Friday, April 3, 2009

What ended the Great Depression?

Since becoming a student of Austro-Libertarian economic and political thinking, I've been intrigued with the Great Depression. How did it occur, why, and what transformed it from the typical sort of depression America had previously and regularly seen, into something which was truly Great?

Murray Rothbard's, "America's Great Depression" is a wonderful book for answering all these questions. If you're the sort of standard-candle Keynesian product of our present economic post-secondary education machine, this book will provide you with the first major cracks in your Keynesian castle walls. If you don't consider yourself much of an economic thinker, or just haven't travelled in such circles before, Rothbard's book will lay for you a sound small foundation and likely pique your interest in learning more about what the Austrian School has to say on the fundamentals of any economy.

If "America's Great Depression" has a fault, however, in my view it's in failing to address the question which naturally follows after reaching its end, "What ended the Great Depression?"

Although not obvious from the start of the book, apparently it was not the book's aim to talk about the end of the depression, but to explain how it happened and why it became so intense.

Whenever I get into discussions with family and friends on these sorts of topics, however, my potential converts to the Austrian School always want most to know, "What ended the Great Depression then, huh, smartypants?"

To them (and me too in my time before learning about Austrian School theory), of course the New Deal led us though the dark years and eventually returned us to prosperity.

One thing Rothbard's book does show, is that the New Deal did nothing of the sort, it added the Great to the depression.

Only by integrating the knowledge I'm building up on Austro-Libertarianism, am I slowly coming to the answer to that question on my own. That quest got a nice boost this week while watching the Glenn Beck TV program.

I watch a lot of Glenn Beck, so the specific people to credit are lost to me now, but one of his guests, when confronted in interview with that question said that Franklin Delano Roosevelt's death was what ended the depression. That and the offshoring of unemployment.

So I thought on that a moment, and it makes sense. WWII gets the credit usually for ending the GD, but I think often for the wrong reasons. The conventional wisdom is that massive gov't spending to wage war juiced up the economy, and that this coupled with the New Deal programs already ongoing, lifted the USA out.

No. The New Deal only made things worse, before the war. But though the war harmed us, the war did set the stage to pull us out, but not the way we normally think.

Military service was a viable option to many otherwise unemployed Americans. Initially, there was tremendous enlistment. Later we instituted a draft, but the effect was to sweep virtually all the unemployed out of the economy and set them to work fighting the war.

I think, ultimately, this is no different than the idea of using gov't funded public works to end unemployment, and in that way is unsound from the Austrian viewpoint. But for now, I will give wartime offshoring of unemployment a little bit of credit because of its sheer scale. People had the opportunity to mentally reset and view labor properly again as another marketable good.

Scarce domestic labor led to reflating of wages and demand for women to enter as replacements. This was an apparent prosperity boom for them, were it not for the fact that rationing for the war effort cause there to be little the women could do with the money they were making, other than buy war bonds, or pay dramatically up for goods made more scarce by the war on black markets. Real wealth was hardly any better than during the pre-war depression period.

With the end of the war came the realization that the country would soon be flooded with labor, and the gov't demand for military materiel (financed with wealth transferred from the public) would drop off. This should have had the effect of resuming the effective depression. It didn't, and the argument Glenn Beck's guest made was that with the demise of FDR, the public understood that the private sector would be allowed to operate more freely and less encumbered by gov't regulation than had been the case during his Presidential tenure.

It was this reality, ignited by the flush of optimism having just won major victories and the banishment of uncertainties which would've continued to linger had FDR still been around to command the economy, which actually pulled the economy out of depression.

My argument is that the depression persisted all throughout the war period itself. Americans still at home had to work long and hard and sacrifice much to enable the war machine to be funded. This was not wealth creation, but a transfer of wealth to the gov't to rain down as needed on the war machine.

But this work ethic decayed slowly after the war. Americans allowed themselves a little rest of course from that austere grind, but that productive effort was not all dissipated, and the fruits of that labor were now allowed to be redirected back at the working people via a less encumbered free-market. Investment in longer-dated factors of production made possible grander economies of scale and great productivity boosts, allowing people to get what they desired, while at the same time working less.

The result was the new modern American middle class. The hard-work and savings ethos took time to fade over the post-war span. While it largely endured, private saving and investment in business (the stock market became popular again, with stocks bought more with cash than thin-air created margin, this time) financed the productivity gains needed to make future life incrementally better.

So it wasn't the New Deal, or the war itself, but rather the knock-on intangible effects the war period induced in people. It primed us mentally. FDR's death and the war's end then set the stage for renewed real growth via lowered uncertainties about future gov't interference in the market, and a willingness (even eagerness) on the part of the public to continue to work and save for a brighter tomorrow.

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Later...gov't would step back into the picture with Cold War era spending. This would distort the market yet again and foster an illusion of greater prosperity via increased economic activity in the military-industrial complex.

Once again, though, that's not real, it's just transfer. Conspicuous consumption by gov't in this period translated into ceaselessly growing gov't debt, borne on the public by increasing taxes, persistent inflation, and the post Bretton-Woods era of pure fiat money, in a final decoupling of the US dollar from gold by Nixon. This has lead to staggering inflation, and necessary busts have been succesively sold into the future via increases in interventionism and inflationary monetary-base expansion. Each time recession hearalds our arrival in the present, to that point to which the prior treatened bust was sold, a new and larger gov't effort is undertaken to sell the bust still further forward. The ossilations growing each time, to the present crisis.

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Adjunct comments on inflation.

My dad grew up in the early post-war years. As a child I was amazed by his tales of Coke and Pepsi available for 15 and then 20 cents. In my childhood, this was more like 50 cents at the vending machines. Now, it's more like $1.50-$2 at many vending machines, or around 75-99 cents in the grocery.

Assuming no benefits from improvements in the cola industry, $1 USD, in cola terms has lost as much as 92.5% of its value ($1 buying 6 2/3 Cokes from the vendor in my dad's day, vs 1/2 a Coke from a vending machine today)!!!

Family legend has it that my grandfather has stashed away a small fortune in cash in some unknown location in the basement of his home (the regular production of musty-smelling fivers from the 50s in birthday cards being the fodder for the legend). To think of that rumored pile, buying now less than a tenth of the stuff it could have bought when it was stashed...debilitating. Government and public policy have passively removed the other 9/10ths of real stuff that cash could have bought, and squandered it on largesse and social programs.

This is inflation. If the dollar were not merely paper, but backed up by something impossible to counterfeit, like gold, the real economies of scale and productivity increases we've actually seen in the cola industry would have translated into less expensive drinks, perhaps say 10 or 12 cents. We'd all also be making way less money in dollar terms, but if one translates wages into colas (or any other real commodity), you can then see how even though you appear nominally worse off in dollar terms, you're actually much better off because what few dollars you have would actually buy you way more stuff than they do in our present, inflationary, reality.

2 comments:

jpbenney said...

When you say "People had the opportunity to mentally reset and view labor properly again as another marketable good", Austrian economist Robert P. Murphy, in communication with me, said that this was also true, though in the reverse way, with World War I.

In his Politically Incorrect Guide to the Great Depression and the New Deal, Murphy appeared to my eyes to suggest World War I contributed to (caused?) lessening acceptance of laissez-faire by the public in the US and presumably Europe. If what you are right about the work ethic decaying, World War I must have caused it to decay much more than World War II ever did.

Andrew said...

jpbenney: That's a very interesting idea about WWI. I follow Murphy frequently on mises.org, and have heard the lectures he contributed to the audio series there labeled, "Home Study Course in Austrian Economics."

I haven't read his book you cited, I've just recently finished Amity Shlaes' book The Forgotten Man, which wasn't quite what I had been expecting, but that's for another post.

I've put Murphy's book on my reading list, however. It is interesting, isn't it, how the American public has piecewise modified its culture to set it along this devolving course back toward the sort of state power it'd formerly rejected with the birth of the nation.

If any insights from Murphy's book, especially on WWI, inspire me to make another post, I'll credit you and seek your comment on it.

All the best to you in Australia, a country whose best and most out-of-the-way sights are on my bucket list fer sure!