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

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