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Jan. 8, 2006 - Freedomain Radio - Stefan Molyneux
51:18
48 Freedom and the Great Depression
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All right, brothers and sisters, it's time to cheer ourselves up by talking about the Great Depression.
So this is to me, of course, one of the, and not just to me, one of the most fascinating, rich, deep, complex, and revealing
sequences of events in western history and especially in american history you know and and a very powerful event in world history uh... simply because it was the first time in american history that problems that were caused by the state uh... attempted to were attempted to be solved by escalations of state power which is of course why they ended up not being solved at all
And, you know, it is something that had just a calamitous, calamitously horrible effect on world history.
Very similar to what the First World War did in this sort of destruction of the free market system in the West that had dominated Western economies since the early 1800s.
The Great Depression brought in, you know, an enormous host of state agencies, government power, high taxation, And, you know, this is just in the West that it cemented state power across enormous swaths of the economy and people's lives.
And of course, in Europe, then it's a strong argument to be made for the fact that the Great Depression caused enough instabilities in Western economies that you get things like, you know, Mussolini's fascist party in Italy, you get Franco's fascist party in Spain, and of course you get Franco's fascist party in Spain, and of course you get the big daddy of all evil, Adolf Hitler's Nazi party, National Socialist Party in Germany, which gets into power in the early 30s.
So, you know, this level of state intervention doesn't just produce the horrors and misery of mass unemployment, financial collapse, people's savings getting wiped out, but of course it also put in place or put in motion.
state events which resulted in a war which you know in which forty million people lost their lives so if anything that we can look at and understand from the great depression can be helpful in helping us look at and prevent anything of any kind of its recurrence or even a small chance or small percentage of its recurrence you know we've done a great good in the world and possibly saved millions of lives which is not a bad way to spend a Sunday afternoon
So at least it's the best way to spend a Sunday afternoon that I can actually publicize on a family-friendly podcast.
So let's have a look at the Great Depression and just try and tease out some of the salient themes about it.
Because, of course, this is another thing that, you know, if you're at all interested in the free market and have talked about it with people, you know, there are like 10 things you're always going to hear.
And one of them is, well, you know, look what happened when the market was free.
We had this Great Depression.
And the government had to come and rescue everybody.
It's hilarious once you actually understand the true facts about the Great Depression and the fact that the free market gets blamed for this.
It's pretty funny.
It's like a doctor getting blamed for trying to treat a plague.
So let's have a look at some of the things that happened.
I'm going to start with a short chat about the general timeline, just for those who haven't, you know, geeked out with economic and history texts on the Great Depression for good chunks of their twenties, like me, then.
And it's not that I couldn't get dates.
Okay, it's that I couldn't get dates.
But, you know, you may not know this sort of stuff, so I'm just going to spend a few minutes on You know, sort of what happened.
Now, not many people know that in 1920 there was a severe recession that was much worse than the one that occurred in 1929.
But, you know, fortunately the government didn't decide to help.
And so, within 12 to 18 months, everything was hunky-dory again.
And again, I'm not saying that there is a natural tendency in the free market for there to be this kind of expansion and collapse, because there just isn't.
I mean, there are certain segments of the market that are going to sort of go through expansions and collapses, but for the economy to change as a whole, you need the government.
You just can't do it.
With millions of aggregated free choices resulting in one big stampede to sort of expansion or collapse, this does not occur without the central power of the government.
And we can talk about that another time, but if you don't mind, you know, indulging me and just taking it for granted that, you know, what I'm going to talk about here, or try and establish here, is the degree to which government interference, you know, created, exacerbated, extended, and deepened the Great Recession, and also talk about how it was certainly was not the Second World War that solved the problem of the Great Depression.
So, you know, in 1920, in January, the sort of economic expansion that occurred after the end of the First World War sort of peaked and the severe recession began.
And you start, you know, this sort of, in the sort of, between 1905 or 1910 and 1940, A little bit earlier, it's generally called the Progressive Era, wherein you get a lot of socialists who've imbibed the sort of heady Marxism and socialism that's been coming out of Europe since the 1870s.
They start to get a lot of power and influence in American politics, and this is where you start to get, you know, the beginning of
uh... socialism in america right so you start to get things like the the fourteenth amendment which is the income tax i think that was in nineteen eleven you get lots of regulations of railways and interstate commerce and postal services and so on because there is this general idea that the free market is chaotic and messy and what you really need is central planning uh... because you know guys with guns in washington are just gonna make better decisions for everyone than they are themselves this poor little lost lamb children who don't know their own good
So, you know, February 28th, 1920, you get the Transportation Act is passed.
You know, the Interstate Commerce Commission is empowered to prescribe, you know, intrastate rates when necessary to eliminate discrimination against carriers in interstate commerce.
The Railroad Labor Board is created and so on.
And sort of what that means is that You know, when it was expensive to get people their railway transportation, then people felt that they were discriminated against.
Everybody wants to have prescribed rates, right?
I mean, except for the consumer in the long term.
Everybody wants to say you can't charge less than a certain amount if they're in a particular industry, so they don't have to worry about innovation and competition.
I mean, if I expect to get paid $75 an hour for programming services, I want to make sure, if I'm, you know, an evil, amoral guy, that I can get the government to pass a law which says nobody can charge less than $75 for software services.
Because that means no one's going to try and innovate and create ways of lowering the price and, you know, it's going to be secure for me.
So, you get that kind of stuff going on.
In 1921, not many people know that the end of World War I, in 1918, it was actually almost three years later that the Allied Reparations Commission established the payment And it was 132 billion gold marks, which was equivalent to $33 billion US at the time, which was of course just absolutely staggering.
I mean, they would still be paying up until the 80s if they'd actually continued to pay, and of course it would have just destabilized and messed up the entire world economy.
I think I mentioned this in another podcast, but you can't just go and pillage someone else's economy without doing far more harm to your own.
And of course, you start to get, in the progressive era, you start to get significant controls over immigration.
So, you know, May 19th, Emergency Quota Act passed, National Quota for Immigrants.
You know, again, this is as people start to, as the state has become more powerful.
Through the progressive era, people are starting to want to use the state to control immigration, right?
So, people who work as manual laborers, they don't want to invest.
You know, if you work as a manual laborer, and I know this because I did for years after high school as a gold panner and so on.
If you work as a manual laborer, you're saving yourself an enormous amount of money because you don't have to pay for university and you don't have to lay out the hundreds of thousands of dollars.
In, you know, tuition fees, books, living expenses, lost wages, and so on, to go to school.
But, and so, you know, why wouldn't you just stay as a manual laborer?
Well, because, you know, there's constantly new waves of younger people who don't necessarily speak English that well coming off the boat who are willing to work for peanuts.
And you also, it's tougher to raise a family if you have to compete with, like, young single guys who just want beer money and sort of futon money.
So what you want to do is try as much as you can to prevent People from coming in to compete with you.
So you want to restrict immigration, pass minimum wage laws, and so on.
Just so you can eliminate competition from more efficient or cheaper sources of labor.
So you start to get this kind of stuff and in July of 21, economic contraction ends, recovery begins.
So in 1922 you begin the problem of tariffs, right, which has been just an enormous problem in the US, but I mean also in Europe as well.
So you get this Fortnum & Cumbridge Tariff Act passed.
The hyperinflation begins in Germany, you know, which is really not so bad.
This is not so good, right.
This is the wheelbarrows of money that you need to buy a loaf of bread, right.
This is, as I read once when I was doing research for my novel Almost, You know, some guy, he was telling the story of his father who said he bought an annuity for his old age, which when he cashed it in the mid-twenties in Germany, was just enough for a cup of coffee.
And you start to get the battles.
The Supreme Court is interesting in this time, during this period in the US, and of course it was the thorn in the side for FDR in the 30s.
Because his New Deal was completely unconstitutional.
It was an unprecedented expansion of federal power.
And, you know, the Supreme Court generally lags a little bit behind the progressive sort of middle-aged intellectuals because they tend to be older men in this time, right?
So they knew a lot about the Constitution.
And the 1920s to the sort of mid-1930s is the last time that you really saw the Supreme Court try and protect the actual principles of the Constitution in the United States.
So, for instance, here, April the 9th, in 1923, the Supreme Court decides, Atkins vs. Children's Hospital, finding a congressionally mandated minimum wage for the District of Columbia is unconstitutional.
There's an interference with property rights, and so on, and, you know, there's nothing in the Constitution which says That the federal government has the power to regulate wages and so on.
So, you know, there's lots of fights starting around minimum wage here.
And so you get... These sorts of fights come up quite a bit.
So, 1924, Congress passed as an amendment to the Constitution, empowering Congress to limit, regulate, and prohibit the labor of persons under 18 years of age.
The number of state legislators that ratified the proposal amendment was 28, or 8 less than the 36 that was required.
So Congress passed it, but they couldn't get this amendment going, so that they wanted the power to limit, regulate, and prohibit the labor of persons under 18 years of age.
And again, this is immigrants, this is people who are going to compete with those who don't want to invest in higher education and advance their careers, but also want to retain the value and increase the value of their manual labor.
And the CAIS Act was passed, which allowed unionization of the Government Printing Office.
I think this is one of the first instances of state unionization.
So, let's go to 1925.
Coal operators in England engage in a lockout for seven months in an effort to force down wages.
So let's go to 1925.
April 28th, Britain announces return to a gold standard for its currency.
So this is interesting, of course, because I think that England went off the gold standard in the First World War.
I can't remember exactly when.
And for those who haven't gone through the whole convoluted and exciting world of the gold standard, I'll give you possibly the shortest review in the world, right?
that gold is is a substance which, obviously, occurs naturally in the earth and requires great labor to dig up and to refine and to produce.
So, it's not really subject to hyperinflation, right?
Because there's a fixed amount and it's hard to get new stuff and you can't just print off gold in your basement to artificially create currency.
So one of the problems is when you start to get governments with central banking is that you know originally gold was the currency and you know people didn't like carrying gold around so they instead began to carry around promissory notes instead.
And so the bank would hold your gold, but you and your friends would pass around these promissory notes basically saying, you know, this is equivalent to a sixteenth of an ounce of gold or, you know, half an ounce of gold.
And that was sort of how currency was developed.
It was just a representation of gold.
So it was sort of like your bank card.
It's a representation of the money that's in your bank account.
And that's what you're transferring around.
Paper money was originally just a way of being able to transport gold without the risk.
It was like a check that was cashable by anybody.
And that was the original idea behind
behind paper money and of course the bank was supposed to surrender to you your gold at any time right so if you had you know two hundred bucks in uh... in greenbacks you could go to the bank and get them to transfer that into gold so what that did was when banks were printing their own currencies is it limited it limited the amount of currency that banks could uh... print because they always had to be able to back it up with gold so the gold standard basically says that
Your currency can be freely converted into gold and back again and that limits the amount of currency that the printing agency, whether it's a bank or the government, can print because they have to back it up with gold and they can't just sort of snap their fingers and create gold.
So the first thing when you want to start shafting the next generation with national debts and printing off money and so on, the first thing you need to do is get off the gold standard.
So what that means is that now your currency is free-floating.
It can't ever be legally converted into gold.
So, you know, it's a heck of a lot easier to print money than it is to dig up gold.
So you can basically just start printing all the money you want and you don't have to worry about having to back it up with any kind of real gold.
This is one of the reasons why, you know, in libertarian circles, the question of the gold standard is quite important.
They do want governments to be bound by the gold standard so they can't just print whatever they want, right?
As if that would work, right?
I mean, governments have had no problem getting off the gold standard and even if we force them back on the gold standard, they just find some other way to shaft us, right?
I mean, you can't tame a shark, is sort of what I'm saying.
England went back on the gold standard, which is sort of good.
Now, in 1926, you have a tax cut, a huge tax cut.
So, there's a Revenue Act in 1926, it's passed, it cuts the taxes of those earning a million dollars or more, of course, for a few people, by more than two-thirds, right?
So, you know, during World War I, you know, you always shaft the rich, right?
You always tax the rich because they're in the minority and you're in a democracy.
In 26, they cut that, and of course, what that did was it freed up a lot of people's income for investment, right?
So, that's one of the things that sort of began.
And so, then what happens is you begin to see that this sort of cut in income tax stimulates the economy, The Federal Reserve also artificially lowers the interest rate.
So the Federal Reserve is setting the interest rate, and governments always want to set the interest rate low so that it will stimulate the economy.
There are a number of technical problems with setting the interest rate low, but we don't have to get into that right now.
But at least understand that there was a lot of artificial stimulation.
The government's printing money, The government is lowering the interest rate, the government is cutting taxes all at the same time, and so you start to get a huge boost and boom in the economy, which is where you start to get the great sort of stock market boom that's going on throughout the mid to late 1920s.
So, for instance, in 1927, the Federal Reserve reduces the discount rate by half a point, purchases $230 million worth of government securities.
And that's sort of interesting, too, because, you know, the government basically prints these securities, which is then bought by the government, artificially keeping up the rate and value of the securities, but also bleeding off, you know, hundreds of millions of dollars from productive investment, which is going to cause great harm to the economy.
So then, in 1929, February 2nd, the Federal Reserve announces a ban on bank loans for margin trades.
Margin trades, as I'm sure you know, is, you know, you bet on the shift in a stock price and you're buying on margin, right?
So, let's say I have $100 that I want to invest in 1928.
Then I can buy 10,000 shares and then sort of buy and sell them, assuming that my loss doesn't total more than $100, I'm fine, right?
But if my loss is $1,000, then I suddenly owe $900 because I've been sort of trading on margin, which is where I'm just trading on aggregate losses and gains for a large chunk of stocks at the same time.
So, you no longer get this regulatory thing that comes down, bank loans.
You can't get a bank loan anymore for margin trades, which is kind of a problem.
During the 15th, 1929, the Agricultural Marketing Act is passed.
Economic expansion peaks in August and then September the 3rd.
You get this peak.
You get a New York Times index of industrial stocks at 452.
October the 24th, Black Thursday, recorded sales of shares hits almost 13 million.
You get on the 25th, the market rallies briefly, and then the 29th, Black Tuesday.
You know, over 16 million shares are sold.
The index drops nearly 40 points, the worst drop in history.
By November 13th, the stock markets are at a low.
Index of industrial stocks is at 224.
You know, you've had this hyper-stimulation of the economy for a number of reasons.
They're pillaging money from Germany, which is coming into England, which is then going to America, because America loaned a lot of money to England for World War I. You have the subsidy of loans that comes out through keeping the interest rates artificially low, and you have the sort of hyper-stimulation of the of the markets which comes through the government buying its own securities and so on.
And then, you know, suddenly it's like, oh, you can't do bank loans for margin trades.
The Agricultural Marketing Act was something that was designed to keep the prices of agricultural goods high, right?
Because that's what the farmers wanted.
So, you know, basically it just set up something wherein the federal government would guarantee prices for farmers, right?
And it didn't take people long to sort of figure out what this was going to do, right?
So if you are the federal government and you guarantee a price of, I don't know, like $8 a bushel for wheat, then if the price goes below $8, everybody's going to sell their wheat to the federal government, which doesn't have any clue what to do with it, right?
There's only so much bread that Uncle Sam can bake, and so what happens then is the government just destroys it, which, you know, in the short run drives the prices up, but it puts entirely the wrong signals to the farmers who are now just going to start, you know, using their crop areas, their land to buy stuff just to give it to the federal government to be destroyed.
So, you know, of course that's going to cause lots of problems down the road.
So then you get this terrible stock market crash and then in 1930 you get the Smoot-Hawley tariff act is passed in June.
Now this is just a complete disaster for the economy.
This is one of those just unbelievable events in sort of the history
of uh... tariff uh... insofar as you know on twenty five thousand goods uh... you get you know an average of sixty five percent tariff right so that's any sort of good that's coming in is is going to be taxed an average of sixty five percent in france and england and spain just slap completely uh... equal tariffs on american goods right so you get this complete destruction of international trade which is just a complete disaster for the economy
There are some things that countries do better just based on either climate or based on their historical skill set or based on weather or conditions.
There are some things that some countries just do better than others.
Once you get rid of that international trade, you just deal crippling blows to the economy because so many people have jobs based on that kind of efficiency disparity with other countries.
For instance, if Florida is not allowed to trade any oranges, what's going to happen to all of the people who sell, trade, consume, stock, transport oranges?
They're all going to lose their jobs, right?
So this is just a complete disaster that goes on with this tariff act.
And, of course, this is the kind of stuff that you'd sort of expect from, you know, our good friends in the government.
The Committee for Unemployment Relief is formed in October, which is the beginning of the sort of welfare state income transfer thinking that is going on.
In 1931, the Committee for Unemployment Relief releases a report on unemployment showing that four to five million Americans are out of work.
I mean, it's just stunning how badly this affected, how badly this unemployment was affected by All of this state manipulation of the money supply and the interest rates and what banks are allowed to do and not allowed to do.
This is something that's very important.
If you ever talk to people about this kind of stuff, it's very important to ask them one basic question that I remember thinking to myself when I first heard about the Great Depression.
And that question is, how can you conceivably have unemployment rates of 20%?
You know, it's unthinkable.
And you simply know that the government is involved for one basic reason.
That if you have unemployment rates of 20%, you have lots of people who are willing to work for less than they used to get paid.
So, for instance, I mean, I used to make just under $130,000 a year when I worked at my last job, when I ran the company.
That's sort of not counting any stock options.
That was sort of my direct pay.
And I was a contractor, because I was, you know, doing some other stuff on the side and so on.
And so, you know, my take-home pay was good.
But this was in the 90s and, you know, 2000, before the tech crash.
And then, You know, after I took my almost two years off, then what I did was I started looking around for work and the only job that I could get was one that paid me $100,000 a year and I had to be a salaried employee, right?
So I didn't get the tax benefits of being a contractor.
And I took it!
Right?
I mean, so, I mean, of course, why wouldn't you?
Right?
I mean, because the difference between $130,000 and $100,000, right?
$130,000 and $100,000, right?
That's sort of what, just 27, 28%.
Well, so that's a loss, right?
But it's not as much of a loss as a hundred percent, which is, you know, not taking the job at all.
So, you know, people will work for less if it is the only option that they have.
I mean, of course I would, right?
I mean, because I'm not going to work for nothing when I could get the hundred.
But, of course, if I was not allowed to work for anything less than a hundred and twenty thousand dollars a year, then I couldn't take that.
That job wouldn't even exist.
And so I would be completely unemployed.
So the fact is that when lots of people are out of work, the market will take care of that automatically by just lowering wages until everybody's employed again, or at least everybody who wants a job.
And, of course, people don't like it, but, you know, I didn't like going from 130 to 100, but I sure as hell preferred that than going from 130 to 0.
So I was, you know, still grateful and happy to have the job, because there's no fantasy land wherein that other job existed that I could sort of flip over into, so you've got to deal with the facts that are in front of you.
So that's sort of the interesting question to ask people, you know, when they say, well, you know, the market couldn't provide jobs for these people.
Well, that's completely not true.
What happened was people weren't allowed to work for less.
You started minimum wage laws in place.
You had lots of federal pressure on the government.
From the government to the industrialists to keep wages high because FDR in particular was probably one of the most economically illiterate I think it was Eisenhower who said, you know, one day I hope to walk into my office and find me a one-armed economist.
And somebody said, well why?
And he said, so for once I'm having an economist who can't say to me, on the other hand, So, you know, this is the kind of stuff where, you know, idiots will say, well, let's just keep wages high because that's going to stimulate demand.
When, of course, that's not the case at all, right?
If you keep wages artificially high, you know, it's not bad for the people who have those wages, but, you know, jobs don't get created, and therefore that demand doesn't get created, and the price of goods remains artificially high, which means that it doesn't really matter that your wages are high because the price of goods is artificially high.
Or, as I used to say to cab drivers who would offer to give me blank checks, I would say, you know, you really shouldn't do that.
Not because it's immoral, which, you know, I guess you could say it is, but because, you know, if people start fudging their expense accounts, then it's just going to raise the price of the goods you pay for, so you're not doing yourself any favors by handing out these blank chips where people can artificially inflate their cab fares.
So I mean this is sort of funny insofar as the farmers lobbied the government and wanted all of this to keep their crop prices artificially high and all that did of course was just raise taxes on the people who made the manufactured goods so they ended up being sort of enslaved to the government and they created this huge bureaucracy that they labored under and they lost the freedom to you know grow what they wanted and in return they got some slightly higher wages for a time but then all that happened was
Those higher wages were immediately translated into having to pay, you know, higher prices for goods.
And then you get FDR at one point.
He tried to use, this is great, he tried to use the Interstate Commission to regulate a farmer who was growing wheat for himself, right?
Because he said, well, you know, if he's growing wheat for himself, then he's not buying wheat from someone further away who may be in another state and therefore, you know, it should be regulated by the government.
federal government because the federal government can regulate interstate commerce.
And so even if you're growing your own wheat in your own backyard, you can be regulated on the grounds of interstate commerce because you're not buying from someone who might be in another state.
So that's what the farmers inherit, and they don't end up with any more money.
They just end up with a worse situation.
So that's sort of an important thing that goes on in the sort of early 30s that you begin to get this just crazy set of tariffs.
And then in sort of March 31st, 1931, the Davis-Bacon Act becomes law.
So this requires prevailing union wages to be paid on federal construction contracts.
And that's sort of important as well, right?
Because then you start to get that the market is not allowed to set July 23rd, the Macmillan Report on Britain's International Finances is released.
federal contracts.
And of course, because this is sort of the New Deal era, federal contracts are huge.
But the market isn't allowed to set the wages, which means that they're kept artificially high, which means that unemployment just gets worse and worse, right?
July 23rd, the Macmillan Report on Britain's International Finances is released.
It points out that Britain's short-term liabilities to foreigners is several times the size of Britain's gold reserves, right?
So this is pretty funny, right?
So I don't know the numbers, but let's say Britain's gold reserves are, you know, a hundred billion dollars, well, or pounds, I guess, you know, what they owe a couple of hundred billion pounds to foreigners.
So obviously, their money is going to deflate, which is going to cause problems, right?
Now, Now, deflation, and again we can touch on this another time in more detail, but deflation is one of these interesting things in economics because everybody considers inflation to be a good thing and deflation to be a bad thing.
But of course, like everything, it has both winners and losers, and you don't just want to listen to the winners who are going to tell you all about why it should happen.
You need to point, you need to sort of ferret out who the losers are going to be who may not even know that they're losing, right?
So, you know, in inflation, things are all well and good for people who borrow money because if you lend me $100, let's say everything is sort of fixed, the price of money is constant, you lend me $100 and you charge me 5% interest and I pay it back to you next year and it's $105.
But if there's been an inflation of 10%, then you're actually losing 5%.
So if I'm borrowing money, inflation is very good for me.
And if I'm lending money, inflation is very bad for me.
I have to sort of build in Built in the loss of monetary value into my inflationary percentage.
But, you know, if there's deflation, just the reverse occurs, right?
If there's deflation, then the value of money is increasing, you know, relative to goods, and therefore I get a bonus if I've lent you money and you pay me back in a year, because I can buy that much more with that hundred dollars, hundred and five dollars that you're paying me back.
So, you know, inflation is good for some people and it's bad for others.
And generally borrowers will outnumber lenders So, borrowers tend to set the debate in a democracy, you know, which generally makes everybody feel that deflation is bad.
And, of course, deflation is not bad at all.
So, it's not good or bad.
It's not as good as stable prices, but deflation as a whole is not bad at all.
So, you know, England can't conceivably keep the value of its money, and so England as a lender doesn't want deflation to happen.
So, of course, I'm sure you can guess the next thing that happens is that England goes off the gold standard, right?
So it just starts to print its money so that it can start to inflate, which is good for it.
October the 16th, the discount rate is raised from 1.5% to 2.5%.
This is the New York Federal Reserve Bank.
And then it gets raised again a couple of days later from 2.5% to 3.5%.
So this is pretty important because you have a recession, you have unemployment, you have artificially high wages.
What you desperately need is capital investment, right?
You need people to have easy access to capital.
And here you have rates being increased by the central banks.
So that's not so good, right?
This is going to really make things worse.
So, let's have a look at what goes in 1932.
In April, Federal Reserve officials initiate an open market program to buy half a billion dollars worth of securities.
Right?
Again, you're just getting money to go into the government out of the free market by having all these securities being sold.
In May, they do another one and they buy another half billion dollars worth of securities.
So, at a time where you really need capital to be going into the free market, you've got a billion dollars taken out of the equation.
Now, June 6, this one's astounding.
The Revenue Act of 1932 is passed on June 6.
This is the largest peacetime tax increase in the history of the United States to that period.
And that is another one of these just staggeringly, astoundingly, mind-blowingly bad things that governments do, right?
So, you have a time, again, where you really need heavy investment to get people back to work, to raise wages, to make economic labor more productive.
And, you know, you've suddenly raised the top tax rates from 25% to 63%.
You reduce personal exemptions from $1,500 to $1,000 a year for single people, from $3,500 to $2,500 for married couples.
And, you know, it's exactly the opposite of anything that could be productive, right?
I mean, so the amount of government interference, and regulation, and tax increases, and subsidies, and interest rate manipulations, and currency manipulations, I mean, it's just all over the place.
There's just an unbelievable bludgeoning of the free market principles from the federal government.
You know, one of the things that I think is important to understand about this is that The people who have the capital are kind of used to the free market.
They're not used to all this government regulation, at least not to the degree that it's happening now.
So one of the things that's pretty directly traceable in the 1930s is that the group of, you know, businessmen who are older generally have more capital and more power and control, but if you're older you've had less exposure to this crazy federal control of the economy and sort of endless intrusions into the free market.
You know, you're kind of rich, you kind of don't know what the hell's going on, so you just kind of withdraw from the fray, right?
You just say, OK, you know, I have no idea what's coming down.
Every month, every week, I open the paper and I see a brand new set of regulations that constrict me of my fortune.
So I think I'm just going to wait this one.
I'm going to sit this one out.
I'm not going to make any major investments in expansion.
I'm not going to open new factories.
Because I don't know what's coming down the pipe next.
Is there going to be another 65% tariff on 25,000 goods?
Is there going to be another massive tax increase?
Are they going to just randomly change the interest rate again?
Are they going to pass another act to raise the price of food?
You don't know, right?
So, like in any situation of extreme uncertainty, you're just going to sort of sit tight, wait for things to settle down, and see what happens.
And, of course, what that means is that people don't invest in expanding their businesses, which further exacerbates the unemployment problems.
And in 1932, we also have the passage of the Norris-LaGuardia Act.
This outlaws yellow-dot contracts and protects unions from antitrust actions, private damage suits, and court injunctions.
You know, one of the things that also happens in the thirties is this great expansion of power, of violent power, coercive power, that's given to the unions by the federal government.
Now, there's yellow dog contracts, you know, for those who don't know this exquisitely detailed history of union and labor in the United States.
A yellow dog contract is, you know, I want to work for you and I'm willing to sign a contract which says that I'm never going to join a union.
I have no interest in joining a union.
I disavow the union.
So that is, of course, put in place by people who the capitalists who don't want unions around because, you know, they know that people are willing to work for less because there's so many unemployed people and they want to give jobs for less, right?
They just can't afford to give jobs for more, right?
So instead of it being five bucks an hour, they'll make four, three, two or whatever dollars an hour.
But they can't do that if there's a union because it's just too much of a hassle because the union has so much power that's been given to it by the federal government.
Now, the interesting thing is protecting unions from antitrust actions is pretty funny because, of course, antitrust legislation is put in place, the Sherman Act of 1890-something, right?
was put in place to, you know, because whiny and negative competitors who couldn't compete with people like the Rockefellers and the Carnegie Mellons got mad.
And, you know, much like the people who invested in Netscape got mad when Microsoft made so much money and destroyed the value of the Netscape stock.
You know, they get mad and they go to the government and say, you smashed this monopoly.
And of course, a union is a monopoly when it has a closed shop.
So they had to make sure that they gave exemptions from that.
And the Glass-Steagall Act, which is passed, which liberalizes the terms under which a member bank can borrow from the Federal Reserve.
Again, not a particularly good idea, because as soon as you borrow from the Federal Reserve, you drive up inflation, create more business uncertainty, and increase the national debt and the requirement for future taxation.
So, in 1933, in March, the economic contraction ends, the economy starts to recover, right?
So, you know, one of the great things about entrepreneurs, you know, sort of having been one, is that, you know, we're pretty adaptable, right?
So we get sort of, we get knocked down, but then we get back up again.
And so as soon as people sort of figure out, okay, the landscape's changed, the federal government's all over the place, lots of things that are going on that are new and hard to get a hang of, people do get the hang of it, and so on.
And then what happens is you begin to get continual regulation, further regulation, right?
So the economy starts to recover, and then you get this Emergency Banking Relief Act passed, which is federal bank inspections are started.
In April, New York becomes the first to pass a state law regulating minimum producer, wholesale, and retail milk prices.
So by the end of the 30s, 25 other states have done this, right?
Where you just start to regulate milk prices.
April 19th, America goes off the gold standard, which again causes inflation and all these sorts of problems.
May 12th, Agricultural Adjustment Act is passed, authorizing paying farmers not to grow crops.
So they start to pay farmers not to grow crops.
So of course people are starving in large areas within the United States.
This is the decade of the grapes of wrath.
So people are starving and FDR's brilliant solution is to pay people not to grow crops.
So, in May 12th, you get the Federal Emergency Relief Administration is created.
May 12th, also the Farm Relief Act is passed, which creates the Farm Credit Administration and the Agricultural Adjustment Administration.
May 18th, Tennessee Valley Authority is created.
May 27th, Federal Securities Act is passed.
June 6th, National Cooperative Employment Service Act is passed.
In June, you get the National Cooperative Employment Service Act is passed, the Homeowners Loan Act, the Farm Credit Act, and The Federal Deposit Insurance Corporation is established and this is a pretty significant aspect of banking in the 1930s and why the depression lasted so long.
Because, as you know, I'm sure the insurance corporation is designed to guarantee your account, the money that's in your bank account, even if your bank goes under, right?
So in 1932, almost 1,500 banks suspended operations and, of course, a lot of people who had money in that bank lost their money.
And so because the banks got hosed because of government regulations, of course you need more government regulations.
So this Deposit Insurance Corporation is put in wherein they guarantee the money that's in bank accounts even if the bank becomes insolvent.
And of course all that means is that the banks become less careful.
about going insolvent because there's just that much less risk.
And of course, because you have this guarantee, the people who put money into banks don't care as much about what those banks are doing, right?
As you may remember from the sort of savings and loan crisis in the 1980s, you just sort of give it up, right?
So what happens is also the federal government is empowered to set maximum allowable interest rates on savings and time deposit accounts, right?
There's a huge, massive regulation that's put down on banks that they can't give out more interest rates than is going on.
Of course, the reason that interest rates are going up is because America's gone off the gold standard, so basically the currency has become fiat money.
Everybody knows that the federal government can print as much as it wants, and it's no longer bound by having to tie it to the actual existence of something like gold.
So interest is going up.
And of course, as interest goes up, the money that the government has to pay on the national debt also goes up.
So the government doesn't want interest to go up, but it wants to print more money.
So this is where you get all these additional regulations.
Commercial banks, then another law gets passed.
Commercial banks are no longer allowed to engage in investment banking, which is the underwriting of securities.
So, you know, you can't get banks buying and selling stocks.
And of course, what that means is that there's that much money, less money that's available for capital investment, for entrepreneurs and so on.
Again, that's pretty bad.
And The National Industrial Recovery Act is passed.
The Open Market Committee is established.
The Emergency Railroad Transportation Act is passed.
This is all in June.
November.
Civil Works Administration created by executive order.
So this is, you know, basically the federal government starts on this massive program of federal projects, of state projects, that is designed to provide employment and of course it doesn't, right?
Because all it does is provide employment in specific sectors while, you know, unproductive employment in specific sectors while destroying productive employment in other sectors.
You know, you spend a hundred billion dollars over here, all that's happened is you've taken a hundred billion dollars from somewhere else that might have actually been used to create self-sustaining and productive employment.
And, of course, it's entirely scattered.
I think it's along the certain sections of the U.S.
Like, the South gets almost none of this stuff.
And the reason for that, of course, is that FDR won the South pretty handily in his election campaign.
So all of these projects are pretty much centered on those states that he had a tough go of it in the last election.
So all of that kind of stuff.
The only good thing that happens in 1931 Sorry, 1933, of course, is that December the 5th, the 21st Amendment is ratified, which repeals the 18th Amendment and thus ends alcohol prohibition.
So I guess once they've got the Mafia to come over and start selling alcohol, they're more than happy to get rid of it, alcohol prohibition and so on.
So, there's 1934, in January, the Gold Reserve Act is passed and that establishes an exchange stabilization fund.
Because, of course, the exchange, once you go off the gold standard, your money's just Not worth that much relative to any kind of gold, and so it fluctuates like crazy.
And so this exchange stabilization fund is supposed to stabilize it, and of course it doesn't.
And, you know, this also allows the U.S.
Treasury to seize all gold held by Federal Reserve banks.
And private possession of gold is made illegal, right?
So now it's illegal to own gold except for, quote, legitimate purposes, you know, like jewelry or artwork or industrial or scientific uses.
And, you know, January 31st, FDR issues an executive decree changing the price of gold, you know, from $20.67 an ounce to $35 an ounce, right?
Again, complete violation of the free market and one of the worst things you can do in a free market is to regulate the price of the base currency like gold and so on.
And then you get the Congress creates the Federal Farm Mortgage Corporation and the In February, the Export-Import Bank of Washington is created and is established under a D.C.
Charter to assist in financing U.S.
trade with the Soviet Union.
February 23rd, the Crop Loan Act is passed.
February 15th, Civil Works Emergency Relief Act is passed.
April 7th, Jones-Connolly Farm Relief Act is passed and the bill effectively places an expanded roster of farm products under the control of the Agricultural Adjustment Administration.
In June, you get the Securities Exchange Commission is established.
In June the 19th, Federal Communications Commission is created.
June 19th, the Silver Purchase Act is passed.
This empowers FDR to increase the Treasury's silver holdings to one third the value of gold, and it nationalizes silver stocks and purchases.
Anti-Racketeering Act is passed.
The Commodity Credit Corporation is created.
Federal Farm Bankruptcy Act is passed.
Federal Surplus Relief Corporation created.
National Firearms Act is passed.
Reciprocal Trade Agreements Act is passed.
And just masses and masses amounts of regulations and legislation that's being put in place.
Now 1935 is the big year, right?
You get the Emergency Appropriations Relief Act is passed which creates the Works Progress Administration The only good thing is that on May the 27th, the Supreme Court unanimously declared Section 3 of the National Recovery Act to be unconstitutional.
Section 3 empowered the President to implement industrial codes to regulate weekly employment hours, wages, and minimum ages of employees.
Then, in June, you get the National Youth Administration created by executive order of the Farm Credit Act is passed.
In July, the National Labor Relations Act, or the Wagner Act, is passed.
And then Social Security comes in August the 14th.
August 23rd, Banking Act is passed.
28th, the Public Utility Holding Company Act is passed.
Bituminous Coal Conservation Act, the Revenue Act, the Wealth Tax Act is passed.
This increases the surtax rate on individual incomes over $50,000, the estate tax on individual estates over $40,000, and graduated steeply taxes on individual incomes over $1,000,000 until the tax rate was 75% in excess of $5,000,000.
It decreases the small corporation tax rate to 12% while increasing the corporate tax on incomes above $15,000 to 15%.
Access profits over 10% were taxed at a 6% rate and in excess of 15% at a 12% rate.
So of course what this does is it ensures that anybody who's making good money, in other words those who are creating jobs and having productive investments, just get taxed even more heavily.
The Federal Power Act is passed.
Rural Electrification Administration is established.
Soil Conservation Act.
Motor Carrier Act.
This extends federal regulatory authority to motor carriages of state and interstate commerce, engaged in interstate commerce.
So, just the amount of regulations that are passed just in one year alone at the height of the Great Depression is staggering.
I mean, I could keep going, but I think you can look this sort of stuff up on the internet, but I think you can sort of recognize that you have a staggering expansion of state power, you know, through the mid to late 1920s, especially in the 1930s.
I mean, this was the biggest expansion of federal state power in the history of the Republic, and something that wasn't equaled until the 1960s, the mid to late 1960s, when the Great Society programs were put in under LBJ.
And so in a decade, I mean, to understand the effects, the psychological and economic effects of the Great Depression, it's very hard for us to understand that you have this 13-year depression where unemployment is averaging 20 to 25 percent.
Starvation is rampant throughout the republic, you know, where the division between rich and poor is staggering.
The economy is just not functioning.
And during all of this time you see, before and during all of this time, you see an unprecedented amount of state power that is, you know, supposedly thrown at the problem trying to solve it.
And the problem just continues.
And that is a pretty instructive lesson to learn That when people say, well you know the Great Depression and the free market and it didn't work and that's why you need regulation.
Well the regulation started before the Great Depression and expanded mightily during the course of the Great Depression so to say that it has anything to do with the free market is just ridiculous.
I mean this is the government had all the power that it wanted to solve the problem and it exercised an enormous amount of power and the problem wasn't solved.
So then the problem cannot be the free market.
You know it could be said that the only reason that the unemployment didn't go to fifty or seventy five percent was because of the free market.
And I think that's a pretty important thing to recognize and to communicate when you're talking to people who have some sorts of opinions about the causes and effects of the Great Depression.
Murray Rothbard, of course, has written a great book about this which you might want to look up.
But basically the thesis of most of the Austrian economists is that when you see an enormous and country-wide economic effect that you have to look at regulations that are covering the whole country.
It simply has to be the case.
You know, millions of people making, you know, millions of decisions cannot create anything other than sort of general static.
And there may be times, you know, with the introduction of something really radical and new like the computer or the car where there's going to be certain dislocations and certain problems in certain areas.
But the only social agency that has the power to affect universally the choices of everybody is the government.
So when you see a massive thing occurring in the economy, the first place you look is to the government, and it's the federal government usually first and foremost, because that's the only agency that can affect the economic decisions of the entire country.
So all you can do is just ask the people back and say, you know, are you aware of the number of regulations, the tax increases, the manipulations of
The stock market and of the inflation rates and the interest rates that were going on, you know, are you aware that this is by far the greatest expansion of state power that occurs throughout the 1930s and that if there's anybody who can be considered responsible for creating and prolonging the Great Depression, it is the federal government because it was certainly the most active social agency of the time.
So, I hope this has been helpful.
It's a fascinating thing to look into.
It can be a little bit technical and I tried to steer clear of some of that during this conversation, but this may be worth sort of reviewing or sending to people who have sort of this fixed opinion that the free market produces the Great Depression and the government saved it both with regulations and with the entrance of the United States into World War II in 1941.
So, thanks again for listening.
I hope you're doing well.
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