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How the fettering of capitalism caused and then prolonged the Great Depression

It cannot be said too often and it is especially pertinent right now, given the state of the world’s economy now, and in particular given how America’s Presidential candidates are talking now: The Great Depression was both caused by and then horribly prolonged by bad governmental and political decisions. The Great Depression was not caused by unfettered capitalism. Throughout this unfolding disaster, capitalism was very fettered indeed, and it was these ever-tightening fetters which proved to be so disastrous:

The genesis of the Great Depression lay in the inflationary monetary policies of the U.S. government in the 1920s. It was prolonged and exacerbated by a litany of political missteps: trade-crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle, and coercive labor laws, to recount just a few. It was not the free market that produced twelve years of agony; rather, it was political bungling on a scale as grand as there ever was.

That is the final paragraph of Lawrence W. Reed’s demolition of Cliché of Progressivism #33 (that it was all the fault of “Unfettered Capitalism”) for FEE (the Foundation for Economic Education). I was steered towards this piece because of its Quotulatiousness. That blog quotulates a few of the early paragraphs of Reed’s piece. I say: read the whole thing.

Almost as important as how the Great Depression began and was prolonged is how it ended, just after World War 2, as Reed also explains very well.

If you want a bit more detail about that recovery, and in particular of its politics, try reading the chapter on mid-twentieth century America in JP Floru’s book Heavens on Earth (SQotD-ed here), which is about eight such happy episodes around the world in recent times. The world now knows, in the words of Floru’s final chapter heading (also the sub-title of his book), “How To Create Mass Prosperity”. Or rather, the sensible parts of it do. The only uncertainly about the free-market, non-interventionist policies that Reed and Floru recommend is in whether such policies will be applied in the first place, and whether they will then be persisted with.

See also this earlier posting here, which reports on, among other things, a ding-dong I had with Lord Skidelsky concerning this exact same point.

15 comments to How the fettering of capitalism caused and then prolonged the Great Depression

  • Regional

    In Astraya a newspaper the Guardian is experiencing difficulties propagating left wing interpretations of events into a market place already saturated with left wing propaganda providers especially the Gubb’mint funded ABC and the poor down trodden ‘workers’ on strike over 200 staff being laid off due to insufficient revenue are reduced to drinking Chateau Collapseable on the picket line.

  • CaptDMO

    The latest Independent Review (V20 #4 Spring), has an amusing piece on Gub’mint intervention, and unexpected consequences, (Pre Income Tax Taxes, Capitalism, free trade,immigration of cheap labor (Chinese), trade, tarrifs, etc.) with the original “War on Drugs” (early 1900s ish).

    In the same issue, Summery of current “status” of Bitcoin (et al.) currencies, and their (sorta)resistance to artificial inflation (barring gub’mint social experiment “intervention”)
    Trigger warning: These are NOT “quick read”, bullet point, pieces. They ARE mercifully short by Academic Paper standards.

  • Thailover

    People generally are aware of the post-depression gov actions in America, like the smoot hawley tariff act and the like, but few people are aware of what put our nation in a tail spin to begin with. America went back on the gold standard after the “great war” (WWI) and priced gold at pre-war prices after they spent years and years creating inflation. The result was that the monetary system lost nearly half its value overnight. Banks were like “WTF?!” and started crashing left and right when they suddenly found themselves insolvent, exacerbating the instability caused by the dumbassery of the feds. It’s hilarious when socialists like BS (B. Sanders) blames “Wallstreet”. Someone should tell BS that Wall Street is nothing more than an auction house. The crashing market was nothing more than the market correcting itself after the government crashed our currency.

    BS, of course is far too stupid to understand the points made above. Here’s BS’s line of thinking. Bob created a widget that everyone loves. He’s sold thousands and became richer than everyone in his neighborhood. He did this by enriching everyone else’s life because they the customers valued widgets higher than the asking price. (Otherwise they would simply return the widgets for a refund). This is a win-win. Bob wins, his customers are better off, hence them making him rich a little at time. Everyone’s happy….except his asshole neighbors. This makes everyone in his neighborhood feel bad about themselves and hate Bob. So, Bernie, the neighborhood association nazi, says let’s “democratically” agree to vilify Bob, rob him at gunpoint and “redistribute” his earned income among those who haven’t earned it, so those “victims of society” can have “self esteem” like Bob, and “community cohesion” to boot. That there would no longer be any incentive to create inventions like widgets is beyond the mentality of the stupid barbarian hordes. That free trade is win-win with no victims reqired is as beyond these socialist thugs as the moon is beyond the reach of chimps.

  • Tim Carpenter

    There are precious few sensible bits of the world left.

    We are rapidly losing one as we speak: Hong Kong.

    WWI produced an immediate depression that was over rapidly due to stroke-induced inaction. Few wish to admit to it. It also upsets the prevailing, self-serving narrative.

    I feel all these points are interrelated and bound up with the success of Keynes. Governments loved his ideology. It was permission to misbehave on a grand scale, and boy have they.

    I am reminded of an anecdote said by Rothbard: Keynes was told that his ideology would be bad in the long run, and that Keynes famously retorted that, in the long run, he would be dead. Well, Keynes is dead, but we are still alive, living in the mess he created.

    Keynesean economics is just too tempting for some. Free money and expensive power.

    Thailover: the UK also made the mistake of re-pegging sterling at vanity rates. It rendered exports unaffordable, pushing manufacturing into a hole.

  • Patrick Crozier

    A couple of points:

    1. The US did not suspend the gold standard during the First World War.

    2. Reed mentions Rothbard’s “The Great Depression”. Rothbard claims that there was a massive monetary expansion during the 1920s. I would like this to be true and it may indeed be true but Rothbard’s tone is very much of someone trying to prove something. This does not make for good history and seems to me to be something of a harbinger for some of the ridiculous things he came out with later.

  • RRS

    I have never completed a project I started for Alisa and some others based on actual real-time human experience (mine) with what has been labeled The Great Depression (in reality two distinct successive cycles). Believe it or not my delinquency (that one and several more) still rattles me from time to time.

    So much of the discussion(s) of that period tend to concern things like monetary policies, fiscal actions, “policies,” etc. that the “real” history of what people were doing, or trying to do in response, what thwarted many attempted responses and thus altered social cohesion (in ways that continue through present times), is lost; or at least its importance has been lost.

    One minor, but predictive, example of the disruption of social cohesion was the displacement of personal and group marketing practices for soft flesh fruits, which involved inter-personal contacts (with the usual elements of trust and preferences), by politically determined “Marketing Authorities” which operated (and operate) on the basis of power. The social cohesion from the former marketing relationships is gone – probably forever.

    The recent case of a Marketing Authority seizing raisins finally brought one aspect of that power to an end, just within the past few months.

    Of course, California is shifting from fruits to almonds, but, even there, at least domestically, marketing has a political interface.

    The “extension” of the second cycle (with its even steeper declines and broader impacts) is as strongly correlated to the frustrations of, and constraints on, individual and group responses to their particular predicaments as it is to any “monetary policies” or similar political financial manipulations.

    What is commonly ignored in the conceits of the “constructivists,” [convinced that an objective oriented economic system and a purposive administrative authority (State)can better provide what the multiple and varied objectives of individuals should be and how their relationships should be conducted] are the destructive effects of those “constructs” on always fragile social cohesion.

  • Paul Marks

    The bust of 1929 was indeed caused by the Credit Money expansion of Benjamin Strong of the New York Federal Reserve in the late 1920s – and Mr Strong was admired by the late Milton Friedman which shows that Chicago can be as wrong as Cambridge. Specifically the Benjamin Strong IRVING FISHER idea that the “price level” must not be allowed to fall is wrong (that Credit Money should be expanded to “maintain the price level”) is wrong – horribly wrong. Just as horribly wrong as the Keynesian Witch Doctors and their claim that busts are caused by “Animal Spirits” not the Credit Money expansion (the “boom”) that goes before the bust.

    However. why did the economy not recover after the 1929 bust – as it has done after the bust of 1921 and every other boom-bust Credit Money expansion of American history?

    It did not recover because of the policy of Herbert “The Forgotten Progressive” Hoover who (before Franklin Roosevelt) worked to PREVENT Real Wages adjusting to the bust. Real Wages are NOT “sticky downwards” – unless government makes wages “sticky downwards” by backing unions (see W.H. Hutt “The Strike Threat System”) and by other means – such as Herbert Hoover personally telling businessmen not to cut wages. He should have been told “it is none of your business – literally” but Progressivism had already eaten into the American soul (people looked to the government it times of difficulty) – perhaps because of the growth of government school systems in the late 19th and early 20th centuries.

    On top of the propping of Real Wages (preventing the “clearing” of the market and the continuation of MASS UNEMPLOYMENT over the 1930s) Herbert “The Forgotten Progressive” Hoover also (again before Franklin Roosevelt) accepted a Donald Trump style Trade War and massively increased government spending and taxation (especially on “the rich”).

    Basically everything the basic history textbooks say about Hoover is wrong – indeed it is the reverse of the truth. Although as soon as he was OUT of office Hoover did indeed become a conservative – denouncing Franklin Roosevelt for continuing the line of policy that he (Hoover) had started.

    But it is the preventing of real wage adjustment that is key – indeed Real Wages did not come down till World War II – and then the government pretended that Real Wages were not falling (by pretending that official prices not “Black Market” prices were the real prices).

  • Alisa

    RRS, I am still humbly waiting for that delinquency to be rectified, never losing hope 😛

  • Laird

    As usual, Paul Marks’ comment is spot on. We should also note that Ben Bernanke (who claims to be an “expert” on the Great Depression, although pretty much everything he thinks he knows about it is wrong) was a fan of Benjamin Strong, and one must presume that Janet Yellen is, too, since she is following devotedly in Bernanke’s footsteps (she is a bit of a cypher; I’m not sure anyone knows what she really believes). And let’s not even talk about Paul Krugman, please.

  • Paul Marks

    Laird – yes.

    Other comments (especially RRS) yes to.

    The dispute between Thaiover and Patrick.

    What Thailover says is truer of Britain than the United States – Britain in 1925 (blamed on Churchill – but he was following the advice of the time) “restored the gold standard” but at the old 1914 rate. Basically pretending the First World War (the Credit Money inflation) had not occurred.

    The United States (Ben Strong) tried to help Britain maintain its artificial exchange rate (do NOT “fix” exchange rates unless you have the really the same currency) by inflating the Dollar – although this was also done to try and keep the “price level stable” (in short New York Federal Reserve boss Benjamin Strong would most likely have acted like a plonker – whatever Britain had done).

    Was there a Credit Money expansion in America in the First World War?

    Well yes there was – but it only lasted a couple of years (as America only entered the war in 1917) – and the bust of 1921 sorted it out.

    But another point needs to be made – this “Gold STANDARD” thing.

    What is that word “Standard” doing in there?

    Either the gold is the money or it not – the word “Standard” (slipped in during the 19th century) was always a cover for fraud (for issuing paper money or credit that supposedly represented gold – some of which DID NOT EXIST).

    It may be “legal fraud” – but to non Legal “Positivists” it is still fraud.

    Boom-busts did not start with the creation of the Federal Reserve in 1913.

    Bankers had long lent out “money” that DID NOT EXIST – and the “bust” is when it became obvious that the money DID NOT EXIST.

    Creating the Federal Reserve was supposed to deal with this problem = actually it, of course, made it worse.

    Lending that is above REAL SAVINGS (and lending out “money” that DOES NOT EXIST is this) automatically creates a bubble – and bubbles burst.

    Government efforts to save the bubble (save the “financial system”) – just make it (and the eventual bust) bigger.

    And, contra Keynes, Credit Expansion is NOT “saving as real as any kind” – it is not Real Savings, the actual sacrifice of consumption.


  • Thailover

    Patrick Crozier said,

    1. The US did not suspend the gold standard during the First World War.

    Yes, I shouldn’t have said gone off the gold standard in a literal sense. The US did in fact cause massive and relatively sudden deflation through their manipulation of the so-called “gold standard”. And this continued after the crash. The Gold Reserve
    Act in and of itself devalued gold more than 40% practically overnight.

  • Thailover

    Paul Marks said,

    “Bankers had long lent out “money” that DID NOT EXIST – and the “bust” is when it became obvious that the money DID NOT EXIST.”

    Exactly. People in the states were exchanging their fed reserve notes for gold, causing a “reverse multiplier effect”, causing a significant contraction of the money supply. In other words, even during the “gold standard” there was, in essence, fractional reserve banking going on, whether they called it that or not.

  • RRS

    Let’s try once again;

    Taking all the statements about monetary policies, etc. as valid, and accepting that they altered or “determined” circumstances in which relationships in an open society transpire – how did all that affect the kinds and nature of relationships.

    In the U S (and from scant information, in the U K as well) what changes in the functions of governments (3 levels) altered or “determined” the circumstances in which relationships in an open society transpire – how did that affect the kinds and nature of relationships?

    Comparing those two impacts on circumstances, which had the broader, more penetrating, longer lasting effects on the nature of relationships in each society – and on the nature of society itself?

  • Julie near Chicago

    Going by your remarks here, RRS, I add my vote for your resumption of your Project für Elise. *g* Very interesting point indeed.

    Paul, I trust you know what I think of your remarks.

    Good comments in general. Not to mention Brian’s posting, of course.

  • RRS

    Not to drag this on too much further, I suggest reading Amity Shlaes’ The Forgotten Man (2009)[no doubt well thumbed over at the PMO] for insights into the involved persons and the efforts of the “New Deal” to restructure American society (not just [or even to] “restore” the economy.

    Disclosure: I am favorably prejudiced from my exchanges with her (on things like uses of scrip and debt revaluation) at the beginnings of her project – which developed into something different as her research went on.

    She is a much overlooked scholar.