Four Theories about the Great Depression

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More than most people, libertarians have beliefs about the Great Depression. Having spent several years studying the matter, I have some conclusions about four such beliefs: first, that what caused the depression was the Federal Reserve allowing a drop in the money supply; second, that what made it terrible was the passage of the Smoot-Hawley Tariff, which collapsed America’s foreign trade; third, that the New Deal really began under Herbert Hoover; and fourth, that what lengthened the Depression was fear of what the New Deal government would do.

In addressing these questions, I am relying heavily on my hometown newspapers — the Seattle Times, Seattle Post-Intelligencer and Seattle Star — because newspapers are “the raw material of history.” They are not the only sources available, and they have their mistakes, omissions, and biases. But they are broader than politicians’ collected personal papers and broader, in a different sense, than the economists’ statistical tables. As sources for general research about a period, I like newspapers best. I know newspapers. I spent 37 years working for newspapers and magazines, about half that time on the business and financial pages.

The first of the four beliefs, associated with Milton Friedman and the Chicago School, is that the Federal Reserve was responsible for turning a recession into a depression — the deepest and longest in American history — by shrinking the money supply. It’s true that there was less money in people’s pockets, and that was a bad effect. But when economists talk about the Fed shrinking the money supply, they mean shrinking the money available to the banks — and during most of the Depression banks were loaded to the gunwales with money. With few willing and qualified borrowers, they simply parked depositors’ money in US Treasury bonds and local bonds and warrants (thereby helping to finance their local governments and the New Deal). Bankers talked about this on the business pages, and showed it in the year-end bank balance sheets presented in newspaper display ads. For those reasons I find it difficult to indict the Fed for starving the banking system of money.

Newspapers have their mistakes, omissions, and biases. But they are broader than politicians’ collected personal papers and broader, in a different sense, than the economists’ statistical tables.

A variant of this argument is that the Fed mistakenly turned a recession into a depression by raising interest rates.

Overall the Fed lowered interest rates in the depression. In the two years following the Crash of 1929, the Fed cut its rate on short-term loans to banks, going down from 6% to 1.5%. But to stop the outflow of the Treasury’s gold during the currency crisis of September 1931, the Fed temporarily raised the rate to 3.5%. This 2% bump is the “mistake” that the economists holler about. At the time the Fed did this, critics said it would retard recovery, and when recovery didn’t come, the critics pronounced themselves right. But at the time, the financial editor of the Seattle Times noted that the Fed’s supposedly stimulative 1.5% interest rate hadn’t done anything to stimulate recovery. (The Keynesians would later say the Fed was “pushing on a string.”) Investors weren’t holding back because of two percentage points. They were holding back because they were afraid to borrow at all.

I’m not a historian of the Fed, and am not claiming the Fed made no mistakes. But pinning the depression on the stinginess of the Fed to the banks doesn’t seem right. If it were true, the interest rates would have been higher. Also, there would have been furious complaints in the newspapers, even in Seattle. And I didn’t see it.

During most of the Depression banks were loaded to the gunwales with cash. With few willing and qualified borrowers, they simply parked depositors’ money.

The second belief is that the Smoot-Hawley Tariff caused the Depression by posting the highest taxes on imports in the 20th century. The figure usually cited is that the average tariff rate under Smoot-Hawley was 59% — a horrible rate. This, however, was the rate on dutiable goods, and excludes the many goods on the free list. The average rate on all goods was 19.8% — still bad, but something less than torture.

Free traders always reach for the Smoot-Hawley argument. I have heard it not only from libertarians but from supporters of the WTO, TPP, NAFTA, and the promoters of trade in my hometown. And politically, I am on free traders’ side. I agree that the Smoot-Hawley Tariff, signed in June 1930 by Herbert Hoover, was bad medicine. And in this case, there was protest in the newspapers, with voices saying it was a terrible, self-defeating law, and predicting that other countries would retaliate. The newspapers ran stories when the other countries did retaliate.

Smoot-Hawley was also a contributing cause of the collapse in the international bond market in 1931, because it made it more difficult for America’s debtors — Britain, France, Germany, Brazil, Bolivia, Peru, and others — to earn the dollars to repay their debts. But this one bad law cannot bear all the blame for the subsequent implosion of America’s imports and exports.

I can think of four reasons why. First, the Depression was already on, so that by June 1930 imports and exports were already headed downward. Second, if you want to blame tariffs, put two-thirds of the blame on the tariffs in place before Smoot-Hawley was signed, which were an average of 13.5% on all goods. Third, in 1930 exports made up only about 5% of US output (versus 12.5% today), so that the shrinkage in trade, though dramatic in itself, was only two or three percentage points of the overall economy.

This one bad law cannot bear all the blame for the subsequent implosion of America’s imports and exports.

Finally, in September 1931, the British Commonwealth went off the gold standard. The British, Australian, and Canadian currencies were immediately devalued by 15 to 20%. Austria, Germany, Japan, and Sweden also went off gold, effectively devaluing their own currencies. The products of these fiat-money countries immediately dropped in price relative to the products of the United States. One example: Swedish wood pulp pushed US pulp out of world markets, so that almost all the pulp mills in Washington state shut down.

When Franklin Roosevelt came into office in March 1933, he ended the convertibility of the dollar into gold at the old rate of $20.67 an ounce. The reason for doing this was not a shortage of gold; the Treasury had stacks of it. The reason was to match the foreign devaluations and make American goods competitive again. And it did. Trade, the stock market, and the real economy jumped immediately when the dollar went off gold. From April to July 1933 there was a kind of boom, even though Smoot-Hawley was still in effect. (The boom ended because of the National Industrial Recovery Act and some other things, but that is another story.)

If you focus on principles, which libertarians like to do, you can lose sight of magnitudes and proportions that matter more.

The third belief, that Herbert Hoover was an interventionist and implemented a kind of proto-New Deal, is a thesis of Murray Rothbard in America’s Great Depression. Rothbard recounts that after the Crash of 1929, Hoover called leaders of industry to the White House and made them promise not to cut wages. The theory at the time was that this would maintain “purchasing power” and thereby prevent a depression. That was a precedent for the New Deal. It was noted at the time by business columnist Merryle Rukeyser (father of Louis Rukeyser, host of PBS-TV’s “Wall Street Week” from 1970 to 2002). Merryle Rukeyser wrote in December 1929 of the Hoover meetings, “The old-fashioned idea of leaving such matters to the individualism of business leaders — known as the doctrine of laissez faire among economists — has been formally laid to rest and buried.”

So Rothbard had a point: in principle, Hoover was an interventionist. But if you focus on principles, which libertarians like to do, you can lose sight of magnitudes and proportions that matter more. The larger fact is that the Hoover and Roosevelt regimes were hugely different in what the federal government undertook to do, what constitutional precedents they set, how many people they employed, how much money they spent, and how much they affected the world we still live in.

The fourth belief, that the New Deal prolonged the depression by frightening investors, is the thesis of libertarian historian Robert Higgs in his essay, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War.” (Reprinted in Depression, War and Cold War, Independent Institute, 2006.) Higgs argues that the Depression lasted for more than ten years because of “a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns” during the later New Deal of 1935–1940.

I can’t comment on much past the beginning of 1935, because that’s where I am in my reading. But I can verify that “regime uncertainty” was real, and that I saw evidence of it beginning in mid-1933, when the initial Roosevelt boom faltered.

At first Forbes advised his business readers to swallow it and said he was loyally swallowing it himself.

In the newspapers I read, the best barometer of this is B.C. Forbes’ business-page column. Forbes — the founder of the eponymous magazine — was very much a pro-capitalist guy. (The magazine calls itself a “capitalist tool.”) Forbes once wrote that his job as a newspaper columnist was to explain the economy to ordinary readers by interviewing industrialists and bankers. Much of the time Forbes was a transmission belt of their doings, thoughts, and feelings along with his own.

It was predictable that Forbes would not like the New Deal. At first he advised his business readers to swallow it and said he was loyally swallowing it himself. But he quickly began choking on the two principal “recovery” programs, the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA). The NRA’s boss, Gen. Hugh Johnson, was a loud, imperious man who had been President Wilson’s boss of military conscription during World War I. During the early New Deal, Johnson helped to popularize two expressions: to chisel, meaning to lower one’s price below the government minimum, and to crack down, meaning to punish. In July 1933, Johnson went right to work, cracking down on the chiselers in American industry.

General Johnson was the closest that peacetime American business ever had to a military dictator. In August 1933, Forbes called him “a Vesuvius, in epochal, thundering eruption . . . Not even Teddy Roosevelt in his most explosive days matched General Johnson’s Titanic energy and action — or his wielding of the big stick.”

And: “Mussolini has nothing on him in readiness to undertake multitudinous tasks and to swing the Big Stick.” (This was when Italy’s dictator, Benito Mussolini, was popular with many Americans.)

General Johnson was the closest that peacetime American business ever had to a military dictator.

In the fall of 1934, when Gen. Johnson was replaced by labor attorney Donald Richberg, Forbes wrote: “Reason is expected to replace ranting swashbucklerism.” Forbes loved to publicize good omens, but during these years he was repeatedly disappointed.

In March 1934, Forbes quoted an anonymous industrialist (probably Charles Schwab of Bethlehem Steel, whom he named elsewhere in the column): “No, don’t quote me as saying anything that would sound like criticism of the administration or any branch of it. It’s too dangerous. I don’t want to be cracked down on at this time when Washington has unlimited power to do what it likes.”

Later in the same month Forbes wrote, “The fear today is not of the law but of bureaucrats. Few employers regard themselves as in a position to stand up against dictation as Henry Ford has done.” (Ford had refused to accept the NRA’s “voluntary” price and production controls, and was not allowed to display the Blue Eagle and its motto “We Do Our Part.”)

One of Forbes’ October 1934 columns was an open letter to Franklin Roosevelt, titled in the Seattle Post-Intelligencer “Mr. President, All Employers Aren’t Crooks.”

Forbes loved to publicize good omens, but during these years he was repeatedly disappointed.

Forbes is not the only wellspring of business angst. Here is Merryle Rukeyser, a man more sympathetic to the New Deal than Forbes, in September 1934: “Business men are in a timid mood because of lack of assurance as to their tax liability and as to the attitude of the powers that be toward business profits.”

A doubter might argue that a handful of newspaper columns aren’t enough to prove Higgs’ thesis. I suppose so; but how would you prove it? It is about a state of mind — “confidence” — and how do you demonstrate that except by considering what people say and do? In fact, investors talked and acted as if they lacked confidence; statistics show a shortage of long-term investment. And in fact, there were statements by Roosevelt and by Hugh Johnson, Harold Ickes, Henry Wallace, Rexford Tugwell, and other New Dealers that might very well cause investors to lack confidence. And it was not only the New Dealers, but also their opponents on the left: Dr. Francis Townsend, who wanted every American over 60 to have $200 a month of government money (about $3000 in today’s terms); Upton Sinclair, the Democratic nominee for governor who wanted to set up a socialist economy in California; Father Coughlin, a radio priest who ranted against the rich; and Sen. Huey Long, the “Kingfish” of Louisiana who called his program “Share the Wealth,” and who was stopped only by an assassin’s bullet. This was a different time — and newspapers give you a flavor of it.

Of the four beliefs about the Depression I mentioned at the beginning, I think Robert Higgs’ “regime uncertainty” is most clearly verified. (Read his essay!) The crucial fact about the Depression of the 1930s is not that America got out of it; it always gets out. It’s that the getting out took more than ten years, which was longer any other depression in US history, and that Canada, Britain, Germany, and most other countries got out sooner, and that it took a worldwide war and the eclipse of the New Dealers for America to get all the way out.

Investors talked and acted as if they lacked confidence; statistics show a shortage of long-term investment.

But I don’t think the depression of the 1930s — the onset of it, the depth of it, the duration of it — was caused by any single thing. The commercial world is more complicated than that. I think the Austrian theory of overinvestment, or “mal-investment,” explains much of the setup of the crash, because in the late 1920s and into 1930 there were a lot of bad investments in real estate, commercial buildings, holding companies, and junky stocks. The Crash in 1929 shrank people’s assets and, more important, their confidence — for years. The Dow Jones Industrials went down almost 90%. The reparations owed by Germany to Britain and France, the sovereign debts owed to the United States by Germany, Britain, and France, as well as by Brazil and other South American republics, all had something to do with it, because in 1931 this grand edifice of debt went down in a heap. The bond market was so thoroughly wrecked that counties, cities, school districts, and corporations were locked out of long-term borrowing for several years. Smoot-Hawley and the whole movement toward economic nationalism had a bad effect. The gold standard deepened the Depression because it imposed a discipline on government finances — heavy spending cuts — at a time when they were painful, and when some countries freed themselves of that discipline it shifted the pain to the other ones. Finally, the anti-capitalist political currents and the ad hoc, experimental, extralegal character of the New Deal frightened investors, whose long-term commitments were needed for economic recovery.

That’s the best I can do. I’m still reading old newspapers.




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The Great Panic

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I have long been a fan of the Panic of 1893, which is the usual name for the great depression of the 1890s. When I say “great” I mean it is comparable by all available measures (business losses, unemployment, political turmoil) to the Great Depression of the 1930s — with two exceptions. First, the depression of the 1930s lasted for more than ten years, ending only with the start of the Second World War in Europe; the depression of the 1890s lasted less than half as long. Second, in the 1930s the federal government intervened massively to try to end the depression, whereas the government of the 1890s did as little as it could.

These two exceptions are closely related. In 1893 and after, President Grover Cleveland had the political and above all the intellectual courage to allow prices to sink until recovery could begin. He devoted his best efforts to stabilizing the dollar, so that sound money and real prices could beget confidence, and confidence could beget reinvestment. This happened. But in 1929 and after, Presidents Herbert Hoover and Franklin Roosevelt were guided by the economic ignorance and sheer quackery of their times (and ours); they intervened to keep prices up and bail out bad investments — using money, of course, extorted from the people who had made good investments. Roosevelt’s subsidies extended to the destructive political ideas of his time; he encouraged political action to fulfill the borderline-crazy terms of his first inaugural address, in which he announced:

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

The result was not only chronic political turmoil but a failure of reinvestment caused by a chronic absence of confidence in the nation’s economic and political prospects. Money, as R.W. Bradford used to say, wants to be invested, but it didn’t during the 1930s, when for a series of years there was actually “negative investment” in the economy.

In 1929 and after, Presidents Herbert Hoover and Franklin Roosevelt were guided by the economic ignorance and sheer quackery of their times (and ours).

So you see one reason why I am a fan of the depression of the 1890s — it provides clear and persuasive economic, political, and, if you will, spiritual lessons. But another reason is that the economic and political controversies of the 1890s are a lot of fun. Communism is dull stuff, no matter where it appears, and in the 1930s it manifested itself in remarkably dull, stupid, pompous, and oppressive forms. Compared with that, the nostrums of the 1890s are bright, delusive rays of sunshine. You just have to smile at Jacob Coxey’s plan to save the country by a complicated scheme for the federal government to print tons of paper money and use it to give free loans to local governments so they could create jobs in public building programs — a plan he implemented in the first of the great marches on Washington, the march of Coxey’s Army. The march culminated in Coxey’s arrest at the Capitol, for walking on the grass.

And who wouldn’t have fun trying to follow the logical permutations of the Free Silver idea, the notion that the American economy would be perfected if the federal government would simply produce unlimited quantities of silver dollars (and paper instruments representing them), priced at 16 silver dollars for one gold dollar, when the market price of a gold dollar was much higher than 16 silver dollars? This was a recipe for outrageous inflation, yet in 1896 it captured the Democratic Party and could have led to the election of the Democratic candidate, William Jennings Bryan, he of the stirring Cross of Gold speech:

You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

It’s a good speech, and some of the books and pamphlets written in favor of Free Silver are immensely clever complications of an argument that is clearly wrong but has a way of starting to look right if you don’t take a step backward and remind yourself of what it’s really about.

Compared with the remarkably dull, stupid, pompous, and oppressive forms of communism that manifested in the 1930s, the nostrums of the 1890s are bright, delusive rays of sunshine.

Now comes Bruce Ramsey, author of the book I am reviewing and — all cards on the table — senior editor of Liberty and a good friend of mine. Bruce is a tireless researcher of the events, theories, and movements of the 1890s. He knows their importance. He knows they reveal important truths about the ways in which economies function, and in which people function within them. And he knows they’re fun. The only problem is that the vast majority of Americans have simply forgotten about the depression of the 1890s. They forgot about it almost as soon as it was over. (I have an essay about this in Edward Younkins’ Capitalism and Commerce in Imaginative Literature [Lexington Books, 2015].) In the popular imagination, the decade of desperation was soon transformed into the Gay Nineties.

There aren’t a lot of good treatments of national politics and economics in the 1890s. Allan Nevins’ biography of Cleveland (1932) remains the best. And there are few decent treatments of the effects of the depression on individual men and women, in their local communities. That’s the vital part of the story that practically nobody knows. And that’s what Ramsey gives us in his brilliant new book about the state of Washington during the Panic.

In writing such a book, Ramsey faced one of the hardest challenges a writer of history can encounter. A straight-line narrative of national political and economic events would capture only part of the picture. So would an exclusive concern with one particular locality, such as Bruce’s home state, Washington. So would concentration on certain personalities, as in the cheap, tangential approach to history that one sees in the Ken Burns films. What Bruce needed to present was the full tapestry of local people and local events, rippling in the strong winds of national affairs; he needed to capture not only the big patterns but the individual figures in the tapestry, and he needed to show those ripples of history too. But he was equal to the challenge.

The vast majority of Americans have simply forgotten about the depression of the 1890s. They forgot about it almost as soon as it was over.

Bruce Ramsey is a quick but colorful narrator. He provides the pungent detail and the suggestive episode and then moves briskly onward to the next significant picture, whether it’s the portrait of an interesting man or woman, an array of statistics, a sketch of political developments nationwide, or a tale of something that’s too ridiculous to be true, but is. Did you know that in 1893 the Populist governor of Kansas tried to use the state militia to oust the Republicans (who happened to be in a majority) from the House of Representatives in Topeka? (If Dorothy wanted adventure, she could have stayed right in Kansas.) This absurd drama — one of many in Ramsey’s book — offers some perspective on the absurd politics of the present era. To say that Ramsey’s political narrative is entertaining is itself absurd; it’s an absurd understatement.

Here are thousands of stories, small in the number of words that Ramsey, a thrifty narrator, allots to each, but large in drama and implication. We see people who are found talking gibberish in darkened hotel rooms because their bank deposits of $256 had been lost to the panic. We see government officials who steal money, and lose it, and then escape to Argentina, or to a place off the coast of Washington called Tatoosh Island, thence to change identities and be discovered working as mowers in Idaho. We learn of a government official who is acquitted by a jury that doesn’t believe that bribery is against the law. We listen to a contractor for the Northern Pacific railway who says he “had put white men at work at $2 and gradually raised their wages to $2.50, although there was no time when [he] could not have employed Chinamen at 80 cents” (p. 51). We meet mayors who work in shingle mills because their cities can’t pay them a salary, and unionists who resort to riot and terror to keep their salaries from being cut.

The sheer number of stories that Ramsey tells is remarkable; still more remarkable is his unfailing ability to integrate them into larger contexts of meaning. Here’s one of the general patterns he sees. Businesses and banks that made it through this great depression often did so because they backed each other up. Seattle, where the spirit of cooperation was strong, suffered many fewer losses than such competing communities as Tacoma and Spokane. Seattle’s bankers went so far as to refuse deposits from people who had withdrawn them in panic from other banks. This was individual action, but it was mutually supportive. It was a kind of spontaneous order, and it often saved the day.

We see people who are found talking gibberish in darkened hotel rooms because their bank deposits of $256 had been lost to the panic.

Here’s another pattern. Led by President Cleveland, the federal government disclaimed responsibility for helping individuals — whether bankers or street sweepers — get out of their financial jam. Most public opinion seems to have backed him up. Newspapers in the Pacific Northwest counseled their readers to take responsibility for themselves — and above all not to hurt business by fleeing to some place with a marginally better economy. Their message was “stay here and keep pitching.” A Baptist potentate cautioned against giving money to the poor indiscriminately; this was “a selfish act, done to make the giver feel good” (83). Some local governments acted in what they regarded as the spirit of community and provided employment on public works projects, and some of them went broke doing it. But charity ordinarily began at home. As Ramsey observes, very perceptively, “In a world with little free public food, people tend to be generous with their private food” (93).

A darker side of community spirit was the almost universal feeling that if anyone was going to be without a job, it shouldn’t be someone white. Everywhere Asians were fired from jobs or prevented from getting any, and mobs formed to destroy Chinatowns throughout the region. It was only a temporary rescue when the wife of a local missionary faced down a mob that came for the Chinese people of La Grande, Oregon: “She appeared with a Winchester and announced that the first man to enter the house would be shot” (79). Most of the Chinese left town anyway; and although 14 rioters were arrested, none was convicted. Oregon’s Progressive governor haughtily rejected President Cleveland’s request that he protect the rights of the Chinese.

A darker side of community spirit was the almost universal feeling that if anyone was going to be without a job, it shouldn’t be someone white.

Much of Ramsey’s book is devoted to racism and progressivism during the depression. It’s quite a story, and again, it’s a gift of perspective: then as now, the predominant individualism of America was too much of a burden for many Americans to bear.

Obviously, the implications of Ramsey’s stories go far beyond the Pacific Northwest. The stories of that region cannot be explained without reference to the bigger stories of the nation’s money policy, its “reform” and “progressive” movements, and its national elections. Ramsey devotes lively chapters to all these things. If you don’t know the 1890s, this is the book for you, wherever you live. If you do know the 1890s, you know a lot about America, and this book will help you learn even more.

The Panic of 1893 is beautifully illustrated, with fine contemporary pictures, and backed by years of patient research. It is a distinguished and compelling book.


Editor's Note: Review of "The Panic of 1893: The Untold Story of Washington State’s First Depression," by Bruce Ramsey. Caxton, 2018, 324 pages.



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When Nobody Knew What a Dollar Would Be

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The Caxton Press has just published my book, The Panic of 1893, and I can now write for Liberty about it. Its topic is the final economic downturn of the 19th century. For more than three years, my head was in the 1890s — in books, articles, personal and official papers, lawsuits, and, especially, old newspapers, chiefly from my home state. The book’s subtitle is, The Untold Story of Washington State’s First Depression.

It is a popular history, not a libertarian book as such. But I have a few thoughts for a libertarian audience.

Many libertarians espouse the Austrian theory of the trade cycle, in which the central bank sets interest rates lower than the market rate, leading to a speculative boom, bad investments, and a collapse. In the 1890s the United States had no central bank. Interest rates before the Panic of 1893 were not low, at least not in Washington. The common rate on a business loan was 10%, in gold, during a period in which the general price level had been gently falling. Washington was a frontier state then, and it needed to pay high interest rates to attract capital from the East and from Europe. Credit standards, however, were low, sometimes appallingly low. Many of Washington’s banks had been founded by pioneers — optimistic patriarchs who lent freely to their neighbors, associates, relatives, and themselves. By a different road from the Austrians’ theory, the economy was led to the place it describes: a Hallowe’en house of bad investments.

The Sherman Silver Purchase Act was a sop to the inflationists, who wanted an increase in the money supply, and to the silver mining interests, who wanted the government to continue buying their silver.

The dollar was backed by gold, with the US Treasury intending to keep at least $100 million of gold on hand. But in 1890, at the peak of the boom period, Congress passed the Sherman Silver Purchase Act, obligating the Treasury to buy up the nation’s silver output with newly printed paper money. It was a sop to the inflationists, who wanted an increase in the money supply, and to the silver mining interests, who wanted the government to continue buying their silver, which it had been doing to create silver dollars. Politically the Sherman Silver Purchase Act was also part of a deal to pass the McKinley Tariff, which raised America’s already high tariff rates even higher.

The problem with the Sherman Silver Purchase Act was that the new paper money being paid to the silver miners could be redeemed in gold. The prospect of an increase every year in paper claims against the Treasury’s gold alarmed foreign investors, and they began to pull gold out. Two crises abroad also shifted the psychology of lenders and borrowers worldwide: Argentina defaulted on a gold loan from the Baring Brothers in 1890 and a real estate boom in Australia collapsed in 1893. These crises shifted the thoughts of financial men from putting money out to getting it back, from a preference for holding promises to a preference for cash.

By the time Grover Cleveland took office in March 1893, the Treasury’s gold cover had shrunk to $101 million. A run began on the Treasury’s gold — and that triggered the Panic of 1893.

In the Pacific Northwest, the four-year-old state of Washington (pop. 350,000 then) had 80 bank failures in the following four years.

Two crises abroad also shifted the psychology of lenders and borrowers worldwide: Argentina defaulted on a gold loan from the Baring Brothers in 1890 and a real estate boom in Australia collapsed in 1893.

Economists have listed the ensuing depression as the second-deepest in U.S. history. (One estimate: 18% unemployment.) But they don’t know. The government didn’t measure unemployment in the 1890s. And the rate of unemployment may not be the best comparison. America was less wealthy in the 1890s than in the 1930s, and living conditions were harsher. In absolute terms, the bottom of the depression of the 1890s was clearly lower than that of the 1930s.

The Left of the 1890s, the Populists and silverites, wanted cheap money. They blamed the depression on the gold standard. And gold is not an easy taskmaster; libertarians have to admit that.

The silverites wanted a silver standard. Most of them were “bimetallists,” claiming to favor a gold standard and a silver standard at the same time, with 16 ounces of silver equal to one ounce of gold. Their idea was that by using gold and silver the people would have more money to spend.

Free silver was a policy well beyond the Sherman Silver Purchase Act, which compelled the Treasury to buy silver at the market price. In the mid-1890s, silver fell as low as 68 cents an ounce. At that price, a silver dollar had 53 cents’ worth of silver in it and the silver-gold ratio was 30-to-1.

In absolute terms, the bottom of the depression of the 1890s was clearly lower than that of the 1930s.

The bimetallists wanted 16-to-1. That was the ratio for U.S. currency set in the late 1700s when the market was at 16-to-1. Later the market shifted and Congress changed the ratio to 15 1/2-to-1. Then came the Civil War, and the U.S. government suspended the gold standard, and printed up its first “greenbacks,” the United States Notes.

The United States Notes were effectively a new currency, and traded at a discount from metallic dollars. In September 1896, the Seattle Post-Intelligencer reminded readers of those times:

There never was a time from the beginning of the first issue of greenbacks down to the resumption of specie payments when the greenback dollar was ever accepted on the Pacific Coast for anything more than its market price in terms of gold.

The greenback was discounted, sometimes by 50 to 60%.

In 1873, Congress decided to define the dollar as a certain weight of gold, but not silver. The silver people in the 1890s called this “The Crime of ’73.”

Redemption of paper money under the gold standard began in 1879. To placate the silver interests, Congress had passed a law requiring the government to buy silver at the market price and coin it into dollars — the Morgan dollars prized by collectors today. At the beginning, the silver in a Morgan dollar was worth about a dollar, but by the 1890s, the value of silver had fallen.

In 1890, the silver-dollar law was replaced by the Sherman Silver Purchase Act, which created paper money. The government still coined silver dollars, and by 1896 had more than 400 million of them in circulation.

To placate the silver interests, Congress had passed a law requiring the government to buy silver at the market price and coin it into dollars.

The law did not require the Treasury to pay out gold for silver dollars, and it hadn’t. But the law declared all the different kinds of dollars (and there were five different kinds of paper money, at that point) to be equally good for everyday use except for taxes on imports. At the amounts an individual was ever likely to have, a silver dollar was as good as a gold dollar.

If you ask why a sane person would have designed a monetary system with gold dollars, silver dollars, Gold Certificates, Silver Certificates, National Currency, Treasury Notes, and United States Notes — Congress had designed it, one variety at a time.

Under the proposal for “free silver,” gold would be kept at the official price of $20.67 and silver set at one-sixteenth that price, or $1.29. Just as the world was free to bring an ounce of gold to the Treasury and take away $20.67 — “free gold” — the world would be free to bring an ounce of silver to the Treasury and take away $1.29. Free silver! The advocates called this the “unlimited coinage” of silver, but the aim was to create dollars, not coins. Most of the silver could pile up in the Treasury and be represented by crisp new pieces of paper.

The gold people argued that for the United States to set up a 16-to-1 currency standard in a 30-to-1 world was nuts. Essentially, the Treasury would be offering to pay out one ounce of gold for 16 ounces of silver. It would be a grand blowout sale on gold, and the world would come and get it until the gold was gone. The Treasury would be left with a Fort Knox full of silver, and the U.S. dollar would become a silver currency like the Mexican peso.

Surely the gold people were right about that. (And today’s ratio is 78 to 1.)

Milton Friedman argues in his book Money Mischief that two standards, with the cheapest metal defining the dollar in current use, would have worked all right. If the cheap metal got too expensive, the system would flip and the dollar would be defined by the other metal. In theory it makes sense, and apparently before the Civil War it had worked that way. But the financial people didn’t want a system like that.

The Treasury would be left with a Fort Knox full of silver, and the U.S. dollar would become a silver currency like the Mexican peso.

In 1896, America had a watershed election, with the silver people for Bryan, the Democrat, and the gold people for McKinley, the Republican. A third party, the People’s Party, endorsed Bryan. Its followers, the Populists, didn’t want a silver standard. They were fiat-money people. But Bryan was against the gold standard, and that was enough.

In that contest, the silver people were derided as inflationists. They were, to a point. They wanted to inflate the dollar until the value of the silver in dollars, halves, quarters, and dimes covered the full value of the coin. The silver people were not for fiat money.

Here is the Spokane Spokesman-Review of October 1, 1894, distinguishing its silver-Republicanism from Populism:

Fiat money is the cornerstone of the Populist faith . . . Silver money is hard money, and the fiatist is essentially opposed to hard money . . . He wants irredeemable paper money, and his heart goes out to the printing press rather than the mint.

The Populists and silverites argued in 1896 that the gold standard had caused the depression, and that as long as gold ruled, the nation would never recover. History proved them wrong. They lost, and the nation recovered. It began a recovery after the election settled the monetary question. Investors and lenders knew what kind of money they’d be paid with.

Milton Friedman makes a monetarist point in Money Mischief that starting in about 1890, gold miners had begun to use the cyanide process, which allowed gold to be profitably extracted from lower-grade ore. The result was an increase in gold production all through the decade. I came across a different story in my research. The increase in the supply of gold (about which Friedman was correct) was outstripped by the increase in the demand for gold. Prices in gold dollars declined sharply during the depression of the 1890s, including the prices of labor and materials used in gold mining. It became more profitable to dig for gold. Deflation helped spur a gold-mining boom — in the Yukon, famously, but also in British Columbia, in Colorado, and in South Africa.

The US began a recovery after the election settled the monetary question. Investors and lenders knew what kind of money they’d be paid with.

Under a gold standard, a deflation sets in motion the forces that can reverse it. This is a useful feature, but it can take a long time.

The recovery from the depression of the 1890s began not with a burst of new money but with a quickening of the existing money. What changed after the election was the psychology of the people. They knew what sort of money they held and could expect. The important point wasn’t that it was gold, but that it was certain. If Bryan had been elected and the dollar became a silver currency, people would have adjusted. With gold, they didn’t have to adjust, because it was what they already had.

The writers of the 1890s had a less mechanistic view of the economy than people have today. People then didn’t even use the term, “the economy.” They might say “business” or even “times,” as if they were talking of weather conditions. They talked less of mechanisms (except the silver thing) and more of the thoughts and feelings of the people. People today are cynical about politicians who try to manipulate their thoughts and feelings, and think that it’s the mechanisms that matter. And sometimes mechanisms matter, but the thoughts and feelings always matter.

Prices in gold dollars declined sharply during the depression of the 1890s, including the prices of labor and materials used in gold mining. It became more profitable to dig for gold.

Now some observations about the ideas of the 1890s.

The Populists, called by the conservative papers “Pops,” were much like the Occupy Wall Street rabblerousers of a decade ago: anti-corporate, anti-banker, anti-bondholder, anti-Wall Street, and anti-bourgeois, but more in a peasant, almost medieval way than a New Left, university student way. Many of the Pops were farmers, with full beards at a time when urban men were shaving theirs off or sporting a mustache only. More than anti-Wall Street, the Pops were anti-debt, always looking for reasons for borrowers not to pay what they owed. On Wikipedia, Populism is labeled left-wing, which it was mainly. It was also rural, Southern, Western, anti-immigrant, and often racist. In Washington state it was anti-Chinese.

In the 1890s traditional American libertarianism was in the mainstream. In the newspapers this is very striking, with the Republican papers championing self-reliance and the Democratic papers championing limited government. Democrats, for example, argued against the McKinley Tariff — which imposed an average rate of more than 50% — as an impingement on individual freedom. Here is Seattle’s gold-Democrat daily, the Telegraph, of September 10, 1893:

If it be abstractly right that the government shall say that a man shall buy his shoes in the United States, why is it not equally right for it to say that he shall buy them in Seattle? . . . Where shall we draw the line when we start out from the position that it is the legitimate and natural function of government to regulate the affairs of individuals . . .

Our idea is that the least government we can get along with and yet enjoy the advantages of organized society, the better.

Here is the silver-Republican Tacoma Ledger of Dec. 3, 1895:

Thoughtful men must perceive that our whole system of civilization is undergoing a revolution in its ideas; and we are in danger of gradually supplanting the old, distinctive idea of the Anglo-Saxon civilization — the ideas of the individualism of the man, his house as his castle, and the family as his little state, which he represents in the confederation of families in the state — by the Jacobinical ideas of . . . continental republicanism . . . The continental republican theory contemplates the individual man as an atom of the great machine called the nation. The Anglo-Saxon considers every man a complete machine, with a young steam engine inside to run it. The continental republican must have a government that will find him work and give him bread. The Anglo-Saxon wants a government only to keep loafers off while every man finds his own work and earns his own bread.

Contrast that with today’s editorial pages.

The Populists were anti-debt, always looking for reasons for borrowers not to pay what they owed.

Here’s a final one I particularly liked. Archduke Franz Ferdinand of Austria-Hungary — the same gent whose assassination 21 years later would touch off World War I — came through Spokane on the train in 1893. Americans, fascinated with him just as they would be a century later with Princess Diana, stood in the rain for hours to get a glimpse of the famous archduke — and they were sore because he never showed himself. On October 9, 1893, here is what the Seattle Telegraph had to say about that:

Why in the name of common sense should the people of this country go out of their way to honor a man simply because he happens to be in the line of succession to a throne . . . The correct thing is to let their highnesses and their lordships and all the rest of them come and go like other people. To the titled aristocracy of Europe there is no social distinction in America.

The America of the 1890s had some unlovely aspects. But in my view, the Telegraph’s attitude toward princes is exactly right. I recalled the Telegraph’s patriotic comment during all the blather over the wedding of Princess Diana’s son.

The 1890s had its blather, but after 125 years, sorting out facts from nonsense is easier. Silly statements, especially wrong predictions, don’t weather well. It makes me wonder what of today’s rhetoric will seem utterly preposterous in the 2100s.




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Rothbard’s Mistake

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Being interested in the history of the 1930s, I recently picked up a copy of America’s Great Depression by the influential libertarian Murray Rothbard (1926–1995). I choked on the introduction, where Rothbard lays out his theory about theory, which makes no sense to me.

“This book rests squarely on the Misesian interpretation of the business cycle,” he writes, referring to the theories of the older libertarian economist, Ludwig von Mises (1881–1973). “Note that I make no pretense of using the historical facts to ‘test’ the truth of the theory. On the contrary, I contend that economic theories cannot be ‘tested’ by historical or statistical fact. These historical facts are complex and cannot, like the controlled and isolable physical facts of the scientific laboratory, be used to test theory . . . The only test of a theory is the correctness of the premises and of the logical chain of reasoning.”

You have to keep in mind that the map sometimes lies, or maybe tells you a truth different from the one you need to know.

Philosophers make a distinction between statements that are valid and statements that are true. Validity is like math. It’s about logic. If P then Q. It’s theory. Truth is about what’s real, which is not the same thing. Logic is useful, but ultimately what we care about is what’s real.

I am reminded of the accounting classes I took many years ago. I gave up on accounting, but one thing has stuck in my mind: the professor described accounting as a map of the “territory” of a firm, and warned us not to confuse the map with the territory. The “map” might say the company is making money, but the truth might be that it runs out of cash before the owners are paid. (As a business journalist I wrote about some companies like that.) The map is useful; to steer the company you need the map. But you have to keep in mind that it sometimes lies, or maybe tells you a truth different from the one you need to know.

Back to Rothbard. He says that an economic theory is “a priori to all other historical facts.” It can be used to explain the historical record, but it cannot be tested. Here is his argument:

Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction. Now the point is that empirically there is no possible way of deciding between them. Where is the empirical “test” to resolve the debate? How can the government rationally decide upon its next step? Clearly, the only possible way of resolving the issue is in the realm of pure theory — by examining the conflicting premises and chains of reasoning.

This strikes me as piffle. There are several ways of deciding between the two claimants. You can compare what happened at times when the policy was imposed with what happened at times when it wasn’t. You might compare the depression of the 1930s with the depressions of 1920–21 or 1893–97 or 1873–79, etc., and see that the one in the 1930s featured the slowest recovery in US history. That is evidence (not proof) that whatever policies were tried didn’t work too well. You can dig deeper. How did investors, entrepreneurs, company managers, workers, and other people in the 1930s respond to the National Recovery Administration? To mass unionization? To the retained-earnings tax? To the abandonment of gold? What did supporters and opponents predict the players would do, and what did they do?

Robert Higgs asks these kinds of questions in Depression, War and Cold War. You can reject what he does — none of his arguments amount to a drop-dead test such as you find in a chemistry lab — but they are ingenious. They are instructive. They make a case.

The social life of humans is more complicated than a test tube.

Rothbard argues, in essence, that such questions are too messy to answer. A theory cannot be “tested” in the way a question in chemistry can be “tested” by heating compounds in a test tube. He’s right in thinking that you can’t test that way with economic policies, but it doesn’t mean that “empirically there is no possible way of deciding between them.” You can look at what lawyers call “the preponderance of the evidence.” “Test” is a high-hurdle word, the wrong word. You can evaluate. You won’t get to 100% certainty, but it’s unlikely that you’ll be stuck at 50-50, either. You can decide, but you have to look at the territory as well as your map — and you may find yourself correcting your map to make it fit the territory better.

Essentially Rothbard denies this.

“Clearly,” he asserts, “the only possible way of resolving the issue [of choosing the best economic policy] is in the realm of pure theory — by examining the conflicting premises and chains of reasoning.” In other words, the only way to decide what to do “in the territory” is to pick the best-looking map without looking at the territory.

No, no, no! Because the social life of humans is more complicated than a test tube, and because cause and effect are mixed up and piled on each other, you have to check your “map” against the territory all the time. Because your theory is only an approximation. A simplification. It is not life.

Praxeology is not primary. Supply and demand curves are not reality.

To quote the philosopher Robert Heinlein: “What are the facts? Again and again — what are the facts?”

If you say, “I don’t care about what facts you have. What experiences, or what statistics, or anything. I have my theory, I’m sure it’s right, and I don’t need to ‘test’ it,” you become irrelevant. You become ignorable. You become the frog at the bottom of the well.




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A Depression that Should Not Be Forgotten

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I liked The Forgotten Depression but did not love it.

Its subject is the depression of 1921 — a valuable subject because, as the author indicates, the depression went away without massive government intervention. Imagine that.

The author's brief history of the problems some big banks got into, in the late 1800s and early 1900s, is excellent. Grant shows how the principals of the banks had their own fortunes tied up in the banks’ capital, which usually kept them prudent. Still, they made mistakes. For instance, National City Bank (“forerunner of today’s Citigroup” p. 18) for instance, invested in Tsarist Russia — just before the Bolshevik revolution. The firm had over 60% of its capital tied up in sugar investments in Cuba, when prices were high, then crashed. Guarantee Trust, another huge bank of the time, was considered "too big to fail," almost a hundred years before our present policies on that subject.

The author aptly characterizes the 1920–21 depression as the last major downturn to be "un-medicated" (by government stimulus policies), and makes telling comparisons with the activist Herbert Hoover and Franklin Roosevelt administrations. Notably, the earlier depression was of short duration, while the “medicated” depression of the 1930s and the recent Great Recession went on and on. Grant’s discussions of the various economists, bankers, and policy makers involved in the problems of the 1920s are challenges to today’s economists, policy makers, and historians.

Meanwhile, Grant adds texture and depth to his story with descriptions of the difficulties suffered by the various sectors of the economy during the Forgotten Depression: farming, steel production, the auto industry, construction, and even haberdashers (including one very famous and resentfully unsuccessful one). But be prepared for a massive amount and variety of statistics about earnings and losses, interest rates, unemployment rates, sales rates and amounts, etc., etc. The author is an expert who knows how to deal with statistics. His writing is not nearly as dry as it could be.

Notably, this earlier depression was of short duration, while the “medicated” depression of the 1930s and the recent Great Recession went on and on.

He is also basically sound on substantive economic issues. He provides a good explanation of the classic gold standard up to the 1920-21 depression, and then of the fake "gold exchange" standard thereafter. He understands market forces and government intrusions and distortions. His description of the anti-business, anti-market biases, or ideology, of the key figures in the Woodrow Wilson administration is appropriately sickening.

Unfortunately, Grant’s presentation of basic business-cycle theory is lacking, save for a discussion of people who believe in the market vs. people who think government competent to force “solutions” on it. His explanations of how government coercion usually has unfavorable, unforeseen, and mostly unacknowledged repercussions is good, but probably not good enough to convince those who believe in such things.

Two other matters need to be mentioned.

First, the book has a section called Acknowledgements, which is more like a bibliographic essay. I liked this section very much. It is moderately short, fun, and informative to read, and it gives a great commentary on Grant’s main sources, some of which I highly recommend. The Great Depression sources, which he uses to excellent effect throughout the book, are very important

Second, the "hero" of Grant’s story is wonderful. But I won’t give it away. It’s in the book.


Editor's Note: Review of "The Forgotten Depression: 1921: The Crash that Cured Itself," by James Grant. Simon & Schuster, 2014, 272 pages.



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Poverty and Crime

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If you’re like me, you have been instructed, from your youth on up, that crime is caused by “conditions” — meaning economic conditions, meaning poverty. You’ve also been told that crime can be reduced, or even eliminated, by the abolition of poverty — which, of course, can come only by means of massive government action.

These were some of the ruling theses of President Lyndon Johnson’s War on Poverty, which continues in its thousand institutional forms unto this day, more than four decades after he declared it.

The theses were always vulnerable, on their face. What do you mean by “crime”? Do you mean a Hollywood producer’s rape of a female staffer, who is too afraid to report the crime? Do you mean a party in West LA, where rich people snort a barrel of coke, and are never caught? Or do you mean a guy who’s pushing weed in Fresno, or a girl who’s arrested for prostitution on the streets of Grand Rapids? Do you mean crime that’s successfully prosecuted, or do you include crime that never gets recorded?

And the thesis has long been vulnerable to the evidence. Johnson’s War on Poverty immediately preceded an enormous wave of crime. The hundreds of billions of dollars that American communities spend on welfare has not demonstrably reduced the incidence of crime, however you want to define that term. Most serious analysts believe those dollars have increased it, by fostering a culture in which principles of individual responsibility are no longer considered necessary.

But wait a minute: what is “poverty,” anyhow? What’s the standard? What’s the definition? Was “poverty” the welfareless condition of virtually all Americans in the 1920s? If so, was it the lack of government welfare that induced millions of people to violate the Prohibition laws, and some thousands of them to kill and maim their fellow-citizens in pursuit of profits from that violation? In a larger sense: isn’t poverty relative? The poor of the 1950s were much richer in absolute terms than the poor of the 1920s, yet fewer people were sent to prison in the 1950s. The poor of the 1980s and 1990s were richer still; yet a much larger proportion of the populace went up the river in the 1980s and 1990s than in the 1950s.

Now comes the following announcement from a website in my town (voiceofsandiego.org), about the FBI’s new report on crime in America during 2010, the year of a great depression, especially here in far southern California:

“In San Diego, the number of violent crimes — murder, rape, robbery and aggravated assault — dropped 5.3% from the previous year and the number of property crimes — burglary, theft and vehicle theft — dropped 4.6%. (Nationwide, violent crime dropped 5.5% and property crimes were down 2.8%.)”

The author adds a reference to the prevailing wisdom:

“Nationwide crime declines in recent years have continued to puzzle criminologists, who expected worsening economic conditions to lead to more crime.”

Experts might be puzzled, but no one with any sense, or historical perspective, would suffer their fate. Officially recorded crime went down during the 1930s — the time of the Great Depression. Why shouldn’t it go down in 2010?

We can’t quantify the sources of crime, but we should know this: crime, and the definition of crime, has less to do with “economic conditions” than with community mores, individual opportunities, and (in a reverse sense) government action. When the government declares alcohol or drugs to be illegal, “crime” automatically results. But when individuals and communities hunker down in order to get through a period of relative poverty, crime may well diminish. Only God knows the exact linkages, but it’s not puzzling that people whose families are making less money than before may respond by doing something legitimately and dependably profitable rather than something criminal.

Indeed, as William Blake commented two centuries ago, the idea that poverty causes crime is a slander on poor people. It ought to be resisted by every person of generous mind, and especially by all of us — and there are many, many of us — who have struggled to come out on the other side of bad “economic conditions.”




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