1920-1929: an Era of exceptional
Prosperity The post war
period was an era of great prosperity generally
referred to as the roaring twenties. US
President Coolige was an advocate of "small government"
and his supply side
economics proved a real success story. Cooliges'
tax cuts restored the incentives to work, save and invest and generated
an athmosphere of optimism. The reduction of
top tax rates particularly motivated the entrepreneurs to
engage in
the risky business of innoviation with an unprecedented series of great
innovations as a logical
consequence. Electrification,
radio and telephone date from this
era and brought a wide
range of new
machinery and consumer goods
whereas new tools and
processes (Ford's assembly lines) drastically increased productivity. All these new
technologies boosted productivity and prosperity all over the world
Calvin
Coolige
Republican President
1923-1929
In the Soviet Union, the communist
experiment was still young and initially looked
like a success story. Many considered the economic model organised by
central
planners as a modern and rational alternative for the "irrational
anarchy" of free markets. In Europe as well as in the U.S., the
economic dispute between the socialist - interventionist ideas of J.M Keynes' and the classic liberal ideas of the "Austrian school"
of Von Mises
and Hayekwas at the centre of the political
debate.
Easy access to
cheap money By the end of
the
decade the economic boom culminated in a general euphoria, particularly
in the U.S. Prices of assets
skyrocketed. Prior to the
euphoria a long period of low interest rates
had caused the money supply to grow at a much faster pace than the
real
economy. The fast growth of the European
money supply was exacerbated
by the massive German compensations for war
damages, whilst English repayment of war loans inflated the
US money supply. As a consequence inflationary
pressures increasingly built up in Europe as well as in de
U.S.
Particularly between 1928 and 1929, the easy access to cheap
credit caused reckless speculation on stock markets and on assets in
general. Prices gradually inflated to an unsustainable asset
bubble.
In barely 30 months the Dow Jones rose 230% from 166 in mach 26 to 381
in sept '29! A correction had become inevitable, but turned into
a crash due to calamitous
government interventions:
Political Blunders Hoping to
contol the speculation and to slow down the economy, the political
authorities and inexperienced Federal Reserve
(1913) took some most unfortunate anticyclic measures, which
most
economists today consider as overdone. For
free market economists the interventions
were superfluous absurdities. In an effort to
control speculation, US government first banned
bank
loans for margin trades, while the FED
drastically raised its discount rate from 3.5% (Jan 1928) to 6% (Aug
1929), causing an unexpectedly contraction of the money supply by a
massive one third in six months
from August '29 till
March '30. The market
reacted most vigorously. Stocks plummeted
and asset prices crashed, causing a dramatic contraction of the real
economy.
In an effort to
remedy the
accelerating recession the US
Government then relied on most protectionist measures.
The US raised import
duties on 25.000 articles to an average rate of 65%, causing reprisal
protective measures by most trading partners. The
trade war that followed just killed international trade, with
devastating effects on productivity and boosting unemployment to
unprecedented levels.
Facing
budget deficits due to declining revenues and increasing welfare
demands President Hoover doubled
income taxes. The 1932 Revenue act increased
top
tax rates from 25% to 63%. President Roosevelt later increased these
rates even further to 79% and at one point even proposed a top
tax rate of 99.5%. The drastic
reduction of most tax exemptions particularly hurted middle income
groups.
In an effort to
halt bank runs, Roosevelt
shortly after his inauguration declared a "bank holiday. For four days
the nation's banks were closed and all
financial transactions were halted. In the meantime Roosevelt pushed
the
Emergency Banking Act through the legislative chain. Passed by Congress
on March 9 1933, the act handed the president a far-reaching grip over
bank dealings and "foreign transactions." Roosevelt also
seized peoples gold
holdings, and devalued the dollar with 40%, setting in motion a
downward spiral of competitive devaluations by
the trade partners
all over the
world.
Unpredictable
interference created a climate of uncertainty. As the crisis
deepened further, panic spread tot
the political leaders who in an ever faster rate took new emergency
measures. The
rapid succession and total unpredictability of government interventions
created a climate of general legal uncertainty and deteriorated the
poor business
environment even further.
Rapidly changing tax and subsidy regimes,
regulations of wages, prices, interests and production were all new
government interventions creating a general atmosphere of uncertainty.
Faced with so much uncalculable risk industrialists mostly preferred
to postpone
investments till things had settled.
New Deal, bad Deal. With devastating Social Damage It was in deed
not
free market failure which produced the 1929 depression. It was
interventionism and political bungling on a grand scale,
with the one policy
blunder succeeding the
other: trade crushing
tariffs, incentive-sapping
taxes,
mind-numbing controls on production
and competition, senseless destruction of
crops, coercive labor laws and not in the least the FED's
mismanagement of the money supply.
The social cost
of the political blunders was the
severest crisis in history. Stocks
fell to 10% of their pre-crash value, income
fell by 28%, car
sales fell by 75%, banks
failed in record
numbers, dragging down hundreds of thousends of customers. 13
million
unemployed in the US causing rumors of revolt
even.
Conclusion
The specialists on the matter Murray Rothbard, Laurence Reed, Stefan
Molyneux, Amity Shlaes all unanimously agree: the
great depression was not a crisis of
capitalism but merely a crisis of interventionism. Politicians
completely mishandled a mild recession. It was not free market
failure but the combined mistakes of Central Banks
and Central Government. Irrational fear for deflation led them to
prevent prices and wages
from falling, hindering markets from ajusting to the new situation and
finding a new
equilibrium. The interventions caused distortions
which lead tot massive
misallocation of scarce resources ultimately turning the
natural
slowdown of the business cycle into the deep depression.
Politicians
would much better have left markets to themselves. The price mechanism
guided by the collective
wisdom of millions of
individuals as expressed in billions of free economic choices
would have lead marketsto a new equilibrium and stable
prices in just a few
quarters.
Lawrence
Reed convincingly
demonstrates that
Roosevelt's
deficit spending did not boost demand. The massive resourses
absorbed in the low
productive public investments outcrowded
productive business investment as well
as private consumption.
In
this way Roosevelt's
Keynesian socialist-style remedies of the New Deal and the and excessive
(near fascist) dirgism in the National
Recovery Act (NRA)rather than
remedying
the 1929 crisis, prolonged it well into the
40's.
Eric Rauchway of
the University of California at Davis and the author of The Great
Depression and the New Deal: A Very Short Introduction, talks
with EconTalk host Russ Roberts
about the 1920s and the lead-up to the Great Depression, Hoover's
policies, and the New Deal. They discuss which policies remained
after the recovery and what we might learn today from the policies of
the past.
No economic myth
these days is more pernicious than the myth that the free market caused
the Great Depression and the New Deal got us out of it. That, as
economist Robert P. Murphy points out is flat-out false. In The
Politically Incorrect Guide to the Great Depression and the New Deal he
provides irrefutable evidence that not only did government interference
with the market cause the Great Depression (and our current economic
collapse), but Herbert Hoover’s and Franklin Delano Roosevelt’s big
government policies afterwards made it much longer and much worse (just
as President Barack Obama’s extraordinary expansion of government
promises to do today). Perhaps even more compelling, Murphy exposes the
untold story behind the New Deal—how it operated by force, and why
what’s really at stake is not only our economy but our liberty. The
real “lessons of the Great Depression” are not what you’ve been taught.
Robert Higgs, of the
Independent Institute, talks with EconTalk host Russ Roberts about the
Great Depression, the New Deal, and the effect of World War II on the
American economy. Using survey results, financial data, and the pattern
of investment in the 1930s, Higgs argues that New Deal policies created
a climate of uncertainty that prolonged the Great Depression. Using
consumption data, he argues that prosperity did not return during
wartime, but rather after the war when government intervention in the
economy subsided.
Amity Shlaes,
Bloomberg columnist and visiting senior fellow at the Council on
Foreign Relations, talks about her new
book, The Forgotten Man: A
New History of the Great Depression. She and EconTalk host Russ Roberts
discuss Herbert Hoover, Franklin Delano Roosevelt, the economics of the
New Deal and the class warfare of the 1930s. Amity
Shlaes uncovers how big Government prolongued the depression till
late in the '30s, even '50s, and how we still suffer the legacy of
Roosevelt"s National Recovery Act and big
government idea's today. A great 60 minutes podcast.
Since it first appeared in 1963, it
has been the definitive treatment of the causes of the depression. The
book remains canonical today because the debate is still very alive.
Rothbard opens with a theoretical treatment of business cycle theory,
showing how an expansive monetary policy generates imbalances between
investment and consumption. He proceeds to examine the Fed's policies
of the 1920s, demonstrating that it was quite inflationary even if the
effects did not show up in the price of goods and services. He showed
that the stock market correction was merely one symptom of the
investment boom that led inevitably to a bust.
The Great Depression was not a crisis for capitalism but merely an
example of the downturn part of the business cycle, which in turn was
generated by government intervention in the economy. Had the book
appeared in the 1940s, it might have spared the world much grief. Even
so, its appearance in 1963 meant that free-market advocates had their
first full-scale treatment of this crucial subject. The damage to the
intellectual world inflicted by Keynesian- and socialist-style
treatments would be limited from that day forward.
GDP Evolution during the Great Depression: a lost decade
Index of the NY Stoch exchange from 1926 to 1939
Some basic numbers
during
the Depression
Year
Nominal GNP
% change
Real GNP
% Change
CPI
% Change
M1
% Change
M2
% Change
Bank Failures
Fail Deposits
Interest rate
Real Rate
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
1920
88.9
11,93
73.3
-1.22
85.7
14.68
23592
9.80
34708
13.52
167
5.42
-9.26
1921
74.0
-18.34
71.6
-2.35
76.4
.11.49
20955
-11.85
32212
-7.46
505
172188
4.83
16.32
1922
74.0
0.00
75.8
5.70
71.6
-6.49
21618
3.11
33646
4.36
366
91182
3.47
9.96
1923
86.1
15.14
85.8
12.39
72.9
1.80
22653
4.68
36411
7.90
646
149601
3.93
2.13
1924
87.6
1.73
88.4
2.99
73.1
0.27
23226
2.50
37992
4.25
775
210151
2.77
2.50
1925
91.3
4.14
90.5
2.35
75.0
2.57
25362
8.80
41691
9.29
618
167555
3.03
0.46
1926
97.7
6.78
96.4
6,32
75.6
0.80
26082
2.80
43539
4.34
976
260378
3.23
2.43
1927
96.3
-1.44
97.3
0.93
74.2
-1.87
25796
-1.10
44384
1.92
669
199329
3.10
4,97
1928
98.2
1,95
98.5
1.23
73.3
-1.22
25761
-0.14
45861
3.27
498
142386
3.97
5.19
1929
104.4
6.12
104.4
5.82
73.3
0.00
26189
1.65
45918
0.12
659
230643
4.42
4.42
1930
91.1
-13.63
95.1
-9.33
71.4
-2.63
25293
-3.48
45303
-1.35
1350
837096
2.23
4.86
1931
76.3
-17.73
89.5
-6.07
65.0
-9.39
23883
-5.74
42598
-6.16
2293
1690232
1.15
10.54
1932
58.5
-26.56
76.4
-15.83
58.4
-10.71
20449
-15.52
34480
-21.14
1453
706188
0.78
11.49
1933
56.0
-4.37
74.2
-2,92
55.3
-5.45
19232
-6.14
30087
-13.63
4000
3596698
0.26
5.71
1934
65.0
14.90
80.8
8.52
57.2
3.38
21068
9.12
33073
9.46
57
36937
0.26
-3.12
1935
72.5
10.92
91.4
12.33
58.7
2.59
25199
17.90
38049
14.02
34
10015
0.14
-2.45
1936
82.7
13.16
100.9
9.89
59.3
1.02
29630
16.20
43341
13.02
44
11306
0.14
-0.88
1937
90.8
9.34
109.1
7.81
61.4
3.48
30587
3.18
45195
4.19
59
19723
0.45
-3.03
1938
85.2
-6.37
103.2
-5.56
60.3
-1.81
29173
-4.73
44100
-2.45
54
10532
0.05
1.86
1939
91.1
6.70
111.0
7.29
59.4
-1.50
32586
11.06
47681
7.81
42
34998
0.02
1.52
1940
100.6
9.92
121
8.63
59.9
0.84
38763
17.36
54328
13.05
22
5943
0.01
-0.83
1941
125.8
22.35
138.7
13.65
62.9
4.89
45349
15.69
61296
12.07
8
3726
0.10
-4.79
(1) $ billions (Historical Statistics, Fl)
(2) $ billions,
1929 prices (Historical Statistics, F3)
(3) 1947-49=100
(Historical Statistics, El 13)
(4) $ millions,
June figure (Friedman and Schwartz, 1963, Appendix Al)
(5) $ millions,
June figure (Friedman and Schwartz, 1963, Appendix Al)
(6) suspended banks
(Board ofGovernors, 1943, p. 283)
(7) deposits
insuspended banks (Board ofGovernors, 1943, p. 283)
(8) yearly average
yield on 3-6 month Treasury notes and certificates (1919-33) and bills
(1934-41)
(Board ofGovernors,
1943, p. 460)
(9)
short-term Government yield less CPI inflation rate insame year
%change refers to year-to-year differences in the logs of the series to
the left
This book, originally published in
1932, presents a cosmology of a mass delusion which affects the
mentality of the world. This takes place following World War I where
the Federal Reserve System, for the first time, allowed flexible
currency. This book blows away the conventional interpretations of the
crash of 1929, not only in its contents but that this book exists at
all. . He ascribes the crash to the pile of up debt, which in turn was
made possible by the Fed printing machine. This created distorations in
the production structure that cried out for correction. So what is the
answer? Let the correction happen and learn from our mistakes. Such is the thesis of the great
Garet Garrett. This book It was written
in 1931. Two years before FDR arrived with his destructive New Deal,
ascribing the depression to captialism and spectulation, Garrett had
already explained what was really behind the correction. It took
Murray Rothbard to resurrect these truths decades later, and when he
wrote this in 1963, it was a shock and we are still fighting an uphill
battle to explain the true causes of the crash and following
depression. But here in this wonderful book is an actual contemporary
account that spelled it out plainly for the world to see. No more
can we say that people back then could not have understood. Garrett
told them. And thanks to this new edition of this classic and important
work, he is telling us again today.
This
is a
frightening book. It
shows how massive consumer debt will trigger the next depression,
starting about the year 2007. Most of the logic used to support this
premise is based on the government's own published data. The exuberance
resulting from the overheated stock market of the 90s caused consumers
to stop saving and go into debt. Then, the dramatic drop in mortgage
rates enabled people to refinance their homes and go even further into
debt. People are no longer living on what they can afford; instead they
are living the lifestyle they think they deserve, costs be
damned! With interest rates
increasing, savings rates near zero, and debt at its maximum; many
people will be pushed over their debt limit, having homes foreclosed by
the banks or going into bankruptcy. Others will heed the warnings and
reduce spending, causing a dramatic slowing of the
economy.
From both an economic and monetary
perspective, the United States is a
house of cards—impressive on the outside, but a disaster waiting to
happen beneath the surface. In a relatively
short period of time, the country has gone from the world's largest
creditor to its greatest debtor; the value of the dollar has declined;
and domestic manufacturing has given way to non-exportable services.
While these and other issues could potentially spell disaster for your
financial well-being, the situation could also present unique
opportunities—if you're prepared. Now, in Crash Proof, Schiff
provides you with an insightful examination of the structural
weaknesses underlying this impending economic meltdown, and discusses
the measures you can take to protect yourself—as well as profit—during
the difficult times that lie ahead. He also outlines a specific
three-step plan that will allow you to preserve wealth and protect the
purchasing power ofthe savings you have worked a lifetime to
accumulate. Peter D. Schiff does have a survival plan that can
provide the protection that readers will need in the coming years.
Zoning and
Land Use Regulation and
their role in the Housing
Bubble . How
planning creates artificial shortages and harms
prosperity, quality of
life and our
children's future. Manipulating
America:
Amity
Shlaes is a prominent
American author and commentator and a staunch advocate for
laissez-faire economics. Her writings offer a refreshing free-market
perspective on the issues of political economy and taxation.
She
has written
extensively for the Financial Time, Fortune, The
New Yorker, The American Spectator, Foreign Affairs, National Review,
and The New Republic,
among many others. Her many appearances on television and radio include
regular commentary on public the radio show Marketplace.
Ms.
Shlaes is the author of three books, including The Greedy Hand: How
Taxes Drive Americans Crazy and What to Do About It and The Forgotten
Man: A New History of the Great Depression, published by HarperCollins
in June 2007.
Formerly a columnist for the Financial Times and a member of the
editorial board of the Wall Street Journal, Amity Shlaes is a
syndicated columnist for Bloomberg News and a Visiting Senior Fellow at
the Council on Foreign Relations. She lives in New York City . .
Burning
Corn for Fuel
In the 30s,
prices for both livestock and cash crops dropped to rock bottom. In
1925, corn had
sold at $1.07 per bushel. By December 1932, corn
was selling
for only 13-cents and was actually cheaper than coal. So, farmers
began
burning their harvest rather than selling it.
Crash Proof
Robert Higgs, of the
Independent Institute, talks with EconTalk host Russ Roberts about the
Great Depression, the New Deal, and the effect of World War II on the
American economy. Using survey results, financial data, and the pattern
of investment in the 1930s, Higgs argues that New Deal policies created
a climate of uncertainty that prolonged the Great Depression. Using
consumption data, he argues that prosperity did not return during
wartime, but rather after the war when government intervention in the
economy subsided.
