Wednesday, July 27, 2011

The Politically Incorrect Guide to the Great Depression and the New Deal

The Politically Incorrect Guide to the Great Depression and the New Deal is the most accessible book I have read on the Great Depression to date. Having read The Forgotten Man by Amity Shales (which I believe to be the definitive history of the Depression) and New Deal or Raw Deal by Burt Folsom, I think I can safely say that this book is the easiest to read and the easiest to digest.

He begins by stating, "Everything You Learned about the Great Depression and New Deal is Wrong," then proceeds to debunk myth after myth. As to the actual cause of the Great Depression, he offers this: The Federal Reserve fueled the stock market boom of the 1920s with its easy-money policies. After the crash, the Fed did the wrong thing by cutting rates and propping up unsound institutions. Hoover and FDR's interventions in the economy only made things worse.

He compares Hoovers reaction to the crash to that of Calvin Coolidge when the market crashed in 1920. Coolidge relied on the wisdom of all the presidents who had gone before and "did nothing." He knew a market had to find its own way out of a financial hit. Although this incurred short-term pain as jobs were lost and industries thrown into turmoil, the market emerged stronger than ever. From this we get "The Roaring 20s." Coolidge did exactly the right thing, but is given no credit. FDR, following Hoover's lead, meddled in every aspect of the economy and led us into the Great Depression. Yet FDR has somehow managed to earn the reputation for pulling us OUT of the Depression.

Contrary to the popular narrative, Hoover was not a laissez faire president who cared nothing for the poor and hurting and therefore did nothing to help the economy. In fact, he actively rejected the advice of the "leave it alone liquidationists" like Treasury Secretary, Andrew Mellon, who urged Hoover to let the economy collapse all the way to the bottom. He stated, "It will purge the rottenness out of the system." Mellon knew that if the government intervened, it would only prolong the pain and prop up businesses and industries that needed to fail.

Hoover was the first to put the "Great" in the Great Depression. The first thing Hoover did was to prop up wages, which was fine, if you had a job. But millions were thrown out of work and with wages forced up artificially, work became that much harder to find. Then he crippled international trade with the Smoot-Hawley tariff. This monstrosity slapped tariffs on imports and was predictably retaliated against by our trading partners, shattering our already limping economy. In addition, Hoover engaged in reckless borrowing and spending, leading to massive tax hikes (the highest rate was 63%) and a 20% unemployment rate at the end of his presidency. Finally, Hoover gave FDR a firm foundation on which to build his New Deal. It was Hoover, not FDR that began the alphabet soup agencies that ultimately hindered any kind of economic recovery.

Murphy then goes on to examine the roll of the Federal Reserve in the Great Depression. Prior to the crash, the Fed had an "easy money" policy, similar to the policies in place in the early 2000s. Conservative polices, like Andrew Mellon's tax cuts in the early 20s, fueled the roaring economy of the 1920s. But a cut in the interest rate after 1927 led a strong economy into an artificial boom. Two years later, the bubble burst. After the crash, the Fed lowered rates even further. Had they in fact raised the rates, the weakest institutions would not have been able to borrow at the higher rate and would have been forced out of business. The stronger businesses, confident of future success, would have taken the bet and paid the higher rates. This would have provided the economy with some "tough love," leading to quicker recovery. Instead, with its easy money, the Fed prolonged the day of reckoning and therefore the Depression.

The biggest myth surrounding the Great Depression is that FDR and the New Deal pulled us out of it. However, by any measure, the New Deal failed in its most basic mission - to improve the economy. Unemployment was 8.9% in 1930, and it didn't hit single digits again until the war "employed" millions as soldiers. Compared to Canada, which experienced its own "Great Depression" yet did not implement a "New Deal," the U.S. unemployment rate consistently remained 5 - 7 points above theirs. A very destructive policy of the New Deal was the National Industrial Recovery Act. This led to the artificial propping up of wages and prices. This worked if you had a job, but overpriced labor led to fewer jobs. Overpriced goods led to real poverty. Americans literally starved to death as crops were destroyed to maintain the higher prices. The "Codes of Fair Competition" likewise benefited specific jobs and industries, but imposed huge harms through severe economic inefficiencies on those not in favored classes. Finally, Roosevelt was no businessman and barely understood what he believed he could manage as a benevolent ruler. His policies led to a "capital strike" as those with money basically sat out the economy during the 30s. In an era that produced Stalin, Mussolini, and Hitler, businessmen were understandably afraid that FDR was on a path to a similarly socialist economy. In fact, FDR intentionally introduced uncertainty into the market so the common man would look to him as a savior. His political ambitions and lust for power led 93% of business executives polled by Fortune magazine in 1941 to conclude that after the war, FDR would socialize much if not all of the economy. The fact that he had sought and won a third term did nothing to alleviate their fears of a budding dictatorship.

Finally, Murphy demolishes the myth that WWII pulled us out of the Great Depression. Just as the National Recovery Administration allocated scarce economic resources inefficiently and prolonged the Depression, the war allocated resources according to war aims (i.e. labor was redirected from private industry to war efforts and goods reallocated from consumer, free market, priorities to wartime priorities). Inefficient use of resources is inefficient whether dictated by socialist policies or wartime policies. The case can be made that it was MORAL to reallocate labor and capital towards victory against Hitler, but it cannot be argued that it was economically efficient. It's the "broken window" fallacy. The broken window fallacy states that a window, broken by something like vandalism, benefits a community because of the economic activity created when the window is replaced. The fallacy lies in the fact that the money used to replace the window is money NOT used for more efficient uses. The owner of the window had many other uses for the money available to him other than replacing a window, but those uses are now precluded. It's simply common sense that killing workers and blowing up capital cannot be helpful to an economy. In addition, wartime economic statics are misleading. Millions of laborers were shipped overseas, and hence removed from the unemployment rolls, government spending increased astronomically on war equipment, causing a corresponding rise in GDP, price controls and rationing distorted consumer price index measurements, and civilian sacrifices further distort the economic picture. Most problematically, the wartime era operated as a centrally planned economy rather than as a free-market, which has proven time and again to be the most efficient way to allocate scarce resources. Ludwig von Mises states, "Capitalism is essentially a scheme for peaceful nations. But this does not mean that a nation which is forced to repel foreign aggressors must substitute government control for private enterprise. If it were to do this, it would deprive itself of the most efficient means of defense. There is no record of a socialist nation which defeated a capitalist nation. In spite of their much glorified war socialism, the Germans were defeated in both World Wars."

Murphy ends the book with lessons for today. Yes, we are doing it again. Yes, with Obama, we are heading in the same direction.

Books to read to follow up:
Great Myths of the Great Depression, by Reed
The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, by Mises
The Great Depression, by Robbins
The Politically Incorrect Guide to American History, by Woods
The Politically Incorrect Guide to Capitalism, by Murphy
Free to Choose, by Friedman
America's Great Depression, by Rothbard
Out of Work: by Vedder and Gallaway
The Memoirs of Herbert Hoover, by the Macmillan Company
The Ethics of Money Production, by Hulsmann
A Monetary History of the United States, by Friedman and Schwartz
Less than Zero, by Selgin
The Case Against the Fed, by Rothbard
What Has Government Done to Our Money? by Rothbard
The Creature from Jekyll Island, by Griffin
Salvos Against the Neal Deal, by Garrett
The Roosevelt Myth, by Flynn
Rethinking the Great Depression, by Smiley
FDR's Folly, by Powell
Economics in One Lesson, by Hazlitt
Depression, War, and Cold War, by Higgs
Against Leviathan, by Higgs
The Costs of War, by Denson

No comments:

Post a Comment