Speaker 1: Right, and there'll be some music and then it starts.
Speaker 2: All right, make a little adjustment here, all.
Speaker 1: Right, everybody, welcome to your on bookshow on this Monday,
Speaker 1: July twenty first. And I am super happy to have
Speaker 1: a join in Sulgient with me. You know, I've probably
Speaker 1: most of what I know, if not all, of what
Speaker 1: I know about money, monetary policy, banking and the way
Speaker 1: you know, suddenly the history of banking, I have learned
Speaker 1: from either George or his partner in many of his books,
Speaker 1: Larry White. So it's a real pleasure to have to
Speaker 1: have George here. So thanks for joining us.
Speaker 2: George. Oh yeah, thank you for the fine compliment. And
Speaker 2: I'm very happy to be here. Good.
Speaker 1: So, you have a new book out. You've got a
Speaker 1: lot of books out, but but you have a brand
Speaker 1: new one out on the Great Depression, and you know,
Speaker 1: specifically on kind of whether FDR, whether the New Deal
Speaker 1: got us out of the Great Depression. But first I
Speaker 1: want to ask you. I mean, there's been a lot
Speaker 1: of there a lot of books in the Great Depression,
Speaker 1: even quite a few books from kind of free market
Speaker 1: advocates about the Great Depression. So why another book?
Speaker 2: Well, first of all, I don't see my book as
Speaker 2: a work of free market advocacy. I wrote it as
Speaker 2: a scholarly assessment of the New Deal, but specifically of
Speaker 2: the New Deal as a program for recovery, and so
Speaker 2: the purpose of the book was to focus on how
Speaker 2: the US recovered from the Depression and how the New
Speaker 2: Deal contributed or held back that recovery. I wrote it
Speaker 2: for University Chicago Press, so even if I had tried
Speaker 2: to write a polemical book, I certainly wouldn't have gotten
Speaker 2: through the gamut that they made me and all their
Speaker 2: authors go through. They were very supportive of the effort,
Speaker 2: by the way, and there aren't many books about that.
Speaker 2: In fact, although there are many many shelves worth of
Speaker 2: books on the New Deal and also on the Great Depression,
Speaker 2: I was surprised to discovered that there was none that
Speaker 2: specifically addressed the question of how the US recovered. And
Speaker 2: more than that, I was conscious of the fact from
Speaker 2: my learning on the subject, because I taught a course
Speaker 2: on the Great Depression for some years when I was
Speaker 2: a university professor. I was conscious of the fact that
Speaker 2: the at least the popular explanations for how the US
Speaker 2: got out of the depression were completely unsatisfactory, and some
Speaker 2: of the scholarly explanations were at best incomplete. What I
Speaker 2: mean by the popular explanations are two extreme views. One
Speaker 2: is the view you alluded to that the New Deal
Speaker 2: got us out of the depression, and that is simply untenable,
Speaker 2: obviously untenable for those who know the chronology, because the
Speaker 2: New Deal effect as an effective ongoing legislative program, had
Speaker 2: ended by thirty eight. They had done all that they
Speaker 2: could think of doing to end the depression, and by
Speaker 2: then they weren't able to get any more radical legislation through.
Speaker 2: Yet the depression was still raging. At the end of
Speaker 2: the nineteen thirties. We still had over seventeen percent of
Speaker 2: the labor force either unwork orly for unemployed in nineteen
Speaker 2: thirty nine. The other popular explanation is World War two
Speaker 2: got us out are There's some truth to that, as
Speaker 2: I argue in the book, but it's not as simple as, oh,
Speaker 2: the government spent a lot and enlisted a lot of
Speaker 2: people who were unemployed in the armed services, and so
Speaker 2: the depression ended. It's not that simple for the simple
Speaker 2: reason that the war ended, and when the war ended,
Speaker 2: the government spending ended that we went back down to
Speaker 2: a percentage of government spending relative to GDP that was
Speaker 2: roughly what it was putting all levels of government together
Speaker 2: in nineteen And of course all the soldiers came back
Speaker 2: looking for jobs. So the question, or rather the answer
Speaker 2: to the question, how did the depression end, has to
Speaker 2: refer to what happened after World War Two ended. It
Speaker 2: can't just be what happened during the war. So for
Speaker 2: these are some of the reasons why I felt a
Speaker 2: book on that issue was called for great.
Speaker 1: So before we get into kind of the details of
Speaker 1: what the New Deal was and how it contributed or
Speaker 1: not to recovery, maybe walk us through. I know this
Speaker 1: is going to be have to be simplified. What caused
Speaker 1: the Great Depression? What led to the Great Depression? Or
Speaker 1: what caused it? You know, the three minute version?
Speaker 2: Yeah, well I should say I don't even offer a
Speaker 2: three minute version in my book. I scrupulously avoid the
Speaker 2: question of what caused the depression, except somewhat indirectly. Of course,
Speaker 2: have to address some of its causes, because one controversial
Speaker 2: topic per book is enough, and a lot of people
Speaker 2: have debated forever the causes. But if I had to
Speaker 2: answer as I apparently do. I would say that the
Speaker 2: biggest problem was the monetary disturbances and disarray that the
Speaker 2: First World War left the world in upon its termination.
Speaker 2: And to make a very long story short, many countries
Speaker 2: had inflated like mad during the war. The belligerents had
Speaker 2: almost all of them, the US less so than other
Speaker 2: countries because it entered late, and most of them got
Speaker 2: off the gold standard once again. The US was an
Speaker 2: exception in that we didn't go off gold entirely, but
Speaker 2: we did suspend restrict gold exports. All of this left
Speaker 2: the world with a money supply in price level or
Speaker 2: money supplies and price levels that were really not consistent
Speaker 2: with the classical gold standard, and more particularly with the
Speaker 2: actual availability of gold. You couldn't have the thing. You
Speaker 2: couldn't restore the old gold parodies under those circumstances unless
Speaker 2: there was going to be a lot of deflation or
Speaker 2: there were going to be some devaluations. Now all of
Speaker 2: these things, Both of those things happened, but they didn't
Speaker 2: happen enough. There was resistance to both. England, for example,
Speaker 2: refused to devalue the pound, and clever people politicians came
Speaker 2: up with a third solution, a kind of gold standard
Speaker 2: on the cheap, where most countries would not hold their
Speaker 2: own gold reserves but would instead participate in a so
Speaker 2: called gold exchange standard, where the Bank of England and
Speaker 2: the Federal Reserve between them became sort of central banks
Speaker 2: for all the other central banks. And what this did
Speaker 2: was to allow us limited amount of gold reserves to
Speaker 2: stretch further and sustain post war money supplies and price
Speaker 2: levels at higher levels and would otherwise have been the case.
Speaker 2: The problem with that arrangement is if the people who
Speaker 2: are participating in it changed their mind. For example, if
Speaker 2: the French decide they're going to cash in all their
Speaker 2: deposits at the Bank of England, they can send the
Speaker 2: whole house of cards tumbling down. And that's what happened
Speaker 2: in the late nineteen twenties, and that precipitated a very
Speaker 2: severe worldwide deflationary depression that then most countries had to
Speaker 2: struggle to get out of. And we took longer than
Speaker 2: every one of them except France, of the major economies
Speaker 2: get out.
Speaker 1: So how did it play out in the United State?
Speaker 1: That is the what are the what are the things
Speaker 1: that happened to kind of manifest the Great Depression from
Speaker 1: twenty nine on.
Speaker 2: Well, there were, of course, we faced the usual macroeconomic
Speaker 2: consequences that essentially define the depression, a collapse in output
Speaker 2: and a collapse in employment. At one point in nineteen
Speaker 2: thirty three, the peak level of employment plus workers on
Speaker 2: work relief was twenty five percent of the labor force,
Speaker 2: a figure we haven't seen even half of since. So
Speaker 2: a lot of people are out of work and a
Speaker 2: lot of production is not happening. Factories are closed down.
Speaker 2: Also behind all of this is a lack of spending.
Speaker 2: That's kind of driving it all. The other thing that
Speaker 2: is important in the US case, specifically, because all the
Speaker 2: countries experienced severe macrick and other consequences, we had as
Speaker 2: well a severe banking crisis. Many many, many thousands of
Speaker 2: US banks failed. Now we had a lot to begin with.
Speaker 2: We had over twenty thousand banks going into this event,
Speaker 2: but a high proportion of them failed, and we had
Speaker 2: banking crises, not just failures, but situations where panic spread,
Speaker 2: culminating in a major banking crisis in February March nineteen
Speaker 2: thirty three that only ended with the shutting down of
Speaker 2: all US banks by Roosevelt as soon as he took
Speaker 2: office in March.
Speaker 1: So what is it So to what extent did what
Speaker 1: Rosevil did when he came to office in thirty three,
Speaker 1: To what extent did it moderate or improve situations? To
Speaker 1: what extent did it make it worse? I mean he
Speaker 1: did some big there was some big, big projects.
Speaker 2: Well, the first thing Roosevelt did, and the first thing
Speaker 2: he had to do, which of course he hadn't been
Speaker 2: anticipating doing doing during his campaign or at any time
Speaker 2: the year before, was to deal with the banking crisis,
Speaker 2: because that broke out during the so called interregnum between
Speaker 2: his election and his taking office. So he had to
Speaker 2: deal with that, and he dealt with it pretty astutely.
Speaker 2: As most historians agree, shutting down the banks was an
Speaker 2: essential step, or at least it was part of an
Speaker 2: overall plan for shutting them down and then gradually reopening them.
Speaker 2: That worked. It worked. When the banks were reopened, generally speaking,
Speaker 2: they were not faced with runs again. Various steps taken
Speaker 2: during the so called National Bank Holiday had quelled people
Speaker 2: speares or just as importantly, eliminated otherwise their incentive to
Speaker 2: run on banks. One of those steps, for example, was
Speaker 2: denying making it impossible for people to hoard gold. One
Speaker 2: of the main causes of runs in February March was
Speaker 2: fear of devaluation, so people were running on the dollar
Speaker 2: to get gold, not necessarily running on banks because they
Speaker 2: thought they were about to fail. And of course, by
Speaker 2: first prohibiting gold ownership and also demanding forcing people to
Speaker 2: bring the gold they'd taken out back, which they did
Speaker 2: in various ways that I talked about in my book,
Speaker 2: they eliminated this one incentive to run, but there were
Speaker 2: other steps. Of course, there was ensuring bank deposits. Eventually.
Speaker 2: What's interesting about this successful addressing of the bank holiday
Speaker 2: from a historian's point of view, is that the whole
Speaker 2: thing was actually planned, or most of it was planned
Speaker 2: by the Hoover administration treasury team, many of from stayed
Speaker 2: on to help the Roosevelt knew. Roosevelt folks, oh frankly,
Speaker 2: had no plan at all coming into office. So what
Speaker 2: Roosevelt did, wisely, he was to let the Hoover Treasury
Speaker 2: experts let them help, because he didn't have to do that,
Speaker 2: and then he helped execute the plan with his wonderful
Speaker 2: fireside chat. The first one soothing depositors and all that.
Speaker 2: So these first steps mark the turnaround. It's very important
Speaker 2: to give the Roosevelt plus the Hoover administration credit for
Speaker 2: stopping the rot, for stopping the down turn of the economy,
Speaker 2: because of course, unless you did that, you couldn't even
Speaker 2: begin to talk about recovery. So that was the early days. Unfortunately,
Speaker 2: subsequent New de policies, which is the real New Deal,
Speaker 2: the part that was not, as it were, a reaction
Speaker 2: to events that couldn't be anticipated. Many of those proved counterproductive,
Speaker 2: and that's where the New Deal really takes effect. And
Speaker 2: much of it is unhelpful, not all of it. I
Speaker 2: talked in my book about programs New Deal programs that
Speaker 2: also were very I think constructive. So it isn't all that.
Speaker 1: So if we take you know, the the NRA for example,
Speaker 1: maybe walk us through this is a very controversial, big
Speaker 1: part of that first administrations. Administration. What was it and
Speaker 1: what was it trying to achieve? And you know what
Speaker 1: was its fate?
Speaker 2: Yes, Well, first of all, it's important to recognize that
Speaker 2: the New Deal comprised three sorts of legislative efforts. Roosevelt
Speaker 2: was very clear on this, aimed at the so called
Speaker 2: three hours recovery, relief and reform. Recovery is obviously getting
Speaker 2: out of the depression. Relief is providing aid and sustenance
Speaker 2: to the people who would otherwise would be unemployed and
Speaker 2: not have a way to make a living. And reform
Speaker 2: was more long term, and the New Deal involved elements
Speaker 2: of all three. I mentioned this because as a prelude
Speaker 2: to saying that of the New Deal's original reform plans,
Speaker 2: there were two major components. The first, and actually the
Speaker 2: earliest to be implemented, was the Agricultural Adjustment Act the AAA,
Speaker 2: and its complement, because these were meant to work together,
Speaker 2: was the NRA. That's the National Recovery Administration, which was
Speaker 2: passed as part of the NIRA, or National Industrial Recovery Act.
Speaker 2: The alphabet stuff, the alphabet soup gets very confusing, very quickly.
Speaker 2: The NRA was part of the Roosevelt team's efforts to
Speaker 2: get prices back up. Now this here we have to
Speaker 2: be very careful, because it is true that, like many economists,
Speaker 2: they felt the Roosevelt people felt that getting prices up
Speaker 2: was something they needed to do for recovery. The problem
Speaker 2: is that unlike most economists, unlike Kines. Yes, but also
Speaker 2: unlike the Chicago School economists and many others, and unlike me,
Speaker 2: they weren't. They didn't want to do this by getting
Speaker 2: making it possible for people to spend more. They were
Speaker 2: particularly they were opposed the FDR, the New Dealers, especially
Speaker 2: in that those first years. They were opposed to both
Speaker 2: fiscal and monetary stimulus, which is the two main things
Speaker 2: that we think of today as you know, what you
Speaker 2: do for depression, and this is very important. Roosevelt was
Speaker 2: a fiscal conservative. First of all. Yes, his deficits were
Speaker 2: bigger than Hoover's, but as was the case with Hoover,
Speaker 2: these deficits were inadvertent. He wasn't he wasn't willing to
Speaker 2: dispense with relief, and because the depression was so bad,
Speaker 2: the government ended spending a lot on relief, including public works.
Speaker 2: But Roosevelt never believed the deficits per se were helpful.
Speaker 2: He thought that they hurt, so he tried to avoid
Speaker 2: them except if it would make people destitute. And on
Speaker 2: monetary policy, Roosevelt didn't believe in monetary expansion. That's what
Speaker 2: they called inflation in those days. Inflation was a word
Speaker 2: that meant monetary expansion, just as the roth Bardians used
Speaker 2: the term. Today most people don't use it that way.
Speaker 2: But Roosevelt was against inflation. So how do you get
Speaker 2: the price level up if you're not going to do
Speaker 2: fiscal spent timulus, which is government spending deficit spending, or
Speaker 2: you're not going to do monetary expansion, or you're trying
Speaker 2: not to do it. Well, you come up with all
Speaker 2: these other things that can get prices to rise, but
Speaker 2: not necessarily with the same consequences. And the NRA was
Speaker 2: one of those. The AA was another. In both cases,
Speaker 2: the idea was to get prices up by restricting output.
Speaker 2: In the case of the NRA, industries were commanded to
Speaker 2: come up with industry wide codes that the government would
Speaker 2: help enforce that would set prices higher, including the prices
Speaker 2: of labor, wage rates and uh, and and enforce those
Speaker 2: higher prices and wages, wage rates and the ideal And
Speaker 2: of course to do this, what you're what they're doing
Speaker 2: is forming legal cartels. Every industry is being cartilized. This
Speaker 2: was understood, it is not and uh. There's a very
Speaker 2: good book on this, by the way, called The New Deal.
Speaker 2: In the Problem of Monopoly. It was a very famous
Speaker 2: book that the deals just with this odd, odd aspect
Speaker 2: of the new deal in the ni it anyway, they
Speaker 2: they mandated higher prices and wage rates. But the problem
Speaker 2: with doing that without monetary or fiscal stimulus is nobody's
Speaker 2: earning more money. Firms aren't earning any more revenues. So
Speaker 2: how are they going to and and how are they
Speaker 2: going to pay workers higher wage rates? Well, they can
Speaker 2: only do it if they hire fewer labor hours, and
Speaker 2: that's exactly what happened. How are they going to sell
Speaker 2: their products for higher prices, Well, they can do it
Speaker 2: by restricting output, right, because you don't have demand pushing
Speaker 2: up prices, you must have a supply contract to push
Speaker 2: them up. Yep. So the the NRA is trying to
Speaker 2: get the economy going again by restricting output and employment,
Speaker 2: though they didn't see it as doing that, and in fact,
Speaker 2: the only reason unemployment didn't go sharply up under the
Speaker 2: NRA was because of another government program called work sharing
Speaker 2: that required firms to divvy up existing jobs into larger
Speaker 2: numbers of jobs with smaller hours or lower hours per week.
Speaker 2: So that hid the actual unemployment from the standard statistics.
Speaker 2: But in fact, if you look at total labor hours employed,
Speaker 2: they go down. And all this time, with all these
Speaker 2: people were looking for jobs, real wage rates had gone up.
Speaker 2: They were going up while people were lining lining up
Speaker 2: for jobs, and that can only happen with controls. So
Speaker 2: that's the NR. Most economists think it was a disaster,
Speaker 2: and even during the time many people concluded that it
Speaker 2: was a disaster. Ultimately, including some New Dealers themselves, they're
Speaker 2: not FDR. He tried to keep the thing alive.
Speaker 1: Uh the does it come from economically? I mean, is
Speaker 1: this just a you know, off the cuff. It was
Speaker 1: the theory behind this, because.
Speaker 2: There was a theory, well there was a theory. Particularly,
Speaker 2: there were a couple of things that played input. One
Speaker 2: was the idea that you know, we're now in the
Speaker 2: managerial state and firms aren't working the way they used to.
Speaker 2: It's all about planning. So it's either they're going to plan,
Speaker 2: or the government's going to plan, or they're going to
Speaker 2: have some combination of the two do the planning. So
Speaker 2: the planning mentality is very much at the forefront of
Speaker 2: the early New Deal. The people in charge or leading
Speaker 2: that phase of the New Deal are very much advocates
Speaker 2: of planning, and because they think it's going to happen
Speaker 2: one way or they are and if it's going to happen,
Speaker 2: the government is more reliable in the saddle than the
Speaker 2: businessman alone. And of course, in this particular case, the
Speaker 2: way they did it, the businessman, the big businesses were
Speaker 2: very happy to cooperate because they say, we can cartelize.
Speaker 2: The smaller firms are going to just have to go
Speaker 2: along with it, because, as you would expect, the big
Speaker 2: firms were able to exercise more control of the process,
Speaker 2: but ultimately they all got sick of it. Because it
Speaker 2: is the classic case of Bastiat's famous dictum that you
Speaker 2: know that the stage is that fictitious entity by which
Speaker 2: everybody tries to get rich at the expense of everybody else,
Speaker 2: through which everybody tries that, and that's what's happening. Everybody's
Speaker 2: trying to be a monopolist or a cartel but everybody
Speaker 2: has to face the fact that the costs that they
Speaker 2: bear are rising with everything else anyway. So the other
Speaker 2: theory that's fueling the NRA, and particularly the wage components
Speaker 2: of the NRA, is something called the high wage doctrine
Speaker 2: that emerged in the nineteen thirties after the twenty twenty
Speaker 2: one crisis, where the idea developed that if we pay
Speaker 2: workers hire wages, I'm doing this on purpose, then they'll
Speaker 2: have more to spend and that will help out get
Speaker 2: achieve recovery. But wages is a terrible word because it
Speaker 2: has two different meaning. One is the total wage bill,
Speaker 2: or the number of dollars that are being received by workers,
Speaker 2: the total mind, which is their incomes. The other is
Speaker 2: the wage rates, which is how much you're having to
Speaker 2: pay workers per hour. Now, if you increase wage rates,
Speaker 2: you don't necessarily increase the wage bill. In fact, unless
Speaker 2: somehow firms can be earning more revenue, the only way
Speaker 2: they can raise wage rates is by paying hiring fewer
Speaker 2: labor hours. And so unless you have an independent policy
Speaker 2: that is providing more spending, that is achieving more spending
Speaker 2: and increasing total revenues in a depression, the firms are
Speaker 2: not going to have a lot of profits that they
Speaker 2: can dig into in order to pay higher wage rates,
Speaker 2: so you end up with more unemployment. It was a
Speaker 2: very stupid policy, quite frankly, because you can draw the
Speaker 2: supply and demand curves on the table nap and figure
Speaker 2: out that raising wage rates doesn't give you more employment
Speaker 2: on the contrary. Nevertheless, it caught on, partly caught on
Speaker 2: because of Henry Ford paying workers hour than usual in
Speaker 2: it and the idea that the seed they can all
Speaker 2: now buy Fords. But it weren't able to buy Fords
Speaker 2: because Ford was paying them high salaries. They were able
Speaker 2: to buy Fords because other people were buying Fords and
Speaker 2: otherwise spending a lot more money, and the revenues were good,
Speaker 2: and Ford could afford to pay the higher wage rates.
Speaker 2: And so anyway, very bad theory. I have a paper
Speaker 2: about it.
Speaker 1: Brought some thing about why Ford wrote it raised wages.
Speaker 1: Why did you he doubled them?
Speaker 2: Right? Yes, well, because he realized that he could get
Speaker 2: good labor for that product that those wage rates. Remember
Speaker 2: that Ford is also a pioneer with advances in assembly
Speaker 2: line technology, so his workers are more productive than other
Speaker 2: workers because they have this technology or management arrangements that
Speaker 2: allow them to be more productive and be worth those
Speaker 2: higher wage traits. So you really he could afford to
Speaker 2: do it because his plants where his plants were productive. Anyway,
Speaker 2: so you had all these theories that didn't form the NRA.
Speaker 2: And also the AAA, and the AAA tried to get
Speaker 2: agricultural prices up by telling farmers to quit farming so much,
Speaker 2: by paying them to reduce their farm their acreage, and
Speaker 2: by kill their piglets and et cetera. And of course
Speaker 2: that will raise prices, but it does so by reducing
Speaker 2: agricultural output. And when you reduce agricultural output, you hire
Speaker 2: fewer workers. The people who really got screwed, if you
Speaker 2: pardon the expression, but it's quite appropriate here by the
Speaker 2: AAA the most where the poor sharehold and agricultural laborers,
Speaker 2: particularly in the Common South, you had many of these
Speaker 2: persons who didn't they legally some of them were entitled.
Speaker 2: The shareholders were entitled to part of the payments for
Speaker 2: reducing output. But guess what they farm owners took it all.
Speaker 2: And so these people ended up with no jobs and
Speaker 2: no opportunities to find them anywhere down South where they're
Speaker 2: now farming less, and they ended up going to the
Speaker 2: urban cities and usually joining the roles of the unemployed
Speaker 2: unless they were lucky and got work relief. And the
Speaker 2: black African American families, many of them, were part of
Speaker 2: that exodus. It was a great tragic consequence of that
Speaker 2: component of the new deal that's often forgotten about.
Speaker 1: The nWay ultimately is ruled onun constitutional. Is that right
Speaker 1: by the courts.
Speaker 2: Yes, they were both ruled unconstitutional, the AAA and the NRA.
Speaker 2: The AAA was ruled unconstitutional because of what was considered
Speaker 2: a discriminatory tax that was used to raise the money
Speaker 2: with which farmers were paid to not have farmed. And
Speaker 2: and by the way, they recreated another AAA after that
Speaker 2: one was struck down that avoided that particular constitutional issue.
Speaker 2: The NRA was struck down unsimilar somewhat similar constitutional grounds,
Speaker 2: particularly concerning whether the whether the actions of the NRA
Speaker 2: of the National Recovery Administration were justified or warranted by
Speaker 2: the commerce clause. And they found that it was not.
Speaker 2: So that disappeared, and thank goodness, wasn't revived. Nothing quite
Speaker 2: like it has ever been tried again since. By the way,
Speaker 2: only one other country implemented reforms that resembled to address
Speaker 2: the depression that resembled the NRA. And I think I
Speaker 2: mentioned that France was the only other country that recovered
Speaker 2: as slowly or perhaps a little more slowly than the USA.
Speaker 2: And guess what they were the ones. So there's a
Speaker 2: lot of evidence that that kind of planning solution to
Speaker 2: the New Deal didn't work. And there are some economists
Speaker 2: who contest this, but the vast majority then and now
Speaker 2: I think the NRA was a big mistake, and often
Speaker 2: the worst mistake of the New Deal. I think it
Speaker 2: was probably the worst mistake. I hope we get a chance,
Speaker 2: by the way to talk about the positive things, because
Speaker 2: they wear some I don't want people to think that
Speaker 2: I'm only cataloging the New deals bad attempts. That it
Speaker 2: was certainly one of the worst things that was done.
Speaker 1: So what happens, you know, a n O A. They
Speaker 1: make things in a sense, wus not better, and yet
Speaker 1: the economy doesn't do us. So what is going on?
Speaker 1: Is the positive going on? That is that is offsetting
Speaker 1: kind of in terms of the effects.
Speaker 2: Well, most of the positive recovery is during the very
Speaker 2: first early period, and there there's actually a big post
Speaker 2: bank holiday uplift of the economy and things are looking
Speaker 2: pretty good for a while. But it's actually after the
Speaker 2: NRA and the AAA kick in, it takes. It takes.
Speaker 2: There's a little bit of a delay, but that recovery
Speaker 2: is starts to peter out, It starts to Peter up.
Speaker 2: Now there is afterwards, there is another period of recovery.
Speaker 2: But I would argue, and I think the evidence supports
Speaker 2: the argument that the recovery that took place overall beyond
Speaker 2: the initial phase where you have the advantage of getting
Speaker 2: the bank situation resolved, which is very positive. Then though,
Speaker 2: when the NRA first is announced and it's being expected,
Speaker 2: you have another little mini boom. You have a mini boom.
Speaker 2: But most economists think that that's because there was a
Speaker 2: lot of anticipatory buying by producers stocking up on inventories
Speaker 2: and inputs and other things because they know that the
Speaker 2: prices are all going to be going up, and then
Speaker 2: it peters out already in the fall, you have the
Speaker 2: New dealers themselves noting that, Okay, now things are starting
Speaker 2: to look a little bit shaky, but what's the art's happening?
Speaker 2: Then that is driving the recovery from that point on
Speaker 2: to the big Roosevelt downturn of thirty seven thirty eight.
Speaker 2: Is a factor for which the New Deal is only
Speaker 2: partially responsible. And that's gold. What we started talking about,
Speaker 2: how lack of gold was part of the problem that
Speaker 2: caused the Great Depression, and that's absolutely true. What many
Speaker 2: people don't realize was that the United States was facing
Speaker 2: an inundation of gold after nineteen thirty three, or actually
Speaker 2: mostly after January nineteenth, after January nineteen thirty four, to
Speaker 2: be precise, that's when Roosevelt finally devalued the dollar, and
Speaker 2: that initially caused some increase in gold inflows into the
Speaker 2: United States, because devaluing the dollar means you're raising the
Speaker 2: price of gold and making it worth more. But the
Speaker 2: main factor that has a temporary effect. For reasons I
Speaker 2: discussed in my book, devaluation won't keep gold in flowing forever,
Speaker 2: even if other countries don't devalue in turn. But there's
Speaker 2: something else going on, and this is the biggest driver
Speaker 2: of the recovery between nineteen thirty four and nineteen thirty seven.
Speaker 2: It's Europe's war clouds. It's Hitler, mainly Hitler. Hitler becomes
Speaker 2: chancellor around this actually a little bit before this time,
Speaker 2: and increasingly there's fear of war, and these jitters are
Speaker 2: become the main reason why gold starts heading in large amounts,
Speaker 2: even larger than devaluation itself would have promoted to the
Speaker 2: United States. In all that gold that is monetary stimulus,
Speaker 2: but it's not on purpose. The Federal Reserve, the Federal
Speaker 2: Reserve is passively having to accept not gold itself actually,
Speaker 2: because now that gold ownership is illegal, even the FED
Speaker 2: isn't allowed to have gold. Instead, the Treasury buys all
Speaker 2: the gold that comes into the country and gives the
Speaker 2: FED gold certificates, the piece of paper saying we have
Speaker 2: this gold, and that becomes the Fed's asset. Anyway, the
Speaker 2: FED is passively allowing this. It's not engaging in any
Speaker 2: monetary stimulus on purpose. And here's the biggest irony. This
Speaker 2: is helping to restore spending. This is doing what the
Speaker 2: NRA isn't doing and the AAA isn't doing, and it's
Speaker 2: making It is limiting the damage done by those programs,
Speaker 2: which would otherwise be quite counterproductive. But then guess what
Speaker 2: happens The government officials in the Treasury and elsewhere. Remember,
Speaker 2: they don't like inflation monetary expansion, so they don't like this,
Speaker 2: and they actually start are absolutely fearing that this is
Speaker 2: going to cause inflation. Not sorry, they don't mind prices rising,
Speaker 2: but they saying this is inflation. What they're really worried
Speaker 2: about is monetary expansion. And particularly that the banking system
Speaker 2: is going to expand they're sitting on tons of reserves,
Speaker 2: and that that's going to cause another a stock market boom,
Speaker 2: and it's all going to lead to a crash. So
Speaker 2: you might say they're very Austrian about it, but the
Speaker 2: sad reality is that here you had the one thing
Speaker 2: that's really driving recovery. It's gold coming in doing what
Speaker 2: gold a gold standard is supposed to do. Right, you
Speaker 2: got low prices, you go comes in and it gots
Speaker 2: things going again. They decided they needed to do something
Speaker 2: about it, and so they did two things. The Treasury
Speaker 2: and the Fed separately did these anti gold inflation things,
Speaker 2: kind of with the it's not exactly talking to the other.
Speaker 2: So you get a double dose of efforts to keep
Speaker 2: the gold from resulting in more spending. The FED doubles
Speaker 2: reserve requirements, doubles them, and at the same time, the
Speaker 2: Treasury starts sterilizing for a period gold inflows, so they're
Speaker 2: not giving the Fed the gold certificates for that much
Speaker 2: for gold for an extensive Between these two things and
Speaker 2: also some government austerity, but mostly I think the sterilization
Speaker 2: first of all, and then the reserve requires the recovery
Speaker 2: stops because the thing driving it stops. There's no more
Speaker 2: goods to me. And that precipitates the great so called
Speaker 2: Roosevelt procession of nineteen thirty seven nineteen thirty eight, which
Speaker 2: wipes out a huge part, not all, but a big
Speaker 2: chunk of the recovery, the progress toward recovery that had
Speaker 2: occurred in the preceding years. And it's all on New
Speaker 2: Dealers because they were the ones who put the brakes
Speaker 2: on that one important source of spending stimulus, golden flows.
Speaker 2: It's very tragic. By the way, Caneskines was very good
Speaker 2: on the depression. I know people hated when I say that,
Speaker 2: but he was for the most part. If the New
Speaker 2: Dealers had listened to Knes, we would have a much
Speaker 2: more rapid recovery. Knes noted this golden flow. He noted
Speaker 2: the connection between it and Stalin, by the way, was
Speaker 2: another between Hitler and Stalin. They did more for recovery
Speaker 2: at this time than Roosevelt. I'm only being semi facetious
Speaker 2: when I say that Stalin was subsidizing gold mining, and
Speaker 2: so he was their mind out. Their minds were putting
Speaker 2: out tons of gold, much more than they had in
Speaker 2: the twenties, and a lot of it was ending up
Speaker 2: as part of that flow to the US via Europe.
Speaker 2: And so anyway Keynes is noting, they say, what this
Speaker 2: is ironic, but this might be. This is the thing
Speaker 2: that's helping the recovery. And what he didn't anticipate when
Speaker 2: he wrote about that was that the US authorities would
Speaker 2: respond to this with policies designed to stop it. We
Speaker 2: can't have all this gold, and I'm absolutely not exaggerating.
Speaker 2: So this was a tragic response to what would have been.
Speaker 2: And by the way, I'm not being radical here. Christina
Speaker 2: Roemer is a very good economic historian who's written all
Speaker 2: about how the gold then flows with a main thing
Speaker 2: driving recovery, and she's not crazy the libertarian or anything
Speaker 2: like that. But this was very tragic. So after that,
Speaker 2: by thirty eight, as the economy is finally getting out
Speaker 2: of this secondary depression, but by then the new Deal
Speaker 2: kind of peters out. There's no more efforts in the
Speaker 2: parts of the old Deal are being dismantled and found unconstitutional,
Speaker 2: and so you end up that's why we end up
Speaker 2: with seventeen point something percent of the labor force either
Speaker 2: on work relief or unemployee. I want to add a
Speaker 2: footnote here on if I may. There's some people say, oh,
Speaker 2: you shouldn't count the people on work relief as being,
Speaker 2: you know, among the unemployed, and I don't. They're not unemployed,
Speaker 2: they're working, but they should be counted if you're trying
Speaker 2: to assess how the recovery is going, because work relief
Speaker 2: is a substitute for recovery. And Roosevelt and Company were
Speaker 2: very clear on this. They said, look, you know, these
Speaker 2: jobs are temporary, emergency jobs. It's a way of keeping
Speaker 2: putting money in people's pockets. But it's relief, it's not recovery.
Speaker 2: Recovery is getting them back to work in the factories
Speaker 2: that are shuttered and getting those factories working again. That's recovery.
Speaker 2: And that did not happen had not happened as of
Speaker 2: nineteen thirty nine.
Speaker 1: So from thirty nine on, is it basically a woy
Speaker 1: economy that kind of generates the jobs?
Speaker 2: And yes, it starts. It starts with the outbreak of
Speaker 2: the war in Europe, where there's a very sharp increase
Speaker 2: in the demand for war material in Europe, and the
Speaker 2: US is happy to supply it. We have the means,
Speaker 2: and that helps, that starts a recovery. That starts a recovery,
Speaker 2: and of course it's not long before we start to militarize,
Speaker 2: even prior to Pearl Harbor. And then the Pearl Harbor,
Speaker 2: of course, causes US military spending to absolutely skyrocket, and
Speaker 2: that in turn means that we have this temporary for
Speaker 2: the time being. The depression is over because millions of
Speaker 2: workers of unemployed, who would have been unemployed or who
Speaker 2: are on work relief, they are drafted into the armed
Speaker 2: services or they volunteer, and so that's the end of
Speaker 2: unemployment as far as the statistics are concerned. And likewise
Speaker 2: you have now a great increase in output of war
Speaker 2: material plants being reopened or established newly established for the
Speaker 2: purpose of building airplanes and such ships. And so the
Speaker 2: depression is over except the war ends. The depression as
Speaker 2: long as the war continues. But as soon as the
Speaker 2: war ends, the government applied shock therapy, as it were,
Speaker 2: It completely cut back war time spending. Yes, there were
Speaker 2: things like the GI Bill and all, but the fact
Speaker 2: is that total spending on all levels declined to the
Speaker 2: share of GDP it had constituted before the war. That
Speaker 2: is before the European War, and of course all those
Speaker 2: workers are coming back demanding jobs. So in order to
Speaker 2: explain the recovery, you have to explain why you didn't
Speaker 2: have another depression as soon as the war ended, or
Speaker 2: what you didn't see the economy lapse back into depression.
Speaker 2: And that's a serious question. One way to engauge how
Speaker 2: serious it a question it was, and why it's not
Speaker 2: obvious is by noting that the administration's economists first, especially
Speaker 2: this is the end towards the end of the war,
Speaker 2: it's still the Roosevelt administration. Now most of those economists
Speaker 2: are Kansians. The Kynesians have slowly gained importance, but it
Speaker 2: should be noted that they were not important during most
Speaker 2: of the New Deal. Canes had hardly any influence directly
Speaker 2: or indirectly on the New Deal. But now there are
Speaker 2: plenty of Kansians in the government, and they are for
Speaker 2: the most part, almost all them predicting a terrible calamity,
Speaker 2: a depression in many cases predicted to be worse than
Speaker 2: it had been in the thirties unless the government gets
Speaker 2: peace time spending up as high as wartime spending had been.
Speaker 2: Particularly deficit spending, we are going to see a depression
Speaker 2: that it is as bad or worse than in the thirties. Well,
Speaker 2: of course, shock therapy was what they were arguing against. Right,
Speaker 2: we can't do we can't just stop spending and not
Speaker 2: do anything else. We can't just liberate prices. They were
Speaker 2: arguing that all of this would be a disaster, with
Speaker 2: some good reason because unless something changed, right, unless there
Speaker 2: was some big change that had taken place between nineteen
Speaker 2: thirty nine and the end of the war, some change,
Speaker 2: it would not cause conditions to revert to where they'd been.
Speaker 2: It was sensible enough to fear that it would be
Speaker 2: you'd go right back to where you started. And yet
Speaker 2: they were all horribly well, they were all fortunately wrong,
Speaker 2: because there was nothing. The unemployment rate never went much
Speaker 2: above four percent, which by their own by the keynesing
Speaker 2: z Own estimates, it never never was far above after
Speaker 2: the war, immediately after war, never rose far above what
Speaker 2: they would consider full employed employment. Yeah, it was remarkable
Speaker 2: that we avoided that. Something had to change. And one
Speaker 2: of the things I try to explain in my book
Speaker 2: is what else happened during the war that made it
Speaker 2: may allowed the economy instead of having a renewed depression
Speaker 2: to actually take off right after the war when the
Speaker 2: government stops all this spending. So what was it. I'm
Speaker 2: glad you asked what it was. I believe and I
Speaker 2: think there's a lot of evidence for it. What it
Speaker 2: was was a change in the government's attitude toward business,
Speaker 2: major change. And there are books about this and brooks
Speaker 2: end articles that are very good that I cite. Because
Speaker 2: one of the problems one of the things that interfered
Speaker 2: with recovery in the thirties. We've mentioned some others, but
Speaker 2: one of the others, especially toward the last phase of
Speaker 2: the New Deal, was what Bob Higgs calls regime uncertainty,
Speaker 2: which is all the experimentation and the unpredictability of government
Speaker 2: policy combined these days. Yes, indeed, very much combined with
Speaker 2: outright fear of the hostility demonstrated by the Roosevelt administration
Speaker 2: and Roosevelt personally towards businessman and his rhetoric and other
Speaker 2: things that got very, very nasty. And there were some
Speaker 2: policies that went along with a nasty rhetoric that, as
Speaker 2: it were, implemented in a nasty rhetoric. The rhetoric was
Speaker 2: mostly aimed at big businessmen, but the policies tended to
Speaker 2: affect businessmen more generally. So there was a lot of
Speaker 2: reason for businessmen to not be confident in the future,
Speaker 2: to not be confident enough to invest and with the
Speaker 2: hope of recouping of profiting from the investment. And so
Speaker 2: what happens in the thirties is investment absolutely collapsed for
Speaker 2: the whole decade. There was especially if you are looking
Speaker 2: at net investment, right, not just replacement of depreciating capital,
Speaker 2: but growth. There was none. It was essentially zero. Sometimes
Speaker 2: it was negative. And that remained true during the war
Speaker 2: because there's no private investment during the war. So something
Speaker 2: has to happen to make businessmen confident again, and the
Speaker 2: war did that. Now, by the way, Caines was very
Speaker 2: good on this. You Canes was scolding Roosevelt for scaring businessmen,
Speaker 2: and he was saying to them, look, everybody, all economists agreed,
Speaker 2: you got to get investment going if you're going to
Speaker 2: have her recovered. You know, you can't just have consumer
Speaker 2: goods being consumed because you've got to make stuff. You
Speaker 2: got to get the factories working again. So they all
Speaker 2: agreed on that, but Kines was particularly It was particularly
Speaker 2: scornful of new deal policies that intimidated businessmen or otherwise
Speaker 2: made it difficult for them to be optimistic about the future.
Speaker 2: He couched it in the general theory, especially in terms
Speaker 2: of what he called animal spirits. He said, Look, the
Speaker 2: way you have businessmen do their thing investing is you
Speaker 2: can't have them thinking about what can go wrong. They
Speaker 2: have to have this optimism. It's like, you know, you
Speaker 2: can't go out and you can't live well if you're
Speaker 2: constantly thinking you're going to die any minute. Right, But
Speaker 2: he said, businessmen have to not fear the future. And
Speaker 2: he said to Roosevelt, basically, quit picking on him. Coddle them,
Speaker 2: make them feel happy, make them feel proud. He said,
Speaker 2: all of these things. It's very very good because it
Speaker 2: helps us understand how the recovery happened. Because World War
Speaker 2: Two comes along American entry in particular, and all of
Speaker 2: a US. So the administration is, oh, we need them,
Speaker 2: we need them, and we need to then we need
Speaker 2: to have them cooperate in the war effort. And the
Speaker 2: next thing you know is all the businessmen are piling
Speaker 2: into Washington taking power, and they produce the planes. They
Speaker 2: you know the record of the production under the cordial
Speaker 2: let's say, detante between the government and business. The result
Speaker 2: of this is an incredible production of wartime materials, all
Speaker 2: the planes Roosevelt promised and more. But there's more to
Speaker 2: it than that. The new dealers themselves, working with these businessmen,
Speaker 2: start saying, you know, maybe they're not so bad, and
Speaker 2: other people are looking at all this saying maybe capitalism
Speaker 2: isn't dead after all, and so everything changes. This is
Speaker 2: not a small chain. It goes from one extreme of
Speaker 2: hostility to business and believing that capitalism is doomed and
Speaker 2: all that to the beginning of what becomes the military
Speaker 2: industrial complex, which is where, if anything, the government and
Speaker 2: business are much too cozy. But as far as recovery
Speaker 2: is concerned, this is a very good development. The long
Speaker 2: run implications may not have been so great, but for
Speaker 2: the recovery it means a businessman and the war on
Speaker 2: an upbeat view of the future, and investment takes off
Speaker 2: like our rocket. And so basically it's like scissors. The
Speaker 2: government spending is going I got to do it backwards.
Speaker 2: Government spending is going and private investment is going shit.
Speaker 2: And that's why you didn't need the government peace time
Speaker 2: spending that the Keynesians thought would be necessary, because private
Speaker 2: investment has taken off. This I think this aspect of
Speaker 2: the war. So you can still tell a story where
Speaker 2: World War II helps end the depression, but it is
Speaker 2: not a simple story of government spending. It's a story
Speaker 2: of more importantly, for the longer haul, for post war,
Speaker 2: the post war revival. The big change isn't the spending,
Speaker 2: it's not the lasting it's the change in attitudes that
Speaker 2: gives businessmen the you know, warm fuzzy feeling that Caines
Speaker 2: thought they needed if they were going to start doing
Speaker 2: their investment thing again. So I think that's the part
Speaker 2: of part of the recovery story that both critics of
Speaker 2: the New Deal, both the conventional criticisms of the New
Speaker 2: Deal UH and the champions of the New Deal argument
Speaker 2: arguments in favor of the New New Deal omit. And
Speaker 2: by the way, it has to be said that this
Speaker 2: change and attitude is part of the abandonment of the
Speaker 2: New Deal, it's not a new new deal. And Kansianism
Speaker 2: helps here too, yarn, because remember Kaanesianism is saying just
Speaker 2: have the government stimulate. Nowadays, it put the Knesian emphasis
Speaker 2: on physical stimulus, but Kanes himself thought monetary stimulus was,
Speaker 2: you know, another possibility. But for businessmen, this kind of
Speaker 2: thing changing interest rates, having the government spend more, it's
Speaker 2: not as oppressive as all that New Deal stuff. It's
Speaker 2: not interfered with their decision making, it's not as scary.
Speaker 2: So for businessmen, they may not like deficit spending, you know,
Speaker 2: they don't like inflation, but they would rather have the
Speaker 2: government pushing and pulling that one big lever than micromanaging
Speaker 2: them or scaring them to death. So for business investment,
Speaker 2: the Kanes revolution which is taking hold, that is the
Speaker 2: idea that the main way you should combat recessions is
Speaker 2: by government spending or monetary stimilus. For them, it's a
Speaker 2: big relief that change, and we need to remember that
Speaker 2: when we're being critical of gains.
Speaker 1: Did that effect also the Fed? That is, did data
Speaker 1: also cause a change in terms of the Fed's monetary
Speaker 1: policy or the attitude towards monetary policy.
Speaker 2: The truth is that monetary policy never really deliberately contributed
Speaker 2: much to recovery even after the war. After the war,
Speaker 2: the main concern of the monetary authorities and the Truman
Speaker 2: administration was inflation and keeping a lid on it, because
Speaker 2: of course prices had been kept down by wartime controls,
Speaker 2: and once those controls were lifted, the tendency was for
Speaker 2: them to go up, particularly when you have all this
Speaker 2: private spending is kicking in, so you can't count on
Speaker 2: the reduction and government spending. By the way, the government
Speaker 2: went into surplus very quickly after the war, and fiscal surpluses,
Speaker 2: which was the Keynesians thought, you know, this is the
Speaker 2: last thing you're going to be able to get away
Speaker 2: with without trouble. So the fact is that you had
Speaker 2: renewed fiscal and monetary austerity, as it were relatively tight
Speaker 2: regimes after World War Two. So neither neither of those
Speaker 2: stimulus sources was contributing to the recovery, and that made
Speaker 2: the recovery of private investment spending all the more important.
Speaker 2: That should be said that many people think that what
Speaker 2: was driving all this was consumer demand, because consumers were
Speaker 2: forced to save a lot during the war. I mean,
Speaker 2: the government is spending a lot and it's ending up
Speaker 2: in consumers' pockets, but they and they saved a lot
Speaker 2: because they couldn't. There weren't as many household goods to
Speaker 2: produce with all the productive machinery of the economy oriented
Speaker 2: towards wartime output. And so one theory says, Okay, after
Speaker 2: the war, they dissaved, they took all these savings and
Speaker 2: they went on shopping spree. But that actually didn't happen.
Speaker 2: They they their savings rate fell after the war. They
Speaker 2: weren't saving as much as a percentage of consumption, but
Speaker 2: they didn't dissave after the war. And that's all the
Speaker 2: more evidence that it's really the investment side of things
Speaker 2: that sustaining the recovery, and it's it's what's allowing these
Speaker 2: people to buy more without dissaving.
Speaker 1: So anyway, if we go back to if we go
Speaker 1: back to the beginning, you know, there's certain people I
Speaker 1: think we know would say nothing should have been done, right,
Speaker 1: you know, these things take care of themselves. Yeah, you
Speaker 1: shouldn't do anything. Yes, So what's what's your view? I mean,
Speaker 1: in terms of you're ninety thirty three, it is what
Speaker 1: it is.
Speaker 2: What I think plenty needed to be done. I don't
Speaker 2: that argument makes little sense. Let's just let's just assume,
Speaker 2: for the sake of argument, that are completely free market
Speaker 2: economy with a proper gold standard and a good free
Speaker 2: banking system of the sort I like had had been
Speaker 2: in effect. You might say doing nothing should suffice. But
Speaker 2: then again, in that sort of system, I think it
Speaker 2: probably wouldn't have had the disaster.
Speaker 1: That you yeah, you don't get it exactly.
Speaker 2: Well, but so we had a disaster, Why well, we
Speaker 2: have had monetary arrangements that had been done badly muddled
Speaker 2: as I described early on, and those weren't going to
Speaker 2: change instantly. So you know, if you're going to do nothing,
Speaker 2: you have to start doing nothing, have to have a
Speaker 2: good economic system in place, not while you still have
Speaker 2: a lousy one in place, and certainly not while the
Speaker 2: lousy one has just caused a massive collapse. That's not
Speaker 2: the time to do nothing, because like it or not,
Speaker 2: the same government that, as we're assuming for the sake
Speaker 2: of argument, created the circumstances that allowed the economy to collapse,
Speaker 2: is also the only agency in a position to try
Speaker 2: to fix things, that is, to correct its own mistakes.
Speaker 2: The banking system isn't one that's going to automatically recover
Speaker 2: the debts that have suffered from deflation. Aren't automatically going
Speaker 2: to just go away. The unemployment is not going to
Speaker 2: quickly resolve itself through deflation because of rigid contracts, especially
Speaker 2: debt contracts, but also because of other kinds of price
Speaker 2: and flexibilities. Some of them are not part of the
Speaker 2: market system, but are not going to go away. There's all.
Speaker 2: The government had an absolute responsibility to take steps to
Speaker 2: help end the recession, and those steps, many of them
Speaker 2: that were necessary, were not going to happen otherwise. One
Speaker 2: of the programs that was a good new deal program,
Speaker 2: in my opinion, perhaps the best setting aside dealing with
Speaker 2: the banking crisis, but this is the new deal proper
Speaker 2: we're talking about, was the creation of the Home Loan
Speaker 2: h Home Loan Mortgage Corporation h I always botched this
Speaker 2: up and homeowners some homeowners Loan corporation. See now, what
Speaker 2: this thing does is you have all these debtors with
Speaker 2: mortgages and the I won't go into the structure of
Speaker 2: the mortgages, but suffice to say these weren't going to
Speaker 2: be easy to refinance, and they're all underwater, and the
Speaker 2: lenders are in trouble because all they can get by
Speaker 2: for closing is properties that's the price of which is
Speaker 2: down and impossible to sell, and that's not going to
Speaker 2: help them. What you ideally needed was refinancing, restructure all
Speaker 2: these mortgages, pretend they'd write them the way they might
Speaker 2: have been written if the depression had been anticipated. Well,
Speaker 2: that's what the HLC did, very cleverly. They swapped. They
Speaker 2: swapped their own the new agency swapped its own agency
Speaker 2: bonds for the mortgages in terms that the mortgage lenders
Speaker 2: were bound to consider better than sitting, than foreclosing or
Speaker 2: holding these non performing loans. And then they refinanced the
Speaker 2: mortgages on better terms, including introducing thirty year new loans
Speaker 2: with its long loan terms mortisized terms, and they managed
Speaker 2: to do it. They are relying on taxpayers because the
Speaker 2: key to this, they're relying on implicit guarantees on loans
Speaker 2: and the interests. So there's risk and taxpayers are bearing it.
Speaker 2: But guess what, it's a macroeconomic crisis. It's a perfect
Speaker 2: example of a public good because if this works, if
Speaker 2: this works, taxpayers are going to be among the beneficiaries
Speaker 2: getting out of it, helping get out of a depression.
Speaker 2: And it works very well. In fact, the government didn't
Speaker 2: lose any money at all it might have, but World
Speaker 2: War Two raised the prices of mortgage of property, and
Speaker 2: eventually the thing came out with very low cost. It
Speaker 2: didn't actually profit. Some people claim it profited, but if
Speaker 2: you get the accounting right, it lost a little bit
Speaker 2: of money, but did a heck of a lot of good.
Speaker 2: It kept a lot of people in their homes, It
Speaker 2: saved a lot of the mortgage lenders, and by doing
Speaker 2: these things it did help the recovery. It was one
Speaker 2: of the best new deal programs in my opinion, because
Speaker 2: it's essentially dealing with price rigidities that the marketplace wasn't
Speaker 2: able to easily overcome. And they had a similar program
Speaker 2: for farm mortgages, but the statistics don't allow us to
Speaker 2: conclude that it was as successful. Moreover, it was kept
Speaker 2: in place long after, in one form or another. It
Speaker 2: became almost a permanent program, and then it ended up
Speaker 2: wreaking havoc with aquaculture, and the whole thing went blotto
Speaker 2: in the nineteen eighties, as people predicted it would. If
Speaker 2: it wasn't eliminated after having done it should have done
Speaker 2: in the thirties. So you don't want these things to
Speaker 2: be perpetual.
Speaker 1: Well, That is kind of the thirty three to thirty
Speaker 1: four bank regulations, right, I mean they.
Speaker 2: Well, those were meant to be permanent all along the AA,
Speaker 2: you know, yeah, some programs were supposed to be temporary.
Speaker 2: The AAA was supposed to be temporary. Roosevelt went back
Speaker 2: on his word on it. He signed it off as
Speaker 2: a temporary measure and then said, oh, we're not going
Speaker 2: to We never thought this would be temporary. It was
Speaker 2: very clear about it, and I think the AAA and
Speaker 2: its post New Deal versions, of course, it ended up
Speaker 2: being the basis for the whole drama and ordeal of
Speaker 2: farm subsidies that were still not completely passed. Anyway, the
Speaker 2: banking legislation was permanent, and it was sad because the
Speaker 2: more astute observers of the situation understood that the reason
Speaker 2: the US banking system was so we and so many
Speaker 2: banks failed was the same reason why we had so
Speaker 2: many in the first place, which was the lack of
Speaker 2: branch banking, which the countries with strong banking systems allowed
Speaker 2: their banks to branch are usually nationwide, and most countries
Speaker 2: that suffered from the depression didn't have banking crises because
Speaker 2: they had better banking systems. Canada, by the way, was
Speaker 2: a very good example. So this was not simply a
Speaker 2: matter of having a central bank that did the right thing.
Speaker 2: Canada had none until thirty five. Anyway, what the banking
Speaker 2: law did was to treat deposit solution as this way
Speaker 2: of propping up these weak banks, because of course, if
Speaker 2: you have if you were fully ensured, you don't worry
Speaker 2: about your bank being weak, even if you know it
Speaker 2: is right, you know these are this is the same
Speaker 2: goddamn bank, that same sort of bank that collapsed a
Speaker 2: few years ago. Nothing's basically changed. It's underdiversified. It can't
Speaker 2: stand a shock to the farm sector in which it deals.
Speaker 2: That's great, It's okay because we have insurance. The alternative,
Speaker 2: of course, was still out branching, but there was a
Speaker 2: glass Carter Glass wanted branching. Henry Stiegel was totally opposed
Speaker 2: to it, so we ended up with this. Roosevelt didn't
Speaker 2: like deposit insurance, and he fought the legislation that deposit
Speaker 2: insurance component of the nineteen thirty three Act Banking Act.
Speaker 2: He fought it till the eleventh hour when he finally
Speaker 2: realized that the deck was stacked against him, that he
Speaker 2: didn't want to veto the whole bill, and he probably
Speaker 2: would have faced his veto being overturned, so he relented,
Speaker 2: and of course, being a wise politician, he then took
Speaker 2: credit for deposit insurance as if he'd wanted it all along,
Speaker 2: But he didn't really, he never liked the idea. Truman, interestingly,
Speaker 2: also hated depause insurance originally, but by the end, during
Speaker 2: the banking crisis, he was saying, well, you know, maybe
Speaker 2: this will be a lesser of two evils. So between
Speaker 2: the two of them, it was Hoover who showed some
Speaker 2: inclination to support deposit insurance. And by the way, when
Speaker 2: I say this about FDR, that's not one of my
Speaker 2: criticisms of him. I think that I think that his
Speaker 2: criticisms of deposit insurance, which we should really call deposit
Speaker 2: guarantees because it's not run like insurance, I think they
Speaker 2: were perfectly sound, and they would many economists would say
Speaker 2: that they were perfectly sound well.
Speaker 1: And the consequences were felt in the eighties to two
Speaker 1: thousand and eight and are still being felt right.
Speaker 2: Eventually, Eventually, badly designed insurance systems, anyway, tend to lead
Speaker 2: to trouble. We had dozens of them before the Great Depression,
Speaker 2: and they all went belly up. They were state depositor,
Speaker 2: they all failed, And so that was part of what
Speaker 2: was informing both Trumen and Roosevelt's negative towards insurance. They'd
Speaker 2: seen what it had done in various state attempts. So
Speaker 2: it was perfectly reasonable for somebody who was and Roosevelt was,
Speaker 2: you know, he was where he understood banking. He was
Speaker 2: no economist, but banking he was familiar with, and so
Speaker 2: I think his views on banking were quite sound, but
Speaker 2: he accepted this as the best that could be had
Speaker 2: in order to get the whole banking bill through. I
Speaker 2: write about the other components of the Banking Act, including
Speaker 2: this famous Glass Stiegal components writing, investment, and commercial banking,
Speaker 2: but only to point out that those things did nothing
Speaker 2: to help end the depression either. The pause insurance may
Speaker 2: have contributed to stabilizing the banking system, it's controversial whether
Speaker 2: it was really that important for that, But the other
Speaker 2: components of the thirty three Banking Act did nothing, nothing
Speaker 2: to help the recovery because the things they dealt with
Speaker 2: weren't part of the problem at the time.
Speaker 1: All right, So we've got a few questions here. Let's
Speaker 1: let's go to those and see. Okay, Wes asks, what
Speaker 1: are common misconceptions fallacies around banking and financing that drive
Speaker 1: you crazy?
Speaker 2: The policies around banking and financing financing.
Speaker 1: I guess generally finance and banking did drive you crazy. Misconceptions?
Speaker 2: Oh goodness, Well, the way I'm gonna I have to
Speaker 2: be very selective here, because there's a long list of
Speaker 2: things that drive me crazy in banking about banking in otherwise.
Speaker 2: I think the biggest one, though, is the belief that
Speaker 2: only a central banking system can be stable. That would
Speaker 2: be not my number one. It's a belief that is,
Speaker 2: if not completely uninformed by history, is informed by a
Speaker 2: very limited knowledge of history, including people looking back at
Speaker 2: the US history and concluding that all our troubles before
Speaker 2: the FED were things that could not have been solved
Speaker 2: without creating the FED. Now, apart from the fact that
Speaker 2: the FED did not perform very well at all, especially
Speaker 2: in its first few decades, and didn't perform any better
Speaker 2: than the preceding systems really in almost any criterion you
Speaker 2: could pick, the fact is that the pre FED problems
Speaker 2: of the United States banking and currency system can all
Speaker 2: be traced easily without a shoehorn or anything to misguided legislation.
Speaker 2: Has to be remembered that we did not have a
Speaker 2: free market banking system at any time in the US history. Instead,
Speaker 2: we had various experiments with regulation, first at the state
Speaker 2: level mainly, and then mainly or at least as much
Speaker 2: on the federal level. And if you examine these regulations
Speaker 2: both before the Civil War and since, you find a
Speaker 2: lot of stuff that was god awful and that played
Speaker 2: very important parts in all of the financial banking problems
Speaker 2: currency problems. We mentioned the lack of branch banking. That
Speaker 2: was the main reason why we didn't have a uniformed
Speaker 2: currency before the Civil War. It wasn't because we had
Speaker 2: a lot of separate, independent banks that issued banknote currency.
Speaker 2: We know from other countries experience that you could have
Speaker 2: that you wouldn't have thirty thousand of them, but you
Speaker 2: might have dozens, and their notes would circulate at par
Speaker 2: where in the nation because they had branches where they
Speaker 2: could be redeemed everywhere in the nation. The US didn't
Speaker 2: allow that, so we had this ridiculous system with thousands
Speaker 2: of banks and notes that were worth different amounts depending
Speaker 2: on where they were and all that. But I could
Speaker 2: say the same you name me. I used to say
Speaker 2: this to my money in banking students. That's another course
Speaker 2: I talked for a long time. If you can name
Speaker 2: a US banking or currency crisis and explain how it
Speaker 2: happened without attaching an important role to some stupid regulation,
Speaker 2: I will give you an A in this class. You
Speaker 2: won't have to do any more work. No, you can't
Speaker 2: do it. No competent economic historian can do it none.
Speaker 2: So what bugs me is the inattention both to the
Speaker 2: details of US history and to experience elsewhere, which many
Speaker 2: US economists are very parochial, and that includes foreigners trained
Speaker 2: in the US and economics. They know a little tiny
Speaker 2: bit enough to be dangerous about US monetary history and
Speaker 2: nothing at all about other countries. Can't. You can't be
Speaker 2: a good monetary banking economist or historian if you don't
Speaker 2: know about the wide range of different experiences to be
Speaker 2: encountered beyond the US board. You just can't. So that
Speaker 2: drives me nuts. That's number one in my list. Do
Speaker 2: I need to come up with more?
Speaker 1: No? I think that's good. So you do this. What
Speaker 1: would be a good source one of your books or
Speaker 1: articles that cover kind of the history of free banking
Speaker 1: in other countries and the history in the United States,
Speaker 1: so that people can can dig deeper if they want to.
Speaker 2: Well. The best book on experiences around the world is
Speaker 2: a book edited by Kevin Dowd published by a new
Speaker 2: edition recently published by the Institute of Economic Affairs in London,
Speaker 2: which we would have published at CATO by the way,
Speaker 2: we had started the project, but a chapter got in
Speaker 2: there that the person in charge, meaning me, did not like,
Speaker 2: and Kevin wouldn't take it out, so we had a
Speaker 2: party of the ways anyway, that chapters and banking in Manchuria.
Speaker 2: I highly recommend the book, except for that chapter which
Speaker 2: GE's what free banking is all wrong? And it's called
Speaker 2: the Experience of free banking, so that's a very good
Speaker 2: place to start. It goes through a lot of episodes
Speaker 2: of relatively free. Of course, none of these systems are
Speaker 2: perfectly free of regulation, but relatively free banking systems and
Speaker 2: how they performed, and I think it includes a chapter
Speaker 2: did originally include a chapter in the United States. It
Speaker 2: talks about all the ways in which we did not
Speaker 2: have free banking, even though we had laws that were
Speaker 2: called free banking lists that would be probably the most important.
Speaker 2: On the Scottish system, of course, I'm bound to recommend
Speaker 2: that's the most one of the most well studied, Lawrence
Speaker 2: White's class now classic study of free banking in Britain.
Speaker 2: That's all on the Scottish system. Otherwise, on the United States,
Speaker 2: I would recommend the book of essays I put together
Speaker 2: called Money Free and Unfree, published with the Cato Institute,
Speaker 2: and that has a lot of chapters on various aspects
Speaker 2: of US banking and currency history. So those three I
Speaker 2: think would cover things very well.
Speaker 1: Great, all right, Limo asks, can you explain how bond
Speaker 1: collateral banking wooked and how it contributed to the Great Depression?
Speaker 2: Well, okay, bond collateral banking, this is I think we
Speaker 2: mainly want to talk about. Bond collateral banking goes back
Speaker 2: before the Civil War. In fact, all those free bank
Speaker 2: laws that people confused with truly free banking. About a
Speaker 2: dozen states had these laws. All their banks were required
Speaker 2: to back their banknotes, their circulating currency, with specific securities,
Speaker 2: which included typically state government bonds. Naturally, because the states
Speaker 2: wanted to sell their securities, but sometimes included other sorts
Speaker 2: of bonds, and those caused trouble in those free banking
Speaker 2: so called free banking systems, but let's not go into that.
Speaker 2: During the Civil War, the Union government did two things.
Speaker 2: They created a new system of national banks, and they
Speaker 2: eventually taxed state banks out of the currency business. So
Speaker 2: the only banknote currency from then on until the FED
Speaker 2: was notes of national banks, and they all had to
Speaker 2: be secured by United States government bonds. Once again, by
Speaker 2: the way, that that big part of the motivation is
Speaker 2: not making the bank safe, it's financing the government the
Speaker 2: Union war effort. So keep that in mind. Now, what
Speaker 2: happened in that system was kind of very different from
Speaker 2: what happened in the state systems because in the state
Speaker 2: systems a lot of the securities that banks were required
Speaker 2: to hold turned into junk, and it was the main
Speaker 2: cause of free pre bank set failures. In the case
Speaker 2: of the national bank currency, something opposite. But just as
Speaker 2: that happened, which is this, so the currency supply is
Speaker 2: tied to the availability of certain US government securities that
Speaker 2: have to back the notes. The banks have to buy
Speaker 2: these securities. In fact, they have to have more than
Speaker 2: one hundred percent face value of securities to cover their
Speaker 2: note issues. What happens is, after the war ends for decades,
Speaker 2: government's running surpluses, so the availability of these securities is shrinking.
Speaker 2: On the other hand, the economy is growing and it
Speaker 2: needs more currency, not less.
Speaker 3: And.
Speaker 2: So you have essentially the conditions for a sort of
Speaker 2: supply demand train wreck where demand's growing, supply is secularly shrinking.
Speaker 2: By eighteen just to give you an idea of the
Speaker 2: secular story, by eighteen ninety, the supply of national banknote
Speaker 2: currency is half what it was in eighteen eighty in
Speaker 2: a growing economy. Okay, Now, economies are very capable of
Speaker 2: adapting to a lot of things. They can handle a lot,
Speaker 2: and so there was some long run secular adaptation. What
Speaker 2: there wasn't was a capacity of the system to deal
Speaker 2: with short run spikes in demand, particularly those that happened
Speaker 2: in the harvest season when there'd be a big peak
Speaker 2: demand for currency to pay migrant workers and of course
Speaker 2: don't have bank accounts. And since it was given the
Speaker 2: high price of the rare securities, increasingly rare securities banks
Speaker 2: had to have to secure notes, and the fact that
Speaker 2: that made it absolutely prohibitively costly for banks to acquire
Speaker 2: the necessarity necessary collateral to meet temporary peaks in demand
Speaker 2: for currency, like the harvest time peak. So every time
Speaker 2: the harvest would occur, and with increasing severity over time,
Speaker 2: you tended to have spikes and interest rates. Why because
Speaker 2: when the farmer comes to his bank and says, I
Speaker 2: need currency to pay my workers, and the bank says
Speaker 2: we can't issue any more of our own IOUs, he says, okay,
Speaker 2: I'll have some legal fender. I'll take some of your
Speaker 2: reserves up, which he's entitled to do, and that leads
Speaker 2: to a contraction of credit. So credit titans, interest rates
Speaker 2: go up. Now, in the good years, that's all that happens.
Speaker 2: Interest rates seasonally spike, But in some occasions you had
Speaker 2: severe currency panics and shortages eighteen eighty four, eighteen ninety three,
Speaker 2: the worst of all in nineteen oh seven. In each
Speaker 2: case there were other aggrevating factors. But behind resting behind
Speaker 2: it all is this inelastic supply of currency that is
Speaker 2: a consequence of the bond deposit requirement combined with the
Speaker 2: increasing scaragecity of eligible securities. So now that explains crises
Speaker 2: leading up to the FED which was established for the
Speaker 2: purpose of supplying an elastic currency. There's no magic behind
Speaker 2: this reform. Basically, the newly established twelve Federal Reserve banks
Speaker 2: were exempt from the bond collateral requirement, and so the
Speaker 2: other banks could come up to the FED with their
Speaker 2: other assets commercial paper mainly which were not eligible backing
Speaker 2: for notes, and they could say, please, sir, here are
Speaker 2: my here's my commercial paper which you discounted for me,
Speaker 2: and give me some Federal Reserve notes so I don't
Speaker 2: have to dip into my recitt That's how the FED worked.
Speaker 2: It's rather like the scene people are now too young
Speaker 2: to remember the movie Misery with Kathy Bates and James
Speaker 2: kan He's a writer, famous writer gets in a car
Speaker 2: crash and she happens to rescue him, and she's a
Speaker 2: big fan. She's obsessed with him. Well, he starts and
Speaker 2: she loves taking care of him as he's recuperating. But
Speaker 2: at one point he looks like he's ready to get out,
Speaker 2: so she smashes his legs with a sledgehammer to keep
Speaker 2: him around a little more so she can cure him longer.
Speaker 2: And that's sort of what the federal government did with banking.
Speaker 2: They smashed the legs and the national banks, and then
Speaker 2: Kathy Bates and the form of the Fed comes along,
Speaker 2: and you know it saves saved. Yeah. Anyway, but you
Speaker 2: asked about the Great Depression, and at that point the
Speaker 2: Federal Reserve is starting to take over currency supply. So
Speaker 2: although it's technically true that the national banks might have
Speaker 2: done more to avert the depression had they been able
Speaker 2: to issue more of their notes, the fact is that
Speaker 2: by the time of the Great Depression, their note issuing
Speaker 2: ability is very, very limited, and the government has come
Speaker 2: to rely almost exclusively, not quite on the Federal Reserve
Speaker 2: to supply all currency, not just emergency correct. It's taking
Speaker 2: over as the sole supply. By nineteen thirty five, the
Speaker 2: last national banknotes are issued. But here's an interesting footnote.
Speaker 2: At some point during the depression, before thirty five, a
Speaker 2: law was passed that relaxed the bound requirement. So they
Speaker 2: really did relax and guess what it helped. There was
Speaker 2: a substantial increase in the supply of national bank notes
Speaker 2: on collateral that wasn't the usual bonds, but unfortunately it
Speaker 2: was too little to make any big difference. I've always
Speaker 2: wanted to write a paper about this episode, because in
Speaker 2: my opinion, if it's said, if they had said to
Speaker 2: the national banks or to the state banks, it still
Speaker 2: existed for that matter, because said you can issue all
Speaker 2: your banknotes that you want. It would have alleviated the
Speaker 2: crisis of the early nineteen thirties. It would have helped.
Speaker 2: But that the Fed said, no, you leave it to us,
Speaker 2: We'll supply all the good bet are reserved notes that
Speaker 2: are needed, which, of course, as Milton, Friedman and Schwartz
Speaker 2: have demonstrated at great length, it did not do. It
Speaker 2: did not do its job as meeting the needs of
Speaker 2: the early nineteen thirties avoiding a monetary collapse.
Speaker 1: So have a few more questions here from listeners. I
Speaker 1: but that you know sparked in me a question of
Speaker 1: you know this idea of the notes being backed by
Speaker 1: GUP and bonds. What are your thoughts on this new
Speaker 1: legislation around stable coins.
Speaker 2: Well, here here I'm going to appear to contradict myself.
Speaker 2: I wrote a paper a few years ago while at
Speaker 2: CATO called what's it called anyway, a narrow Path to
Speaker 2: Efficient stable Coins or something like that, where I argued
Speaker 2: that rather than suppress stable coins altogether, the government should
Speaker 2: embrace them, specifically by allowing stable coin issuers to take
Speaker 2: part in the Federal Reserves clearing and settlement system, to
Speaker 2: have master accounts and treat stable coins like so many
Speaker 2: banknotes of your But since I knew they were never
Speaker 2: going to just allow them to do that without regulating
Speaker 2: them otherwise, they said, well, let's say, least, you know,
Speaker 2: allow them to do it as long as they hold
Speaker 2: one hundred percent reserves at the FED one hundred percent.
Speaker 2: So I said, let's have narrow banking for stable coins. Yep,
Speaker 2: a compromise. Now this isn't bound deposit, right, this is
Speaker 2: one hundred percent reserves. It's not the same thing. But
Speaker 2: it does of course mean that you can't issue stable
Speaker 2: coins for which you don't have full reserves. The because
Speaker 2: one of the big problems with stable coins as they've
Speaker 2: existed is that, in fact, many of them claim to
Speaker 2: have one hundred percent reserves, but they don't. They don't
Speaker 2: they have other stuff, They have cash equivalents, And it
Speaker 2: turns out the closer you look at these things, the
Speaker 2: less they look equivalent to cash. And so and you've had,
Speaker 2: of course, a few disasters where people had reason to
Speaker 2: suspect that their banks were fully liquid and found out
Speaker 2: the hard way their stable coins were fully liquid, found
Speaker 2: out the hard way that they went. So in my opinion,
Speaker 2: it was a reasonable compromise to preclude any more drastic
Speaker 2: opposition to stable coins at least give them at least
Speaker 2: give them the opportunity to exist and take part in
Speaker 2: the Federal Reserve system if they have one reserves, which
Speaker 2: and the other thing about that arrangement is unlike the
Speaker 2: case with actual stable coins, monitoring is a cinch. The
Speaker 2: Federal Reserve always knows if you're holding what your reserves
Speaker 2: its participants have because it's the reserves are in an
Speaker 2: account at the Fed. So they don't know. Nobody knows.
Speaker 2: So that was my suggestion. So it's not I'm not
Speaker 2: advocating bond deposit requirements, which are a different kettle of fish.
Speaker 2: And by the way, bond values suctuate, so they're not
Speaker 2: the same. If you're holding a long maturity bond with
Speaker 2: a coupon of x percent in rates go up, that
Speaker 2: bond is going to depreciate. The bank discovered that, right, yes,
Speaker 2: and the Federal Reserve has discovered it. It's taken the
Speaker 2: men's losses, but of course, not being your average bank,
Speaker 2: it doesn't have to worry about it. But bonds are
Speaker 2: not the same as reserves as actual cash reserves. Anyway,
Speaker 2: what I think about the legislation is that I think
Speaker 2: of it in the same spirit. Is my suggestion. If
Speaker 2: it's either that or have stable coins suppressed entirely or
Speaker 2: regulated out of existence, I would prefer this legislation. And
Speaker 2: the reason is because the reason is that I think
Speaker 2: stable coins have the potential to be beneficial, and we
Speaker 2: should give them a chance. Rule out the worst possible
Speaker 2: disasters and fraud and all that, but don't rule them
Speaker 2: out altogether, because we really haven't seen them achieve what
Speaker 2: they might achieve. Let's give them a chance.
Speaker 1: If you have a few more minutes, We've got a
Speaker 1: few more questions that. Okay, sure, go ahead, Sure molten
Speaker 1: has Why did the Great Depression last as long as
Speaker 1: it did. What would have been the best and most
Speaker 1: effective response to offset the depression and effect your recovery
Speaker 1: and effectuate recovery?
Speaker 2: Yeah, well, I talked about some of that. Let me
Speaker 2: just remind our questioner that the length of the depression
Speaker 2: varied a lot from country to country, and as I
Speaker 2: mentioned earlier there were two countries that were the biggest laggards,
Speaker 2: and one of them was the United States and the
Speaker 2: other one was Friends And the reason they were laggarts
Speaker 2: was because, to a large extent, because they pursued poor
Speaker 2: solutions to recovery. That should be said that in the
Speaker 2: United States case, we also had a deeper depression because
Speaker 2: of our banking crisis. That might have made our recovery
Speaker 2: take longer anyway, but it didn't have to take as
Speaker 2: long as it actually did. And now, ending a depression
Speaker 2: takes time. If it's deep, it's going to take longer.
Speaker 2: There's no way around that. But as far as what
Speaker 2: I consider the best remedies, I've already said that I
Speaker 2: don't think doing nothing is acceptable or workable. I think
Speaker 2: you have to get spending up. You have to get
Speaker 2: depressions involved, at least approximately a collapse in spending. People
Speaker 2: spend less, firms, earn less, firms, higher less, and so on.
Speaker 2: You've got to get spending back up because getting prices
Speaker 2: to all adjust down without being able somehow to magically
Speaker 2: rewrite long term contracts painlessly is not practical. And to
Speaker 2: get spending up there are various possibilities. The most desirable
Speaker 2: is monetary expansion because it involves less interference with the
Speaker 2: forms that spending takes. What gets what money gets spent on,
Speaker 2: There's less opportunity for waste. That's not to say that
Speaker 2: there should be no role for fiscal policy, which is
Speaker 2: government increasing its spending on fiscal policy. I see a
Speaker 2: lot of merit in what was a very old fashioned
Speaker 2: approach to countercyclical fiscal policy was the one Hoover favored
Speaker 2: in many econdoms favors. It's you save up for a
Speaker 2: rainy day. You don't save up. You may run surpluses.
Speaker 2: But saving up here means keep some government public works
Speaker 2: and other projects that it has to undertake anyway, keep
Speaker 2: them aside, and then really do them all when you
Speaker 2: get a downturn in the economy. And I think that's
Speaker 2: a perfectly reasonable thing for governments to do. Is a
Speaker 2: fiscal answer. I'm also a believer in relief spending. If
Speaker 2: people can't get jobs any other way, give them other jobs, certainly,
Speaker 2: give them a check, don't let them starve, And that
Speaker 2: itself is a source of demand. But most of all,
Speaker 2: I think the most effective, potentially and most desirable solution
Speaker 2: is monetary stimulus. It's not always easy. If interest rates
Speaker 2: hit zero, it can be very hard to use monetary stimulus.
Speaker 2: But there are also ways to try to avoid having
Speaker 2: an economy reach the zero lower round so that you
Speaker 2: don't have to deal with that contingency. Anything that gets
Speaker 2: real interest rates up high and makes the economy more
Speaker 2: productive reduces the odds of that happening for starters. So obviously,
Speaker 2: from my talk with Yarn, there are many things I
Speaker 2: think you have to avoid to not make a depression worse,
Speaker 2: and that includes interfering with price adjustment to the extent
Speaker 2: that prices are trying to struggle their way to a
Speaker 2: new equilibrium levels that don't interfere with that. Certainly, don't
Speaker 2: try to force firms to pay higher wage rates or
Speaker 2: raise their product prices. Let them be induced to do
Speaker 2: those things by the fact that their revenues are being
Speaker 2: increased through other kinds of policies. So these are some
Speaker 2: of the steps. In the nineteen thirties, of course, it
Speaker 2: was very important to let that goal come into the
Speaker 2: country and make sure it does as much to stimulate
Speaker 2: bank credit, lending and spending as possible. Instead of worrying
Speaker 2: that it's going to cause an artificial boom. Kanes Knes
Speaker 2: is said to have equipped I can never find I
Speaker 2: can't find a primary source for this that when the
Speaker 2: authorities put the brakes on gold stimulus, he said, they
Speaker 2: profess to fear that for which they dare not hope,
Speaker 2: meaning rising price it and and the boom boom.
Speaker 1: Right, quite articulate.
Speaker 3: Yeah, a boom is what you want to have, a boodresion.
Speaker 3: You know, maybe you don't want it to go too far,
Speaker 3: but you sort of want it to want to have
Speaker 3: it something boom.
Speaker 2: So so there are a lot of both negative lessons
Speaker 2: and positive lessons to be learned from the nineteen thirties.
Speaker 2: If I had to say, though, one of one of
Speaker 2: the biggest lessons for that people should remember is this.
Speaker 2: Every time we have another depression or recession, people say, oh,
Speaker 2: let's look at the new Deal. They solved it. Let's
Speaker 2: do what they'd do. No, the biggest lesson we can
Speaker 2: have from the New Deal is that we know more
Speaker 2: than they did about fighting recessions. We're still not very
Speaker 2: good at it, but know about fiscal stimulus. They didn't
Speaker 2: know about monetary stimulus. They knew all kinds of things
Speaker 2: that were wrong. And so that is generally speaking, with
Speaker 2: some few exceptions, there is very little that the New
Speaker 2: Dealers have to teach us about fighting depressions. So if
Speaker 2: we need innovative steps, let's not look there. That's not
Speaker 2: Maybe we do need new innovative ideas for fighting depressions.
Speaker 2: I'm sure we could use some, but that is not
Speaker 2: where you're going to get them. That's the place to
Speaker 2: look for innovative ideas that didn't work, and for the
Speaker 2: failure to use things that arguably do help.
Speaker 1: Hey, let's take that for what is your essentialized evaluation
Speaker 1: of panics depressions in the ninteenth century? What are the
Speaker 1: most important things to know about them?
Speaker 2: Well, I think I already answered that yarn by saying
Speaker 2: that bad currency and banking laws were a very important
Speaker 2: part of the problem. You know a lot of people say, oh,
Speaker 2: the gold standard. Look at all the crises in the
Speaker 2: United States that happened under the gold standard before the
Speaker 2: meaning before the Federal Reserve Chris passed and the Fed
Speaker 2: supposedly was going to fix everything. But they don't understand
Speaker 2: that this couldn't it couldn't be the gold standard. How
Speaker 2: do I know it couldn't be the gold tender. Well,
Speaker 2: Canada was on the very same gold dollar. Yep, Canada
Speaker 2: was bound to be buffeted by the way by anything
Speaker 2: bad that happened to the US economy. Yet for the
Speaker 2: most part, they evaded all of those crises. They simply
Speaker 2: didn't have. We have the record of banking crises that
Speaker 2: we had. Now, how could they escape with the same
Speaker 2: called dollar. Well, the answer is there were other differences
Speaker 2: between the Canadian banking and currency system and the US system.
Speaker 2: And so if you want to know why we had
Speaker 2: crisis in the US, you better look at those other things.
Speaker 2: And there were plenty of them, and they were bad.
Speaker 2: We had stupid banking laws, we had really bad banking life.
Speaker 2: That I think is the most important thing to learn
Speaker 2: about US history, at least to judge by the wrong
Speaker 2: things people often say. And this goes back to that
Speaker 2: insolarity I was complaining about before. These people who say, oh,
Speaker 2: the gold standard was the problem before the creation of
Speaker 2: the FED, or only the creation of the FED could
Speaker 2: have addressed the banking crisis, they don't know the reality
Speaker 2: of what was causing US crises, and they know nothing
Speaker 2: about even the country just to the north of US
Speaker 2: and what happened there. If they did, they would be aware.
Speaker 2: Their arguments are really not very satisfactory explanations for what happened.
Speaker 1: So Remo asks thoughts on libertarians who against fraction with
Speaker 1: their banking.
Speaker 2: Well, I won't just limit There are other people who
Speaker 2: are opposed to fractioners are banking too, so let's not
Speaker 2: just limit this to libertarians. And of course many libertarians aren't.
Speaker 2: But I'll talk mainly about the Rothbardians because they are
Speaker 2: the most notorious the followers of Rothbart, of whom there
Speaker 2: are many, of course, And the big problem with them
Speaker 2: and with the Rothbart himself, is that they've made a
Speaker 2: complete botch job of the banking law. They just don't
Speaker 2: understand how fractioners are banking works, what its legal foundation is.
Speaker 2: They're very con fused about what it is that a
Speaker 2: bank deposit in titles. It's older too. It's not a
Speaker 2: property right to the money you brought to the bank.
Speaker 2: It is a deposit credit that entitles you to a
Speaker 2: certain sum on demand the money you bring to your
Speaker 2: bank that goes that that you the banker takes possession
Speaker 2: of that. And this has been true since this has
Speaker 2: been legally the case since ancient dis goes all the
Speaker 2: way back to ancient law. Basically, h if you went
Speaker 2: to a money change or a bank or anyone else,
Speaker 2: there were two things you could do with a bag.
Speaker 2: You have a you have a bunch of coins. All right,
Speaker 2: let's see, you have a bunch of money. I write
Speaker 2: about this in an article that the title of which
Speaker 2: it's called the bagging the bagging rule, bagging law. If
Speaker 2: you went to a bank with a bunch of loose
Speaker 2: coins and put them over the counter and said here,
Speaker 2: those coins became the property of the bank. Now he
Speaker 2: might give you. Presumably he would give you a little something,
Speaker 2: a banknote or a little contract that says you can
Speaker 2: have an equivalent amount of coins anytime you want it.
Speaker 2: That would be a demand deposit. Or if you had
Speaker 2: the banknote, then you have you know that the right
Speaker 2: to redeem that note, or someone else who gets it
Speaker 2: can do so. And that's all. But those coins aren't
Speaker 2: yours anymore. And there was a very practical reason for this,
Speaker 2: because the only way the bank could honor the commitment
Speaker 2: to give you back your property would be by giving
Speaker 2: you back exactly the same coins. So what if you
Speaker 2: don't want the banker to own your money. Well, the
Speaker 2: law was very simple on that and very specific. You
Speaker 2: bring them in a sealed container, could be a bag,
Speaker 2: could be a box, and you say here, I want
Speaker 2: you to store these coins for me, and then they're
Speaker 2: not going to touch them. Then there's still your property.
Speaker 2: And you get a bailment contract, which is a storage contract.
Speaker 2: And I've had articles on this too. The two types
Speaker 2: of contracts very easy to see the difference. A banknote
Speaker 2: doesn't say the same thing as a bailment contract. It
Speaker 2: says we promise to pay the bearer on demand X amount.
Speaker 2: A bailment contract says we have this stuff for you
Speaker 2: in our warehouse and we're storing very different. A Rothbard
Speaker 2: and company have totally twisted all this history, and it's
Speaker 2: tempting to say, I will say it they lie. And
Speaker 2: so you have people like Hans Herman Hoppy running around saying, oh,
Speaker 2: the banks are replicating titles to the same property. No,
Speaker 2: when I bring money to a bank, when you bring
Speaker 2: money to your bank, you are parting with that property
Speaker 2: and you're getting something else, a financial instrument in exchange
Speaker 2: that doesn't title you to money, but doesn't entitle you
Speaker 2: to that same money because you don't have property rights
Speaker 2: to that anymore. So there's no duplication of titles. By
Speaker 2: the way, most not all, but most banking contracts, you
Speaker 2: look at your depositor agreement with your bank. Many of them,
Speaker 2: I don't say all, because I've seen some exception. Many
Speaker 2: of them very clearly state hey, this is not a
Speaker 2: bailment contract. We are your debtor and you are our creditor.
Speaker 2: That very clearly means that you've made a loan to
Speaker 2: them of money and you're entitled to get the same
Speaker 2: value of money back with interest or whatever. It does
Speaker 2: not have anything to do with storage anyway. They're all
Speaker 2: wrong about that. Now they're also wrong about the economic
Speaker 2: consequences of fractional vers are banking. I don't mind the
Speaker 2: mistakes they make there because they're less part they're more pardonable.
Speaker 2: But when it comes to claiming that there's a fraudulent
Speaker 2: basis to all banking, it's just false and there's no
Speaker 2: two ways around it. It's bad banking history, bad banking law.
Speaker 2: And this again I go back, goes back to ancient times.
Speaker 2: So this is not some innovation that some crooked judge
Speaker 2: came up with in the Victorian era. This another story
Speaker 2: Rothbard tells about a case where the judges perverted the law. No,
Speaker 2: you look at that case. He is simply abiding by
Speaker 2: legal doctrines that already were many centuries old by the time.
Speaker 1: Paul asks what effect did tariffs have on the Great Depression?
Speaker 2: Oh gosh, this is something people debate a whole lot.
Speaker 2: I can't claim to have any novel opinions about this.
Speaker 2: I will simply say that the terror in question of
Speaker 2: the smooth so called smooth Heart Hawley tariffs passed under
Speaker 2: the Hoover administration nineteen thirty two, and they wear a
Speaker 2: pretty serious round of tariffs, to be sure, though not
Speaker 2: as bad as trumps. And they started with Hoover trying
Speaker 2: to get some protection for farmers who are struggling, had
Speaker 2: been struggling ever since the end of World War One,
Speaker 2: and it ballooned into a much more widespread set of
Speaker 2: tariffs thanks to log rolling, and then of course that
Speaker 2: invited retaliation by the countries that the teriffs were imposed upon,
Speaker 2: So he really ended up with a big tariff mess,
Speaker 2: and many people think that it did a lot of harm.
Speaker 2: I would be inclined to think so, except that person
Speaker 2: whose work on this subject I trust mote most, which
Speaker 2: is Doug Irwin's, and he's no friend of Tariff's. He
Speaker 2: says he doesn't think the effect of the contribution to
Speaker 2: the depression was very great, and if Doug says it,
Speaker 2: I hesitate to say otherwise. I'm not sure, but I'm
Speaker 2: I'm just not sure. But I do think that Doug's
Speaker 2: opinion should be taken seriously. They didn't have a positive effect.
Speaker 2: We know that, and then it's numble no, we can
Speaker 2: rule that out. The question is how big the negative? Yeah, yeah, yeah, This.
Speaker 1: Is the last question. What is it?
Speaker 2: What is it?
Speaker 1: It's actually a good last question. What is an achievable
Speaker 1: first step towards free of banking that advocates could focus
Speaker 1: on today, one which wouldn't cause major displacement and disruption
Speaker 1: and might be actual chance of passing.
Speaker 2: Well, you know, there's a lot of confusion about what
Speaker 2: free banking means, and that's because free banking today doesn't
Speaker 2: mean what it meant in the nineteenth century. In the
Speaker 2: nineteenth century, under the gold Standard, it meant there was
Speaker 2: no central bank. There's an alternative to central banking. Where
Speaker 2: banknotes are competitively issued. There's no one source of currency,
Speaker 2: and there's no bank that is supplying reserves of any
Speaker 2: kind any other bank. Now today, of course, the gold
Speaker 2: standard's gone. Our basic basic money is the fiat money
Speaker 2: issued by the Federal Reserve system. There isn't anything else,
Speaker 2: and so our dollar rests on this foundation of as
Speaker 2: it were, Federal reserve paper and digital book entries and
Speaker 2: nothing more. So now you can have free banking on
Speaker 2: a federal reserve fiat dollar where you let the banks
Speaker 2: issue IOUs that are claims to dollars. It could be banknotes,
Speaker 2: but it more likely would be stable coins, right, And
Speaker 2: that's what we're talking about with the legislation. Of course,
Speaker 2: to have true free banking you have to get rid
Speaker 2: of other obnoxious regulations. We have gotten rid of some.
Speaker 2: We got rid of barriers to branch banking, which used
Speaker 2: to be extremely obnoxious. On the other hand, we've introduced
Speaker 2: and ratcheted up deposit guarantees in a big way. The
Speaker 2: biggest departure today of our modern system from free banking,
Speaker 2: apart from the fact that we have a fiat standard,
Speaker 2: it's just huge, is that we have both deposit insurance
Speaker 2: and tremendous implicit guarantees to banks that are too big
Speaker 2: to fail. You can't have free banking unless you roll
Speaker 2: those things back. So now I'm in a bit of
Speaker 2: a I'm in a quandary because the question was what
Speaker 2: can we most easily accomplished, and now I'm talking about
Speaker 2: what most badly needs to be accomplished, which is to
Speaker 2: get rid of these guarantees implicit and explicit, or you're
Speaker 2: not the main problems in the US banking system today,
Speaker 2: Instead of being lack of branch banking and other pesky
Speaker 2: regulations that interfere with what banks can do today, the
Speaker 2: main problem is government guarantees that let that encourage them
Speaker 2: to take excessive risk. That is number one. Now it's
Speaker 2: really changed since before the thirties. The government's screwing things
Speaker 2: up one way or the other, but it's changed the
Speaker 2: way it doesn't now. I don't know any easy way
Speaker 2: to get rid of these guarantees. I really don't. I
Speaker 2: have argued, and most recently my colleagues at CATO have
Speaker 2: argued again that the FED really doesn't need to be
Speaker 2: in the last resort lending business, in the sense of
Speaker 2: providing loans to any specific institutions. It should stick to
Speaker 2: providing liquidity in the marketplace through its open market operations
Speaker 2: when necessary, quantitative easing, whatever you want to call it,
Speaker 2: and of course regulating interest rates, but through nowadays through
Speaker 2: setting interest rate unreserved. It should be taken out of
Speaker 2: the business of direct blending. That can be done, and
Speaker 2: it shouldn't prevent It shouldn't prevent banks. It shouldn't make
Speaker 2: it easy for solvent banks to fail solvent. If there's
Speaker 2: enough liquidity in the marketplace, solvent banks can borrow from
Speaker 2: other solvent banks, and that's been demonstrated many, many times
Speaker 2: in the past. It's also been demonstrated historically that there
Speaker 2: are very few banks that suffer and fail simply because
Speaker 2: people run on them out of sheer panic. Bank bank
Speaker 2: runs are almost always runs on banks that are already
Speaker 2: in trouble, and they usually start by the way they
Speaker 2: start with the smart money. The people you see lined
Speaker 2: up at the bank, they're the last ones. It's the
Speaker 2: smart art money has already wired its money away by
Speaker 2: the time they show up at the front door. And
Speaker 2: that's that smart money knows, knows, usually knows when banks
Speaker 2: are sounded when they aren't, and stages runs on the
Speaker 2: unsound ones. So we need more bank runs actually and
Speaker 2: less last resort lending by the FED. And those are
Speaker 2: some of the central steps and very hard to take
Speaker 2: steps to get toward free banking. I wish I could say,
Speaker 2: you know, the things that are easy are far less important.
Speaker 2: You know a lot of dumb tesky regulations out there
Speaker 2: still that might be easier to get rid of. DoD
Speaker 2: Frank is bad read bad legislation. My colleague Mark Collaborate
Speaker 2: is very good about why the myths behind its passage.
Speaker 2: But well, I'm going to cop out and say what
Speaker 2: I think we badly need to do without pretending I've
Speaker 2: answered the question about what's easy to do. I don't
Speaker 2: think anything's easy.
Speaker 1: So JOJ have a lot of your time. Really really
Speaker 1: appreciate it. Thank you.
Speaker 2: That's it all. I love the opportunity Yard. That's all.
Speaker 2: It's my pleasure.
Speaker 1: We should we should do this again, and and and uh,
Speaker 1: because because there's a lot to talk about. I mean,
Speaker 1: there's a there's a ton going on in the world
Speaker 1: of finance fun to talk about. So remind everybody the
Speaker 1: book is forced on the new deal and the promise
Speaker 1: of recovery nineteen thirty three to nineteen forty seven. You
Speaker 1: can find it pretty much every week. Can find books,
Speaker 1: and you can find Jodge's work.
Speaker 2: Where would they?
Speaker 1: Where would where's the best place for them to go?
Speaker 2: Well? Nowadays, of course, it's the Internet basically, and a
Speaker 2: lot of my stuff is out there. A lot of
Speaker 2: my essays for the Cato Institute are online. They've been
Speaker 2: transferred to CATO at Liberty from the old all Them
Speaker 2: site that I used to run. And a lot of
Speaker 2: my papers are out there. My academic papers they can
Speaker 2: find listed on Google and elsewhere Jay Store. They may
Speaker 2: need a university library access to get to some of them,
Speaker 2: but there's plenty of stuff out there easy to look up.
Speaker 2: All right.
Speaker 1: Well, I know it's a nighttime where you are, so
Speaker 1: I have a great night and you seeing you sometimes.
Speaker 2: I hope if we will get together yar, And thank
Speaker 2: you very much for having me on this show. Bye
Speaker 2: bye by