The Great Depression

 

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Sorry for the raw-sounding audio, Audacity detected the wrong microphone and I didn’t catch it until it was too late.

  1. I recommend that you listen to last podcast episode about the Weimar Republic. While I’m not super happy with the finished product, it will serve as a good introduction to the thought processes we will be running through in this episode and I probably won’t be able to resist taking some things from that episode for granted in this one.
  2. There are a number of “mainstream” explanations as to what caused the Great Depression and what prolonged it. Of course, those are two wildly distinct questions; I will be focusing on the causes of the G.D. and, if I have time, I can touch on reasons it lasted so long.
    1. History: The Great Depression, generally conceived, was basically the entire 1930’s. It started with a stock market crash near the end of 1929 and ended with a general rise in employment and quality of life around 1941.
    2. Many historians will claim that the great depression was only from 1929 to 1933, but the economy was in the toilet for the entire 30’s with a brief uptick due to speculation on increased gold supplies in the mid 30’s.
      1. Many Keynesians credit the wartime spending of WWII for the depression era ending. That’s just as incorrect as blaming deflation for the Weimar Republic or Great Depression.  Hopefully we’ll have time to address that at the end.
    3. Like I pointed out last episode, people act with incomplete data, due to delays in market signals as well as simply not being omniscient.
      1. Mises’ Master builder: Builder starts running low on supplies: he can adjust the plan better the earlier he knows.
    4. Business cycle is due to credit expansion sending false market signals until there is a shortage and correction.
      1. One such signal is the availability of capital assets and consumable goods.
        1. The primary mechanism by which loans are issued (specifically, the incentive to offer a loan and the signal that loans are available for investors) is interest rates. Interest rates are, effectively, the price of money over time.
        2. If I want money now and you have money that you don’t need right now, you can give me said money so long as I promise to give that money back within a certain time frame, plus interest.
          1. This exchange is beneficial, as I can take the money that is otherwise stagnant and invest it in a way that it otherwise would not have been, thus increasing the odds of it generating further wealth. You, in turn, are able to put the money to work for yourself by increasing its quantity over time, based on your level of risk aversion and distance of your time horizons.
          2. The interest rate is usually determined by two factors.
            1. The primary factor is the supply of money available for loans as compared to the demand for loans: basic supply and demand curves. The more people that want money, the higher the interest rates until the market clearing price is discovered: those that can’t afford higher interest rates drop out until there is the same quantity of loan requested as there is money to loan out.  These funds are usually supplied by savings accounts, certificates of deposit, and other forms of “long term” storage of money.
            2. Secondarily, the interest rate can be skewed higher or lower based on individual risk factors. If you have a good or bad reputation for paying off debts, your specific interest rate could be lower or higher, respectively.  Collateral for the loan is also a factor; mortgages can have a lower interest rate, because the loan issuer can always just take the house back.  Car loans are a little less secure, as a car can drive into the sunset, never to be seen again, and thus have a higher interest rate.  Then credit cards and student loans merely have abstractions such as credit scores as collateral and therefore ought to have some of the highest interest rates, second only to payday loan outfits.
  • Because the interest rate is tied to various factors such as supply and demand and risk, it serves as a market signal to potential savers/loan issuers/loan-takers with regards to the current economic climate.
  1. In the parable of the master builder, the apparent supply of bricks correlates to the signals sent by interest rates.
    1. In the framework I outlined just now, an investor can estimate, fairly accurately, the trajectory of various economic factors and thus be better able to steer his investments to success (which is represented by wealth creation).
  2. If, however, there is a central authority on the creation and management of money, propped up and secured by a violent imposition of legal tender status, interest rates begin to lose their utility.
    1. If money can be issued in the form of a loan without being backed by some actual creation of wealth, the interest rate will naturally fall.
      1. Last episode, I mentioned how coinage used to be made from materials that had reliably stable supply curves, such as gold or silver. The only way more coins could be made was by actually acquiring the requisite materials (barring counterfeiting).
        1. As a side note: this reality is essentially what led to the discovery of inflation; with the sudden influx of gold and silver into Europe from the Americas, the otherwise reliable supply curve was upset and purchasing power of most currencies dropped. Kings were very confused at how getting more money made things more expensive, much like leftists, today.
      2. This reliable supply curve helps establish interest rates because one can calculate how much money will be created during the lifespan of the loan and the degree of wealth that will be created over that same time span, which will determine the real price of the money (the purchasing power) once the principal and interest are paid.
      3. If there is no real competitor for the monopoly money of the central bank and there is no significant physical limit to the printing of more money, the effective money supply is theoretically infinite: you can always just print more. To incent increased loan quantities issued by the central bank, the bank can simply set the interest rate lower by fiat or decree, rather than necessarily inflating the money supply directly.
        1. Either way, the end result remains the same: the quantity of money available increases significantly relative to the availability of wealth: the brickyard says it has more bricks than it really does. Eventually, there will be no more bricks, regardless of how many were promised.  The bubble bursts.  The decade-long party comes to a crashing halt.  There’s a run on the banks to try to pull as many bricks out of the brickyard before everyone else that was promised bricks gets them all.
      4. Many mainstream economists and public-school-educated plebs insist that the cause of the great depression was the contraction of credit supply at the end of the roaring 20’s.
        1. A second parable: A certain public figure gets addicted to Methamphetamines.  The addiction, of course, begins as a result of the increased focus and energy the drug provides.  As intake of the drug increases, the body needs to begin expending stored resources to keep up with the metabolic strain of the drug, which, counter-intuitively, results in a chemical dependency on the drug to keep running: the hallmark of psychological and chemical addiction.
        2. Eventually, friends, family, and fans of the public figure get worried and stage an intervention: cutting off the supply of the drug. This makes the addicted public figure furious.  They feel great.  They have energy, they are focused, they are invincible.  But any outside observer would note that they are emaciated, covered in sores, irritable, and exclusively focused on Meth, rather than anything productive.
        3. When the friends and fans cut off the meth supply and the addicted celebrity becomes increasingly uncomfortable and angry at his situation, what do you think he’ll blame his situation on? Will it be himself and the choices he made early on (probably because he was unhappy to begin with) which caused the addiction, or the people who cut off his supply of drugs (which made him feel awesome)?
      5. Public figures in the 30s, and pretty much ever since, have responded to being cut off from their credit addiction the same way any other addict is; they blame the absence of the drug, rather than the drug itself, for their shitty situation.
        1. You will even hear friends of ours in the Chicago School parroting these sentiments, despite the prima facie fact that the initial and protracted artificial credit expansion is what led to the inevitable implosion of the market.
      6. Why does this matter, though? Wasn’t the depression, like, a century ago?  Didn’t the federal reserve learn its lesson?  Otherwise, why wouldn’t there be any depressions since then?
        1. Well, if you’re aware that all the mainstream economists and politicians did was change the definition of “depression” and effectively replaced it with the term “recession”, then one would have to account for 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1990, 2000, 2008…
        2. Admittedly, only one or two of them would be able to compete with the depression of the 30s, but we’re finally coming out of a decade-long depression as a result of credit expansion and collapse in real estate and ancillary markets, so it’s fairly relevant today.
          1. The most recent issue of “The Austrian”, a publication of the Mises Institute, gets deep into the parallels and differences between our current situation and that of the progressive era. I highly recommend getting a subscription to “The Austrian” as it always has relevant material derived from history and praxeology.
        3. “We” clearly haven’t learned our lesson from the Great Depression, as the federal reserve and the federal government (same thing) implemented essentially the same strategy they used back in the 30s, with the same outcome.
      7. The strategies implemented in the 30’s were centered around manipulating market signals further, in order to incent consumers and investors to behave as if the economy were running smoothly, as it had prior to the creation of the federal reserve (pay no attention to the man behind the curtain).
        1. For example, FDR tried to artificially elevate prices by literally destroying supplies of necessary goods like food, causing shortages, which would elevate prices. No now all the unemployed and under-employed could take their meager assets and buy far less food than before.  Great idea.
        2. He also artificially raised the cost of labor by using the violence of the state to enforce minimum wages and increasingly untenable workplace regulations, making it too expensive for beleaguered entrepreneurs to hire the mass of unemployed who would be happy to work for even a nickel an hour, thereby worsening unemployment rather than solving it.
        3. Stealing all the gold by executive order was another brilliant idea. It was basically an expansion of the existing legal tender structure, forcing people to exclusively use federal reserve notes as currency as opposed to more secure and reliable assets.  Thereby further reducing the available wealth of the American people, especially when artificially elevated prices are in effect.  It’s almost as if FDR wanted everyone to starve.  Fortunately, today, no one can confiscate Bitcoin absent the rubber hose method.
        4. And, of course, hardcore propaganda echoed across the country so loudly that wrong-think didn’t need to be punished by legal means; social stigma and even private-sector violence were promptly unleashed on anyone who would dare to question the new socialist order. To this day, that propaganda can be heard echoing through the halls of academia and when random “financial experts” catch a whiff of the sweet perfume of industry on social media, you can be sure that someone will be compared to Hitler for questioning FDR.
        5. Unfortunately for everyone involved in the American 30’s, or any other socialist era, no amount of coercion and destruction of wealth will solve the economic calculation problem presented by violent centralization of market action.
      8. Which brings me to my final point, Herbert Hoover was far from the laissez-faire Ayn Rand Anarcho-Capitalist FDR’s propagandists have made him out to be. A better way of characterizing Hoover would be to say that he’s the Vladimir Lenin to FDR’s Joseph Stalin.  That is to say, they tried the same thing, but FDR definitely got the high score.  The entirety of the New deal was simply taking the knobs on all of Hoover’s attempts to salvage the economy and turning them up to 11.
      9. Also, deflation had even less to do with the great Depression than it did the Weimar Republic. Sometimes people will point to certain market shifts during the credit contraction and go “See? Deflation.” Even if it were deflation, it was minor, isolated, and a symptom rather than a cause of the Depression; calling it deflation is disingenuous, though, as those isolated incidents are merely the result of increased assets being available on the market as people tried to unload luxuries in favor of necessities, flooding the luxury markets with goods and causing prices to fall.
      10. I also highly recommend getting a subscription to Tom Woods’ Liberty classroom (using my link), Reading Rothbard’s “American Great Depression”, and listening to the Mises Weekends podcast feed. I don’t think I’ve said anything original in these 20-or-so minutes, I’ve just amalgamated a bunch of material from these and other sources over the last decade or so.  I may have made some mistakes or left some important details out, so it’s always best to go to the primary sources if you’re interested.

Carpe Veritas

Weimar Germany and Deflation

 

  1. During WWI, all major players not beholden to a commodity standard (such as gold or silver) inflated their money supplies.
    1. What I mean by “inflating the money supply” may be a little bit different than what one would learn in a basic economics class. What I mean is that the total quantity of money put in circulation increased relative to the available wealth within that nation’s economy.
      1. This is usually only possible if the money in question is not physically made of a commodity that is limited in availability (such as fiat currency not tied to gold or silver reserves) or if there is an unexpected windfall of the limited commodity (such as the sudden importation of gold and silver from the Americas into Europe).
    2. Typically, this inflation is felt by consumers in short order, as the supply of money increases relative to its demand (as the available goods remain constant). This is represented by decreased purchasing power a.k.a. a general rise in prices.
      1. In the case of the Weimar republic, this rise in consumer prices was delayed by various forces.
        1. In the mainstream narrative, this was due to people hoarding their money in mattresses and hidey-holes due to the economic uncertainty of war. By not allowing the money to enter circulation, the citizens of the Republic delayed the Cantillon effect.  After the war ended, people had more confidence in the economy and began spending the money they had hoarded, causing the Cantillon effect that should have been felt gradually over the course of the war to be felt all at once.
          1. The Cantillon effect is a result whereby an individual coming into possession of counterfeit or inflated (same thing) currency can more easily raise the market clearing price of a particular good, thereby securing that good more easily than others in the market. This windfall on the part of the seller of said good then contributes to his ability to raise the market clearing price of a good he desires.
            For example: if the Reichsbank just printed me a hundred thousand marks, I could either more easily outbid my competition for purchasing a vehicle I desire or I could buy the next nicest model without having contributed any actual wealth to the market.  This is free money for me and it is also effectively free money for the car dealer.  He, in turn, can purchase a house he wants for a higher price than his competition or buy a nicer house than he could have originally afforded, and this process continues throughout the economy.
          2. This process can be drowned out by noise in the market if it is just one counterfeiter, but when an entire nation takes advantage of that free money, there’s no way the market can absorb that general rise in prices.
        2. After the initial market correction to the elevated prices, uncertainty concerning the value of the Mark over time diminished and the economy was allowed to recover and adjust to the new normal. This new normal featured relatively stable purchasing power for the Mark, despite the Reichsbank continuing to print money.
          1. A situation not unlike the current situation in the United States emerged, though. Through government payments to foreign nations (in Weimar, it was due to the absurd demands set in the treaty of Versailles, in our situation it has a lot more to do with foreign aid and proxy wars) as well as a severe imbalance between importation and exportation, the Cantillon effect was, again, delayed by moving Marks out of the country at a rate comparable to the rate they were being printed.  This made the Mark weak as compared to other currencies in circulation, but one would not notice if their financial concerns were purely domestic.
            1. This loss of purchasing power (like that of the USD is) was masked by the coincidental inflation of foreign currencies as well.
          2. As more countries dropped the Mark as a preferred currency, more and more marks moved back into the Weimar Republic, causing that delayed Cantillon effect to be felt all at once, again.
            1. The mainstream account tends to overlook the reality that the mechanism by which this flood of returning currency occurred was by using the Marks, which were created out of thin air without commensurate increases in tangible wealth within the Republic, to purchase the goods which remained in the Republic. This drastically decreased the available capital assets of the Republic while also drastically increasing the available money supply relative to those assets.
            2. One thing that the mainstream account does acknowledge is that the rising prices over time provided consumers with incentives to spend quickly, which, in economic terms, means that the demand for said money was drastically reduced, further compounding the effects of inflation.
              1. To take it one step further: at this point, according to Mises’ regression theorem, the Mark was totally unsuitable for use as a currency, which should be no surprise given the nature of fiat currency in general, but the Western World has a hard time learning from its history.
            3. Ultimately, once the Mark was inflated to the point that it was more expensive to hold and transport the Marks one owned than the Marks were worth, the economy was dead on arrival. This is where a populist movement centered around a fiscally literate charismatic demagogue will come to power, declare the Mark to be of no consequence, default on international debt, install a more secure monetary policy, and unleash military force on anyone who would try to stop them from doing so.
            4. But I digress… As far as deflation is concerned, it had very little impact on the general trajectory of interbellum Germany.  While the mainstream accuses deflation for the sudden burst of post-war inflation, the cause of post-war inflation was the presses running amok during WWI.  The deflationary forces of scared consumers, at most, simply delayed the effect of wartime inflation.  A more likely cause of the delayed effect than scared consumers, though, is the mechanisms by which the inflated money supply was confined to military budgets and paychecks that wouldn’t be spent until the war wound down and the soldiers went home and the manner in which the inflated marks were exported to foreign producers of arms and consumer goods, much like the temporary stability experienced in the Weimar Republic.
              1. This delayed economic impact is actually more common than a lot of people may think. Because economic signals are the results of human actions and human actions are the result of people responding to market signals, there is always a degree of delay between when an event takes place and when one reacts to the event… rinse and repeat.
              2. Also, if one is able to keep certain market signals secret, as in the housing collapse of 2008, the delay of a couple days or even months can cause people to behave in ways that they would not, if they had all the information they needed to make a sound investment. In the case of the housing bubble, the banks were able to feign loan viability and even solvency for the entire bank long enough to get political processes started for pending bailouts.  In the case of apparently stable prices during WWI and prior to the hyperinflation as the Mark collapsed, the sheer quantity of money being printed and exported was being largely ignored in the media at the time.  For comparison, look at the reported national debt of the United States today as compared to the “unfunded liabilities” of the same.
            5. A lot of these events and theories parallel the next podcast episode that has been commissioned concerning the Great Depression in America.
              1. If you like this episode, please send Bitcoin (BTC) to the address in the show notes: [insert address]
              2. If you’d like an episode to be produced on commission or would like consulting or tutoring services, feel free to contact me on social media or at madphilosopher@gmx.com
            6. Carpe Veritas