3299 What Caused The Great Depression? | Lawrence W. Reed and Stefan Molyneux
In the aftermath of the Stock Market Crash of October 1929, financial panic gripped the United States of America. The Great Depression (1929-1941) was the longest-lasting sustained economic downturn in the history of the Western industrialized world. Foundation for Economic Education President Lawrence W. Reed joins Stefan Molyneux to debunk the conventional view and they discuss the central role that government policy played in fostering this legendary catastrophe.Lawrence W. Reed is the President of the Foundation for Economic Education and the author of many books, including “Great Myths of the Great Depression.” https://fee.orgGet the "Great Myths of the Great Depression" book at: http://www.fdrurl.com/great-depressionFreedomain Radio is 100% funded by viewers like you. Please support the show by signing up for a monthly subscription or making a one time donation at: http://www.freedomainradio.com/donate
He is the president of the Foundation for Economic Education and the author of, oh, so many books, including Great Myths of the Great Depression, which I've actually read the article that the book was based on, which you will put a link to below.
And you can find Dr.
Reed's information and his organization's activities at www.fee.org.
Thank you so much, Lawrence, for taking the time today.
Hey, it's my pleasure, Stephan.
I hope you're well.
I'm well, thank you.
Now, why are we talking about the Great Depression?
It is one of the scare stories, like ogres and monsters and things under the bed, that is regularly told to people in order to scare them back into the protective arms of government.
And the myth goes something like, well, we had this giant free market, and there was this hysterical bubble throughout the 1920s.
There was this disastrous crash, and the do-nothing, laissez-faire, let the market take care of itself.
President Hoover sat on his hands, and things got worse and worse and worse.
And then people finally panicked and ran to FDR, who manfully stood to the podium and thundered against the evils of unregulated capitalism and passed a whole bunch of government regulations that made everything better.
But sadly, it was too late, and the world slid into World War II.
And that's what happens when you let the free market try and take care of society.
You end up with a 13-year depression culminating in a war that kills 70 million people.
Now, are you still for the free market, or do you like the government now?
I'm just characterizing it somewhat roughly, but it seems to go something like that.
Oh, it sure does.
In fact, you managed to wrap up about 500 misconceptions in just a few sentences.
I often do that, but mostly inadvertently, so I'm glad it was focused at this time.
But that is the conventional wisdom still to this day, unfortunately, although I think people understand this episode in history better than they may have 20 or 30 years ago.
Well, nothing could be further from the truth, Stephan, because Government has its fingerprints all over the Great Depression.
It caused it in the first place largely by its crazy monetary policy coming from the Federal Reserve System, of course, which from about 1924 until 1928 embarked upon a very significant expansion of money and credit, and that caused a bubble in the economy.
The Fed flooded the banks with easy money, It drove interest rates to historic lows.
Much of the newly created money found its way onto the stock market, which bid prices up to dizzy heights.
You had a land boom in Florida.
You had all of the classic symptoms and signs of an artificially induced monetary expansion, a bubble, a classic bubble, that sooner or later would have to be pricked.
And then, as I'm sure we'll get into in the latter part of our discussion, There were subsequent interventions by government that took a bad situation, made it much worse and kept it bad for about a decade.
The introduction of the Federal Reserve into the American economy in 1913, I think is fairly arguably the base cause of the end of the free market.
Of course, most economic transactions rely on money.
And when the government is in control of the money supply, you really have a beginning of the deterioration of the free market.
Because in particular, entrepreneurs rely upon the The amount of savings that are there because savings are deferred spending and when people are saving, it's a good time to borrow because interest rates are lower because savings are high.
So you borrow money in the anticipation that you're going to get a whole bunch of people spending money down the road.
And when there's a lot of money around and interest rates are low, it's a good signal for businesses to invest in upgrades and so on.
But if it turns out that the money is not Real money.
In other words, if it's just monopoly fiat currency run by the printing presses, then what happens is that demand fails to materialize and there's this huge malinvestment or misinvestment which then begins to unwind the illusion of wealth that everybody thought was real.
Exactly.
You may have heard, and your listeners may have heard, of the analogy that's often made between the boom and bus cycle induced by government monetary manipulation and the drunk who goes to a party and drinks like a fish.
And, you know, he feels great for a time, but then he stumbles home at 2:00 a.m. and a few hours later he wakes up with this terrible hangover.
Well, you wouldn't say at the bottom of his cycle there during the hangover that that's when the damage was done.
The damage was done the night before when he thought he was having a great time.
When the spike or the punch was spiked.
And, well, that's analogous to the Fed's policy of easy money, driving interest rates low, Businesses always have projects on the shelf that they'd like to undertake, but if they have to be financed at, say, 6%, they don't look profitable, so they sit on the shelf.
But when the Fed drives rates to 4%, 3%, you know, just to pick numbers from the air, then all of a sudden a lot of things look like they...
Maybe profitable to invest in.
So they come off the shelf and business rushes to borrow the easy money from the banks.
But then later, when monetary policy changes to make up for all the damage that the inflation was doing, interest rates soar and a lot of those projects then go bust.
They were based on an illusion to begin with and will be sloughed off and liquidated during the down phase of the business cycle later.
Well, and I think people recognize this pattern from the 07-08 financial crisis, which was everyone thought that interest rates were going to remain low, so they bought these variable rate mortgages, and it turns out that when interest rates went up, they couldn't afford their houses anymore, and that kind of randomness is really impossible to account for.
And the estimates have been, I want people to understand the scope of the monetary expansion, because monetary expansion is like a drug you can't say no to.
If you are the drunk at the party, at least you're choosing to imbibe.
Monetary expansion is kind of like roofing or drugging or making everyone drunk in the entire economy, whether they want the drug or not.
And there are estimates that say that throughout the 1920s, the Federal Reserve increased the money supply in the U.S. by 60%.
And that is staggeringly high.
At a time when the world economy is trying to recover from World War I and the resulting Spanish flu epidemic, which killed actually more people than World War I did, but was brought home by the returning soldiers.
At a time when the economy was struggling to regain its footing after the catastrophe of the Great War, you have this massive injection of currency into an economy.
And of course, as I've talked about on the show before, you had a crash in 1920, even worse than the crash of 1929.
But because there was genuinely little intervention at that time, it recovered in about 18 months.
So the amount of monetary expansion was truly staggering, and I think outside of war, fairly unprecedented in American history.
It was very substantial, no question.
And I think you're probably right.
The greatest expansion of money and credit in a comparable period in American history, except for maybe during the Civil War.
And, you know, a lot of people didn't quite see it.
They They weren't looking at the numbers coming from the banks or the Federal Reserve System.
They were looking at, say, prices in the economy and a lot of them didn't seem to move all that much because you had some good things happening at the same time.
You had the Harding and Coolidge administration cutting tax rates dramatically.
That helped to boost productivity.
That helped to offset some of the price effects that you would have gotten likely if If they kept tax rates high and just pumped out the easy money.
So a lot of people didn't see it coming, but it was there.
And if you looked at certain prices, like in the stock market or land in Florida for a time, there was lots of price inflation.
But it was the direct result of what the Fed was doing, this easy money stuff.
And we call this period of the bubble the Roaring Twenties.
This is not laissez-faire.
This is government with its central banking apparatus artificially fostering a bubble.
Now, there's a stated role of the Fed, which I actually have never physically in my life read without laughing out loud and crying at the same time.
But the stated goal of the Fed, of course, is to maintain stability, full employment, and, you know, all of the lovely pixie-based magic words of happiness that it never seems actually able to achieve.
But why would the Federal Reserve create so much money?
What is the incentive?
Why don't they just keep the amount of money stable and have it grow?
You know, if the economy is growing 3%, yeah, maybe 3% more money.
I mean, what is the incentive?
What is the political or economic drivers behind why the Fed would let rip with the printing press so much?
There are several factors at work.
Part of it is that bureaucrats by nature like to be busy doing something.
So if they're just doing nothing and everything is moving along smoothly and sort of automatically, it kind of looks like you really don't need them.
But more importantly, in the 1920s, there was a deliberate policy at the highest levels of the Fed.
To ease interest rates here to help Great Britain restore a gold standard.
Now, I'm very friendly to a gold standard, so that end objective is appealing to me.
But the problem was that Britain wanted to go back to gold, which it had abandoned during World War I. At a ratio of British pounds to gold that didn't reflect all the paper pounds they had printed.
They wanted to act as though, you know, there were just as many pounds out there as there was before World War I, but that was not the case.
The pound had depreciated and so the ratio should have changed.
In order for Britain to be able to do this, And avoid gold outflows, people redeeming their paper pounds for gold, especially Americans, the American economy would have to see lower interest rates.
You'd have to make investments in America a little less attractive.
So there were high-level meetings between the head of the Bank of England and the head of the New York Federal Reserve, and they agreed that American interest rates would go down, that the dollar would be depreciated so as to assist Britain's return to an unrealistic gold standard.
Well, and just for those who may have missed it, I think it's a fairly important tenet of the free market that when decisions are being made by two heads of government meeting, you are no longer in the land of the free market.
And I think that's really important for people to understand.
So the money supply was vastly extended and expanded, which created, you know, wow, magic, free wealth, who has to work for a living?
I'm just making money by watching my stock ticker go through the roof.
And then, as is always the case, inflation refers to an inflation of the money supply.
The price inflation the consumers and business to business people see is the effect of that.
So when you print lots of money, your interest rates go up.
Now that's bad of course for a lot of people and in particular it's bad for people who borrowed at variable rate loans and the price of repaying the loans goes up.
But it's also really bad for governments because it drives up the price that they have to pay to maintain the national debt.
So then what governments want to do after they print a lot of money is they want to crush down the interest rates or keep them down, but eventually they break free and then, I think it's fair to say, we saw in the late 20s the government collapse the money supply printing.
The printing press has stopped.
And that is, you know, if you're going to get off a very powerful drug, cold turkey, well, let's just say it can be just a little bit risky.
It should have been something that was publicly admitted as an error, tapered off rationally.
Wait, sorry, I'm in the alternate universe where the government does something sensible.
But this contraction of the money supply, is it fair to say that that is what began to trigger the dominoes?
Yeah, I think so.
It was a very substantial factor.
You know, some people actually argue to this day that once the Fed makes the mistake of inflating, then at some point it should correct that by deflating.
And I'm one of those who thinks, look, don't commit the sin of inflation in the first place.
But if you've done it and now you have to ask yourself, how do we contend with it?
How do we stop it?
It's best to stabilize.
Now that you've run over the guy with a truck, don't assume that if you put the truck in reverse and back up over him, you know, that's the way for recovery.
But that's what the Fed did.
It not only inflated, but when it stopped, it didn't just stabilize, it contracted the money supply, drove interest rates through the roof.
And now I do believe that The contraction in the money supply got out of hand, that they didn't see how massive it would become.
But nonetheless, they presided over it, and for three years, the money supply, which had ballooned by 60% plus in the previous period, now contracted by about a third, and prices tumbled across the board because of it.
Yeah, so if people can imagine, this is a very rough analogy, but imagine if you really believed that you'd inherited 60% of your net worth right now.
Ooh, free money!
Well, you probably would loosen the old spending spigots a little bit.
And then if it turned out, not only did you not inherit 60% of your net worth, but you owed a third of your net worth.
Well, your spending habits would change considerably and you'd be like panicking and hunting in the woods for squirrels to eat and so on.
And then when the crash happened, I just want to give people a sense of how catastrophic it was and hopefully will never be again if people finally begin to listen to Reason and Freedom.
So over the four years, this is from your article, over the four years from 1929 to 1933, production at the nation's factories, mines and utilities fell by more than half.
People's real disposable incomes dropped 28%.
Stock prices collapsed to one-tenth, one-tenth of that pre-crash high.
And you say the founder of General Motors ended up as a pauper.
The guy who founded Birdseye Fish Foods ended up virtually broke.
The number of unemployed Americans rose from 1.6 million I mentioned this on the show before, Dr.
Reid.
I had a book when I was a kid about terrible things that happened in the 20th century and the Hindenburg and the Titanic.
There was a whole chapter on the Great Depression, all these guys in lines in soup kitchens trying to get some food and all that.
Even as a kid, I remember thinking, well, wasn't there stuff that needed to get done in the country?
And why weren't they just hired at lower wages if there was an oversupply?
And that is something that's really hard for people to understand.
Not just the crash, but why it didn't self-correct more quickly.
It didn't self-correct because of further interventions by government.
In fact, the nadir of the depression that you described is really 1933-34.
If you go back a little bit, just a few months after the big stock crash in the fall of 1929, we actually saw a bit of a recovery.
By the spring of 1930, we didn't have a depression yet.
We only had a recession.
The stock market, which had really suffered badly in the previous fall, had actually regained about half the ground it had lost, and we didn't yet have a depression.
We just had a recession in the spring of 1930.
That's a great testament to the resiliency of an economy battered by lousy monetary policy.
But then that recession quickly becomes a depression with a series of interventions by Congress and two administrations beginning with the Smoot-Hawley tariff passed in June of 1930 that raised taxes on the import of foreign goods so massively to an all-time high It virtually closed the borders and ignited a worldwide trade war.
This is not laissez-faire.
This is an act of Congress taking a recession and quickly, by crushing trade, making it a full-scale depression within the year.
And let's rewind just a little bit.
I got eager and raced slightly ahead.
But there is the myth or the story that's put forward, which is that Hoover was a non-interventionist guy.
And it was the very lack of intervention that continued to have the economy spiral down to the great Florida sinkhole of disaster.
And this is...
Not even close to true.
I mean, it's almost like the exact opposite of true.
I wonder if you could help people to understand some of the steps that Hoover took that were so disastrous for the U.S. economy.
Absolutely.
For the statist who worships at the altar of government, it's a convenient myth to be able to say, oh, well, we had a depression, Hoover was president, we have to tar him with the charge that he was a laissez-faire president so that our narrative holds.
But Hoover was a massive interventionist.
Even Franklin Roosevelt, when he ran against him in 1932, accused him of presiding over the greatest taxing and spending administration in American history.
Roosevelt's running mate, John Dance Garner, several times, using his terms, said that Hoover was leading the country down the path to socialism.
What they were referring to were the massive hikes in trade-killing tariffs in 1930, and then two years later, Hoover signed into law the Revenue Act of 1932, which doubled the income tax.
In the midst of the Depression, the top rate actually more than doubled, went from 24% About 65% overnight and a whole range of other taxes were imposed.
Hoover had massive spending increases.
He had bailouts.
He had his Reconstruction Finance Corporation.
I mean, he was all over the economy, jawboning businesses to keep wage rates high even as prices were tumbling, which therefore raised the cost of doing business.
So, he was a massive interventionist and when Roosevelt ran against him in 1932, he actually promised if elected he would slash federal spending by 25%.
It was in the Democratic Party platform of 1932 because Hoover was such a spendthrift that spending had to be cut.
But once Roosevelt got elected, of course, we discovered that he had many other things up his sleeve, quite the opposite of what he promised, and the result was the Depression was prolonged by another seven years or more.
Well, and the Smoot-Hawley tariff Is particularly disastrous because a lot of the tariffs weren't for a percentage of the price.
Because if the prices are falling, as prices did fall by half or more during the Great Depression, if the prices are falling, it's 5%.
Well, then it's going to be, instead of 5% of 100, $5, it's going to be $250 because it goes down to $50.
But they were for a fixed amount of money, regardless of the end price of the product or the import price of the product, for that matter.
So, what that meant was as the prices fell by half, the effective tariff rate doubled without any further legislative intervention.
One of the things I found actually kind of interesting was that one of the few remaining tariff-free goods were leeches and skeletons.
I assumed that they were remain tariff-free because they needed them to fill the seats on the Federal Reserve.
Boom!
That's my big Federal Reserve joke for the entire show.
Now, help people to understand tariffs, of course, re-emerging as a question in presidential politics these days.
One of the challenges, of course, with tariffs is you don't just impose them on yourself.
And you mentioned earlier that there was a trade war.
What is the problem with preventing foreigners from being able to sell their goods in a domestic market?
Well, if foreigners cannot sell here because our taxes on their goods raises the price so high that people can't afford to buy them, if foreigners can't sell their goods here, then they can't earn the dollars that they need to buy here.
If the boat never comes with, say, cars from Japan, it never leaves American ports with American soybeans or wheat.
Or other products that they would buy and take home to their country.
Trade is ultimately a two-way street.
You can't close the door to imports without closing the door to exports.
So Smoot-Hollywood would have been devastating if nothing else had happened, but it actually had a compounding effect by stimulating other countries to do the same thing.
So they retaliated one country after another against American goods.
How can you blame them?
I mean, politically speaking, so many of these countries saw what we were doing to their goods and they said, okay, we're going to do it to your stuff.
And so we raised barriers to commerce and anybody who was involved in the import-export business on either side of world trade saw their businesses flattened.
American agriculture in particular.
We were selling off the American farm about a third Of what farmers were producing in overseas markets before Smoot-Hawley.
But now foreigners can't buy that stuff anymore.
So farmers went bankrupt by the thousands and rural banks that held the farm mortgages then failed.
You had a terribly compounding effect, a spiraling downward of the economy because of the anti-trade effects of Smoot-Hawley.
Yes, one wonders how American history might have been different had John Steinbeck known about economics rather than just blaming the weather and mean-eyed local banks.
And just so people understand, tens of thousands of farmers went bankrupt.
And that is, you know, a particularly heartbreaking scenario.
I mean, you put your blood and heart and mind and sweat into that very soil.
And partly that's because a bushel of wheat that sold for a buck in 1929 was selling for 30 cents by 1932.
And I invite anyone out there to think That if the price of what you were selling on the market, whether it's your salary or your goods, went down by more than two-thirds or it went down by 70%, what would happen?
And of course, yeah, then the rural banks fail because the farmers can't pay back the loans.
I mean, the relationships between farms and banks is pretty complex because of the amount of uncertainty and variability in the farming life.
They basically hedge and stabilize with banks.
And so when the farmers go out of business, they drag a lot of banks We're good to go.
There are savings.
There were bank runs.
There was even, I think, under FDR a bank holiday that went on for over a week.
And this just seemed to be a whole series of dominoes, like the universe of money and trade and survivability.
Civilization itself is foundational upon trade.
It all seemed to be unraveling and there was this absolute terror in the world as a whole.
And there's an economist you quote in the article, Alan Reynolds, and I thought it was really, really compelling.
I wanted to share this with people because it's easy to talk about, relatively easy to talk about the financial side, but the emotional side, the failure of faith in freedom.
It was really foundational, and he said, Alan Reynolds wrote, the terror of the great crash has been the failure to explain it.
People were left with the feeling that massive economic contraction could occur at any moment, without warning, without cause.
That fear has been exploited ever since as the major justification for virtually unlimited federal intervention in economic affairs.
And, I mean, the explanations that I've seen, they...
Voodoo!
Demonic possession of the economy.
I mean, this makeup stuff, like, it's sort of like what's happening in Venezuela now where they say, oh, well, Venezuela is failing because the price of oil went down.
No, they're failing because they nationalized the oil industry and that's a socialist disaster.
But this fear of freedom and the idea to run for solace and protection to the all-powerful arms of the Fed and the federal government, that really got netted into the soul of America during this period, I would say.
That's right, it did, and it was very unfortunate and very misdirected.
The fear that Americans should have developed was the fear of intervention.
We should have been in dreadful fear of what happens when government plays games with the money supply.
We should have been in terrible fear of what happens when government slaps massive tariffs on trade and shutting down world commerce.
We should have been in fear of what happens in the face of a depression when the government doubles the income tax.
But instead, we had scholars and teachers and professors across the country saying, ah, this is all because of laissez-faire or capitalism, and politicians and more of them with more power are the answer.
Nothing could be further from the truth, and the record ever since ought to prove that.
Well, and the Federal Reserve has since admitted that it was instrumental in the Great Depression, but that's a footnote that is a little bit below the above-the-page blaring headlines of capitalism, evil, government good.
Now, let's talk about what happened when FDR got into power.
I'm still waiting for people to recover from the shock of hearing that a Democratic presidential nominee promised a reduction in government spending.
But now that people have picked themselves back up off the floor, he did.
He promised stability and he promised reduced government spending, was complaining that Hoover was far too interventionist and far too – government management of the economy was far too high.
And then he got into power.
He got the ring.
And then it seemed to do the nasty work that it does on most people who get power.
So what happened after FDR took the helm?
Well, in his first term, he doubled spending.
I mean, this is a guy who just attacked Hoover for being so reckless in his spending and promised to cut it by a quarter.
He doubled it!
But on top of that, in the first hundred days of his first term in 1933, He inaugurates what is known to this day as the New Deal, a package of legislation that he got through Congress, which was now heavily Democratic, and all designed to tinker and tweak and push around the economy rather than get off its back.
Two of the most destructive aspects of the New Deal passed in early 1933.
Where the National Industrial Recovery Act, a great name, right?
I mean, who could be opposed to industrial recovery?
But what it did was it imposed price controls and industry-wide codes so as to force prices up.
There was one guy famously prosecuted.
He was a tailor in New Jersey or New York, as I recall, named Jack Megan.
He charged somebody 35 cents to press a suit of clothes But was prosecuted because he didn't charge the government mandated price of 40 cents.
So think about, you know, in the midst of a depression, you're lucky if you got a suit of clothes.
Here's a guy who says, I'll press it for 35 cents.
He goes to jail because he didn't charge you more.
Well, this was the Roosevelt administration's effort to boost prices by decree, not recognizing that one man's price is another man's cost.
But if you think that's something, you know, the other thing, the other pillar of the New Deal was the Agricultural Adjustment Act.
And it was designed to improve this terribly sick agricultural economy, which, of course it's sick, you know, you got the Fed contracting the money supply, prices tumbling, you got smooth Holley's effects, closing off markets.
All those reasons are causing agriculture to be in terrible shape.
The AAA, the Agricultural Adjustment Act, imposes a new tax on agriculture.
Just what a depressed economy needs.
And then uses the money to pay for the destruction of perfectly good herds of cattle, sheep and pigs, and perfectly healthy corn, wheat and other crops.
So we're destroying stuff, taxing agriculture to do it, expecting to force prices up at a time when the country's in deep depression.
It was absurd and only made the situation worse.
This is the image that I would really like to help people take away from this conversation because the idea is that There was this free market economy and it kind of went crazy on its own and then it just kind of got sick and fainted.
And it was just down there, lying there, groaning and the government was like kneeling over it and giving it mouth-to-mouth and CPR and just doing its very best to try and get this Victorian couch fainting specimen back up and it was trying to inject it with some drugs to save its life and so on.
I think that's entirely incorrect.
And the analogy that I would put is the government beat up someone and that person was down on the ground and they're shaking their head.
They're spitting out a tooth or two and they're like, OK, it's OK.
I can get up.
I can get up.
And then they try and get up and bam, the government pounds them again.
It's like, whoa, OK, I guess I can get some more teeth and pound.
So the economy was continually trying to restore itself, was continually trying to get better.
And the government was raining Muhammad Ali style blows on its solar plexus, on its jaw and just giving it cauliflower ear, bloody eyes, stitches.
And the idea that the government was trying to resuscitate someone who was prone.
No, the government kept beating down an economy that was struggling to restore itself to normalcy.
Exactly.
Even today, whenever you do get a recovery underway after a previous battering by the government, the politicians are quick to take all the credit.
It's as if they think of the economy as, you know, helpless people just sitting around waiting for Barack Obama or some other politician to tell them what to do.
But in fact, at the bottom of a depression, what you've got are individual people Struggling to improve their well-being.
They're slashing their costs, in some cases making very painful decisions to lay people off work, to keep their costs in line and keep the company afloat.
They're the ones that you might say are the heroes of a recovery, but they're rarely ever recognized as if the politicians who cause the problem are somehow magically stimulating recovery when they're not.
You have to give credit to the entrepreneurs and the workers who are making all the adjustments necessary in a sick economy to put themselves back on their feet.
So then in the mid-1930s, and again, you see this bloodied, bruised remnant of the free market economy struggling to get back to its feet.
1937, 1938, the wheels really went off the rails.
The National Labor Relations Act in 1935, I love how it's called the Wagner Act, like it's just a stirring piece of opera.
This is when...
America really abandoned equality under the law and you get these secret star chambers and these kind of creepy government relations where there's a Stalinist-style board that determines guilt and innocence and is heavily corrupted.
What happened to American labor and its relationships to employers as a result of the Wagner Act?
Well, this was truly a fundamental and dramatic shift away from the rule of law.
We took labor management disputes out of the ordinary courts and put them in front of a presidentially appointed body, the National Labor Relations Board.
Which has always been politicized.
You know, you get different rulings depending upon who comprises the board, which is determined by which president is in office and what his or her philosophies may be.
So, that's dramatic.
Can you imagine doing that in any other If we said, oh, renters and landlords, they're special somehow, so any dispute that arises between them, instead of it being settled by a court of law, a jury of your peers, and so forth, let's just put a commission of seven people appointed by the president in charge of those disputes.
I think we'd all say, what?
That's not the way the rules are supposed to be written in a republic of free people.
But, uh, the Wagner Act also gave massive new powers to organize labor.
This is the origin of exclusive representation, which is, you know, once you get 50% plus one of the workers at a site to vote for the union, then the other 49% plus have to be compelled to be a part of it.
Collective bargaining, uh, uh, This is the origin of today's basic labor law, which is stacked in the deck, stacked in favor of militant labor unions, except we've made some adjustments, fortunately, in recent years.
But still, it's not the ordinary courts of law that are settling these important disputes.
I want people to understand because whenever you start talking about labor, one's sympathies based upon a seemingly endless series of pro-labor movies and books.
I think it's fair to say that in a free market, any particular group of employers or employees can get together to organize for their collective benefit.
The owner of a factory is vulnerable to a strike by his employees and will work as best as he can or she can to accommodate that.
However, when the power balance shifts to the point where let's say that there was a law passed that said, OK, if you work for me, if you work in my factory, if you quit or you go on strike, I'm never going to allow you to work anywhere else again.
Well, that would be far too much power on the hands of the employer.
On the other hand, if the employees get the right not just to quit and go on strike but to bar anyone else from coming into the factory to work, that creates too much of a shift of power from management to labor This kind of imbalance, which is natural in a democracy where the government intervenes because labor outnumbers the managers, but that gives too much power on the part of the workers.
The workers may benefit from that with higher wages in the short run, but what happens is in the long run, fewer people want to get into the manufacturing sphere, want to get into dealing with unions, which means there's lower demand for union members over the long time, and it digs a crater under their future aspirations, as is so often the case with government intervention.
It's a pay me now at the massive expense of later.
That's right.
And the effect of the Wagner Act, which was passed in 35, but took effect in 37, was to stimulate a wave of strikes and militancy across America among organized labor organizations.
You had a doubling of the number of man hours lost.
In the space of one year to strikes from about 14 million to 30 million in the space of one year, 37, 38.
And that dramatically raised the cost of doing business.
So businesses either went broke or saw their profits tumble.
Dividend payouts dramatically reduced.
Their hiring practices greatly impinged.
And that was a big reason for the 1937 collapse.
But you also had Roosevelt jacking up taxes And that was very depressing in the late 30s too.
Well, this is something that is quite astonishing.
It reminds me of that Beatles song, Tax Man, because they were facing a 95% tax rate.
They sang, you know, that's one for me, 19 for you.
And yeah, as we pointed out, so Hoover, the supposed non-interventionist guy, raised the top marginal income tax rate from 24% to 63%.
And of course, everyone thinks, oh, good.
Well, that means we're going to get more than twice the money.
No, that's not what happens.
Rich people tend to be rather smart and will simply change their behaviors in order to avoid the taxes.
Under Roosevelt, the top rate was raised at first to 79% and then to 90%.
And in 1941, Roosevelt even proposed 99.5% marginal tax rates.
And when the advisor said, well, I don't know if that's a good idea.
Do you think we should?
Roosevelt said, why not?
That's a great argument.
Yeah, you know, one of his biographers, James Warburg, who was a financial advisor very close to Roosevelt, both before his presidency and for the first year or so of his first term, James Warburg wrote a great little book called Hell-Bent for Election.
This is after he had a break with Roosevelt.
He's looking back, trying to analyze, you know, Why was this guy so different as president than I saw him before that time?
And he says he really was always an economic nincompoop.
Warburg said, I tried to sit down with him and talk dollars and cents, and he just wouldn't have it.
He couldn't grasp any of it, and so he was an opportunist who would try almost anything and fall for almost any goofy proposal somebody came up with.
And then, this to me, and you know, for me it's like, well, 99.5%, why not 100?
Well, because 100 would be communism.
But it actually happened.
Roosevelt issued an executive order to tax all income over $25,000 at a tax rate of 100%.
100%.
100% tax.
I mean, that is exact top-tier economic enslavement.
Totally.
And can you imagine?
And that was 100% on all incomes over $25,000.
So if you made $25,000 and then you're thinking, hmm, I wonder if I should expand my business.
Should I hire another person?
Should I take this or that risk in the hope that I might make a few bucks more?
Why would you?
When the president is saying, look, I'm not going to take any of the risk, but if you do and you earn the money, I'm going to take it all.
I mean, that's ridiculous.
No wonder the economy continued in depression.
So, the road to the Second World War.
A Second World War, I think, can be easily characterized as, at least in Western Europe, a potentially civilizing ending event.
And there are a lot of people, of course, who draw the parallels, and this is another, as we mentioned at the beginning, a slander on the free market, that the Great Depression was solved by the war.
And...
I can certainly see why some people might have that viewpoint, but let's talk about how the Great Depression led to or contributed to the escalations of tensions that resulted in World War II. Well, certainly if you go back to Samud Hawley and the trade war that it started in the early 30s, you've got a major factor in the coming of war, particularly with Japan.
When goods don't cross frontiers, as I believe Frederick Bastiat once said, armies will.
When you break down trade, countries that have ambitions then decide, well, the only way we can get what we want is to go take it.
So the trade breakdown, I think, pulled people apart and made enemies where they once were friends.
And that contributed mightily to the coming of the war.
But you also had the disastrous effects of the Versailles Peace Treaty that ended World War I, causing the rise of Adolf Hitler in Germany.
So there are multiple factors there.
But we kind of stumbled along until the war started.
We entered it at the end of 1941.
And people look at the unemployment rate in subsequent years and say, ah, the war must have helped us.
Look, unemployment plummeted.
Well, we took 11 million men out of the workforce because we drafted them, sent them overseas.
They didn't count in the unemployment numbers anymore.
That's a big reason for the fall in unemployment.
But you have to think of war not as a stimulus, but as a diversion.
You can argue that you've got to have it sometimes.
If you've got a mortal enemy, you have to beat.
But it is nonetheless a diversion of resources.
We were making guns and planes and tanks to win World War II and not making cars and refrigerators and consumer goods.
So the general standard of living during the war years, if anything, stagnated, probably fell.
We didn't get genuine recovery until after the war, which is a good argument for saying that this depression lasted not 12 years, but 16 years, from 1929 until 1945.
Well, and this is one of the great, awful terrors of government policy, which is that when the government has made a disastrous series of Not just not efficient but immoral mistakes in terms of pointing guns at people, ordering them to do stuff, telling them what they can and can't sell, at what price they can and can't sell, how they are to enter into their contracts, how those contracts are to be resolved.
When the government is waving its guns around like some crazy homicidal sheriff and the economy begins to collapse as a result – When this malinvestment, and this is directly parallel, I think, to what's happening in the West at the moment, when the malinvestment has accumulated for a long time, then there is going to be a lower standard of living during the correction.
I mean, that's inevitable.
It's going to have to happen.
You know, if you quit the drug, you are going to get withdrawal, and it's going to be not only are you not going to get the plus of the drug, you're going to get the minus of the withdrawal or the hangover, as you mentioned earlier.
And so the question is for politicians, how can you get people to accept reduced standards of living in order for the market to correct itself?
Well, you can, of course, if you're very good at economics and a good rhetorician and, I don't know, have the speaking skills of some sort of combination of Winston Churchill and Cicero.
OK, then maybe you can convince people of the moral cause.
But once you've implanted the fact that the government intervention has been evil, it's going to be very tough to resurrect that again in the future.
But the way that historically governments have got people to accept a lower standard of living is through war.
And that is the desperate and great tragedy which of course everybody with a heart, mind and conscience is working as hard as possible to avert in the future.
Because when you face that common enemy, when you stimulate people's fight or flight with a mortal enemy, they will accept rationing cards.
They will accept vast reductions in their standard of living because they have a let's join together collective cause that they're willing to sacrifice for.
And it seems to me, at least certainly what I've studied in post-Second World War Germany, it wasn't that the war ended the Great Depression, it's that the war ended government intervention to a large degree in the West, in that the government took over massive sections of industry, and then...
relinquished more than they had taken at the end of the Second World War.
So it was a way for the government to disentangle itself from the economy and to allow people to accept the reduced standards of living that inevitably occur after decades of malinvestment.
Sorry for the long speech but that was just my sort of general perception.
Absolutely right.
After the war, there were a lot of people, Keynesian economists in particular, who always believed that when the government spends more, it stimulates, but when it spends less, that's harmful to the economy.
There were a lot of those people who thought that, ah, now that war spending is going to fall, we'll probably slump back into depression.
But in fact, the economy soared, in part because government spending fell.
Because now, instead of diverting resources to wartime needs, those resources were freed up to be used by the private sector for far more productive purposes.
And then in 1945, you also got a big stimulus from Washington, in this case, when President Truman reluctantly signed into law a huge reduction in the business income tax rate.
It fell from 90% to 38% in one fell swoop.
Well, anybody, if you think about that, would recognize that if one day the government threatens to take as much as 90% of what you might earn, but the next day says, nope, the most we'll take now is only 38%, you're going to think differently about taking risks and hiring more people and expanding your plan.
So that was very helpful in 45, but it was one of the few good things that the government did that was helpful to recover.
One of the things that has struck me, and again, this is very, very contemporary, in that back then, of course, prior to the internet and other forms of media, people had a very limited number of sources for their news.
And to me, it's...
It's how it's characterized that is the real problem, for the most part, right?
So when these disasters began to accumulate, in general, the press that I've read from the late 1920s and throughout the 1930s is a constant socialist clamor for more government intervention.
I mean, even Roy Rogers, when FDR, as you point out in the essay, when FDR was going to get into power, he's like, just do something, man!
Burn down something!
At least you'll start a fire!
Just do something!
And this idea that it is the government that had to do something...
There seems to have been a fairly significant infestation of leftists, if not outright communists, in the American media.
That was later exposed to some degree by Senator Joseph McCarthy.
But this infestation of leftists slash communists who were actively suppressing the crimes that were occurring in the Soviet Union and who were promoting all kinds of socialist, Fabian socialist, progressive socialist government agendas, that to me is one of the greatest disasters.
And that is really the fundamental reason why it continued for so long is that everybody was scared and they turned to the experts they could get in the media.
And the experts in the media said, we need more of the same poison in order to get better.
Though, of course, they characterized it as a healing elixir.
The role of the media, which again is so powerful now, even with the rise of alternative media, you know, like this conversation in particular, the role of the media in promoting the myth of a solution by omnipotent government seems quite strong.
Do you think that's a fair way to characterize it?
Oh, very definitely.
It was very present in the 1930s and 40s.
And with the victory of the Allies, allied with the Soviet Union in World War II, you had the growth of this notion that, ah, central planning seems to work.
We just won a major war with it.
And then you had a lot of people who were smitten by the myth that the Soviet Union was some kind of worker's paradise.
You had Walter Durante, a prominent reporter for the New York Times, denying that there was a famine in the Ukraine.
And so if you don't get an accurate perception of what's really going on in these top-down, centrally planned communist dictatorships, you may get the impression that, wow, they seem to be marching forward and doing great things.
We didn't fully appreciate the brutality of what socialist countries, communist countries were doing until much later, in part because the media was smitten by the promise of communist nirvana.
Well, Walter Durant, of course, got a Pulitzer for his covering up of the slaughterhouses in Soviet Russia.
That Pulitzer has never been rescinded.
I just really wanted to point that out.
If you had a journalist who was covering up mass murder in Nazi Germany and still retained his Pulitzer, I guess, posthumously now, today, people would be shocked and appalled.
But that's, of course, because the media has grudgingly inched slightly away from communism and a little bit more to what they now call democratic socialism, which is the prelude to communism.
But they have still got this fetish for socialism that is dragging, it seems, almost inexorably, the world back to the very horrors that millions of lives were spent in the...
Yeah, we may painfully have to relearn some of the lessons we should never have forgotten.
stuff.
Thank you.
Thank you.
Oh, I'm sorry.
I may have talked over you there.
We had a little...
So let's...
No, no, no.
That's fine.
That's fine.
So let's talk about some of the lessons which we can extract from these horrors.
When I sort of look back throughout history, it is...
You've got to grit your teeth and harden your stomach because it is a grim parade of repetitive disasters a lot of times.
It's the same mistakes, different costumes.
And...
It is the goal, of course, as the old saying goes, that those who do not learn from history are doomed to repeat it.
What are the central lessons that we need to extract to learn from these world-spanning disasters of depressions and lives lost and people jumping off bridges and suicides and war that consumes Western civilization?
The only honor we can do to the dead, or the greatest honor we can do to the dead, is to learn...
The mistakes that led to their ends.
And that is the great homage that I want to give to the past is to use the crosses as ways to illuminate the future.
So what would you like people to get out of the Great Depression, the mistakes that were made, and how we can avoid such a repetition?
Well, the big picture lesson, I think, of the Great Depression and what followed really goes back to Lord Acton's famous dictum, which is that power corrupts and absolute power corrupts absolutely.
The sub-lessons of this experience are don't trust government to manage a nation's money supply.
Because when you put politicians in charge of anything, and this is ever more true, the more important it is, you're going to have political manipulation, you're going to have mistakes for which there's no accountability, and the Great Depression wouldn't have happened in the first place had it not been for manipulation by government of money and credit.
Then other sub-lessons, you might say, of the experience are don't impose barriers to commerce, to international trade in particular, with the idea that somehow you're going to stimulate employment at home.
It never works that way.
You close the borders to imports, you close the border to exports.
And then using government and its power to dictate prices and wages, Invariably leads to unintended and disastrous consequences.
And that's the premier lesson, I think, of the latter part of the 1930s.
And another important lesson is don't be jacking up taxes on an already depressed economy.
You're simply preventing recovery.
And don't concentrate power because when that fails, governments then look around and once they've run out of scapegoats to blame at home, they will look abroad and maybe drag you into a war.
Right.
Sorry, there was one other thing I wanted to mention.
So, I mentioned earlier that tariffs are coming up largely as a result of Donald Trump.
Now, I, as a good free market student, am opposed to tariffs.
However, and I hate it when there's a footnote, but so, you know, talk me out of my error as best you can if error it is.
And I sort of look at the option just to give what hopefully is not a false dichotomy, the option between tariffs and an income tax.
Of course, as you know, the federal government, according to the Founding Fathers' documents, was initially funded by tariffs.
Now, the tariffs were relatively low, relatively reasonable, relatively conscribed or focused on a narrow range of goods.
If I have the choice between income tax and tariffs, I would generally tend towards tariffs in that they are at least avoidable.
You can substitute domestic production.
You can avoid the goods that are being tariffed, if that's even a word.
And so tariffs, because they are avoidable, they have a ceiling on...
I mean, here in Canada, they keep trying to jack up taxes on cigarettes, and when they go too high, you just get smugglers.
And, you know, it's not legal, but it just generally happens.
Whereas, of course, when you raise an income tax at source, people aren't going to quit their jobs in protest.
So, when I sort of look at the 19th century in America, when it became the world's dominant manufacturing power, while having the world's highest paid labor force almost, there were tariffs.
Then they said, oh, you know, well, tariffs are bad because there are aggressive tax on the limited incomes of the poor who pay more proportionally in tariffs than the rich.
So let's switch over to income tax.
And that was sort of one of the great promises.
And so with Donald Trump now, he says, well, I'm going to cut income tax, but I'm going to raise tariffs.
Now, how high he's going to raise the tariffs, I don't know, because, you know, this is just an opening bargaining position that he's talking about.
But if I have made a grievous error in my sort of analysis of this, I'd certainly like to be corrected.
But I see tariffs as, I mean, I'd rather have neither income tax nor the tariff.
That's a whole different conversation.
But if I had to choose the two, given that they are far more avoidable than income taxes and given that there is necessarily going to be a downward pressure on their escalation, I can see the case for them, again, based on sort of founding father arguments.
Am I way off base here, or is there anything to what I'm talking about?
I'm not an expert in what the most efficient way to rip people off is, but I'm inclined to think that if I absolutely have to make a choice between those two, you're probably right, tariffs would be better than an income tax.
With an income tax, of course, you've got to have, as we've discovered, sadly, this massive internal bureaucracy to police every To find out what you're making and where you're getting it from.
But we tax because we spend.
The problem really is a spending problem.
If you spend too much, there's no form of taxation that can ultimately be regarded as fair, reasonable, or efficient.
It's going to be devastating to the economy.
So I'd like to see spending drastically reduced so that ultimately it doesn't matter all that much What form of taxation might be adopted, because we don't have to raise all that much.
But if you're going to spend four trillion dollars a year, about a third of what the economy produces, then yeah, whatever you do is going to be oppressive.
But if I had to pick, I think you're probably right, I'd go for tariffs over the income tax.
But they both need to be dramatically reduced, if not eliminated.
Well, and this is, you know, as we go into the election cycle here, it is important for people to remember that the income tax, as it was proposed, was only going to affect a few percentage points of the population.
It was only going to be a few percentage points of their income.
And then, as we talked, I mean, within a decade or two, rates were cooking up 60, 70, 80, 90, 99.5% proposed, and...
You win at 100% of somebody's income over 25K. This is really, really important.
The promises that are made of, oh, you know, we're just going to tweak things a little bit.
Well, you know, this is tweaking like painting with a sledgehammer.
All you end up is with a big, big splattered mess where your beautiful portrait of an economy used to be.
All right.
Well, thanks very much for the time.
You know, I really, really...
I'm going to exhort people watching this and listening to this to like, subscribe, and share, and of course visit fee.org for more of Dr.
Reid and his team's great, great work, and I really appreciate the amount of economic education that is available on the website.
It's deep, it's complex, and...
I like to skim it in a debutant kind of way because, you know, that's just how I roll.
But there's as much depth and power in the exploration of your website's contents as could fill a lifetime.
So I really, really want to exhort people to like, subscribe, and share this stuff.
It sounds like ancient history, but we really want to make sure it doesn't turn out to be future prophecy.
So thank you again, Dr.
Reed, so much for your time.
Always a great pleasure.
Hey, thank you, Stephan.
And I invite people to like my page on Facebook, too, as well as feed.
We will link to that below.
We will link to that.
Thank you.
And thank you for all that you do for Liberty and have been doing for years.
