learn the lessons of history, you're condemned to repeat it. Well, 1920 and 21 is a period of history I would love to repeat. I'm afraid we're going to repeat 1929. We're told that in 1929 we had a great depression, government wasn't able to get us out of it, therefore we need to do exactly what the government did in those years. That syllogism doesn't work.

47:58So instead it seems to me, why don't we try sanity for a change? Why don't we try the things that really did work? And the only way we can do that is simply through the old-fashioned method, amplified by the Internet, of spreading the message through our own efforts. And ladies and gentlemen, good luck to all of us. Thank you so much. Thank you very much.