America’s Great Depression: My Takeaways

Having gone through Rothbard’s very interesting book on the Great Depression, 

it is time to summarize for me: What did I take away from it?

1. It’s a valid approach to summarize chapter by chapter for your own pleasure. This did greatly help me to really finish the book, which I did not achieve on 3 previous trials. Summarizing also helped me to gain understanding of the material presented.
2. While I have a tendency towards Austrian Theory of the business cycle, I am no expert on the field. Summarizing the book does not mean I can agree or disagree on the main topics or even some details of the book, as I simply have neither the background-knowledge nor the time to do any scientific examination on any of the points taken within.
3.  Having studied business administration, which included lessons on economics, I stand ashamed on how little I know about the Great Depression.
4. After finishing the book , I am several hours of podcasts further on studying the topcic – and several articles, too. There are much more interesting aspects on the topic than Rothbard (could have) covered in his book. I will for sure continue to improve my knowledge on the field.
5. The whole inflationary / deflationary cycle plays in my view a major role in the business cycle. After finishing he book, I am even more inclined to see the Austrian Theory as valid: government intervention and monetary policy create the first part of the business cycle – the inflationary boom. And I also see the catastrophic outcome of Hoovers interventionist actions on the state of the US and world economy.
6. Still there are other, additional causes of the Great Depression – other economic theories also seem to have valid points. While non-intervention seems to be the right policy if you start with a balanced economy, that has not be intervened upon previously – things get more complicated when you do not have ideal starting conditions.
7. So once you are in a crisis – like in 1929 or today – it obviously is not easy to define the right measures. For sure, Hoover did take the wrong actions on some fields: higher tariffs, not allowing wage rates to adopt, interventionist actions siding part of the economy only (banks, rail-roads, …), banning immigration …
   On other fields I am not so sure: public works as long as they are temporary and create infrastructure really needed (which maybe 50 % of government infrastructure projects not do); pubic relief programs (still allowing wage rates to adjust, but maybe avoiding the impact of adjustments going too far thus hitting the consumption level too hard); change of monetary policy from inflation to ….to whatever (how do you get a drug addict to being sober? Controlled, slow reduction of the intake? Or sudden reduction to zero? He should take no drugs at the end – but what way to reach this goal would harm him less?)
8. This is all an almost-academic discussion. I opted to invest hours of my time to gain a little bit more of understanding. What good does it do to the decisions our political leaders will take today? Did they ever gain the level of insight I have – as limited as it might be? How much does the average man on the street with one vote to take to the ballot on the next occasion - care?

To summarize: I do not see any short term trade-takeaways here. I see, I have to learn much more to gain better understanding. I fear (and know) that the whole subject has little influence on the average man-on-the-street or even the average politician. As Mark Twain said: ‘History does not repeat itself, but it does rhyme.‘ I am afraid, we are doomed to make not the same, but similar errors leading to comparable harm.

AGD - Chaper XII: The Close of the Hoover Term

Hoover sought reelection with a starting position for the presidential race, that could not be worse (It’s the economy, stupid!). He clearly stated that under his leadership, government had done much more than ever before to fight a depression. Especially, he was proud of having wages kept up while prices and dividends had moved lower and profits had vanished. 

Despite (or because) Roosevelt and the Democratic Party suggesting more of the same measures, Hoover had to leave the office. After the elections, but before Roosevelt took office, uncertainty did raise. Rumors on the US leaving the gold standard led to a loss in confidence in the Dollar and a ‘hoarding’ of gold by foreigners and domestic citizens. Deflationary pressure from the private sector increased, while the FED tried to fight this tendency. The number of bank failures increased dramatically, and bank holidays in different states became regular. 

With the crisis intensifying and the trust in the fractional banking system vanishing, Roosevelt declared a national bank holiday from March 6th to 13th (with the only legal ground to be found being the Trading with the Enemy Act of World War I). While gold was not confiscated momentarily, the Federal Reserve threatened to publish a list of the leading ‘gold hoarders’. 

Conclusions: The Lessons of Mr. Hoover’s Record – Rothbard’s goal of the book was to demonstrate how government intervention created the boom of the 1920s, and how the Great Depression was aggravated by the interference of government. Rothbard ends with: ‘And in any other depression, past or future, the story will be the same.’

AGD - Chaper XI: The Hoover New Deal of 1932

Facing a USD 1 bn budget deficit, Hoover imposed the most drastic tax increases in US history (doubling income tax to 4 – 8 %, increasing income tax surcharge to 63 % (sic!), establishing a 33 % gift tax, …). Despite the rate increases, Federal revenue declined in 1932 as the tax base eroded. Federal expenditures also declined by 1 USD bn. So in the midst of a deep depression, Hoover raised the taxes and cut spending. Overall, the public share of GDP increased significantly. 

Agitation for even more public works continued, with suggestions for new programs topping each other. In the meantime, even Hoover got his doubts and direct programs where expanded only a little compared to 1931. Inducing the Reconstruction Finance Corporation (RFC) he still propagated ‘self-liquidating’ public works. From Feb. to June 1932, the RFC handed out USD 1 bn worth of loans (it was founded on USD 0.5 bn of government capital and USD 1.5 bn of issued debentures). Most of this was given to banks and railroad companies. Already in June the first president of the RFC had to leave office, the Chicago bank he headed being granted credit from the RFC. 

Mid 1932 the nation’s first Federal relief legislation was enacted. Inflation continued with the Glass-Steagall Act broadening the asset base for rediscounts with the FED and permitting the FED to use government bonds as collateral for its notes. While the monetary base was broadened, the private sector did contract. Banks decelerated lending and started to hold ‘excess’ reserves. With artificial low interest rates but high business risk, incentives for lending out where not sufficient. Government started to blame ‘hoarders’ and ‘non-cooperating’ banks. Another field for blaming was the stock market, where especially short-sellers and the NSYE’s failure to hinder short-sellers were identified as reason for stock prices not representing ‘true values’.

The Home Loan Bank System was enacted late 1932, and the bankruptcy laws changed, so that a majority of creditors could accept extended time for repayment. (Common standard today, but it clearly means that some creditors are forced to let go a share of their assets by a voting party they had not chance to influence the composition.) And finally, the fight against immigration continued with anti-immigration laws enacted.

AGD - Chaper X: 1931 – “The Tragic Year”

The financial and economic crisis in Europe was particularly dramatic in this year, starting with the failure of Boden-Kredit Anstalt of Austria. When French Government, the Bank of France and lesser French banks insisted on redemption, the crisis hit. Finally Austria had to declare bankruptcy having guaranteed USD 150 m to support the bank and Austria went off the gold standard. Germany, England and many other European countries had to go off the gold standard later that year, England even without fighting avoid disaster. All this affected the US by falling exports and a loss of trust on the US ability to keep the gold standard. Throughout the crisis, the Federal Reserve tried to support European governments by expanding credit or renewing loans when borrowers failed to pay at maturity. 

The American Monetary Picture: The US economy meanwhile contracted further, with unemployment shooting up and production plummeting. The Fed did lower its rediscount rate further to 1.5 %. While it tried to continue inflating, the private sector started to pull out money from the system and hoarding it. Banks where no longer trusted. Even a gold drain started, reducing US monetary gold stock by more than USD 1 bn. 

The Fiscal Burden of Government did raise further, with government spending increasing and huge deficits in 1931 (after a surplus in 1929). Federal expenditures raised by 1.3 USD bn in 1931, 1 bn thereof transfer payments. More Public Works programs were suggested, with expenditures in the range of billions of USD. Wage rates were kept high, meaning that while prices dropped, real wage rates did go up. But this did go hand-in-hand with still higher unemployment. Only in the fall of 1931, the trend stared to shift (with US-Steel and even Henry Ford starting to cut wage rates).

The Spread of Collectivist ideas in the Business World: Rothbard here sketches ideas presented in 1931 – up to so-called Five Year Plans. It is hard to find the best lines here to summarize how far left the thinking did go. Maybe this is a good one: National Guards in Texas to enforce a stand-still of oil-wheels when prices dropped ‘too far’ after discovery of new fields.

AGD Chaper IX: 1930

More Inflation: Despite first signs of recovery, state intervention continued in 1930. Early July, Congress authorized a USD 915 m public works program, including the Hoover Dam (according to internet sources, a loaf of bread did cost 9 US-Cents in 1930 …). Re-discount rates of the New York Fed fell from 4.5 to 2 %. 

The Smoot-Hawley Tarif: Hoover continued his high tariffs policy in 1930. With the Smoot-Hawley-Act, tariffs did go up for many agricultural products, but also for industrial products. Tariff rates were raised to a record level in US history – this being the signal for protectionism all over the world. 

Hoover in the Second Half of 1930: Hoover tightened immigration laws, leading to a sharp drop in net immigration. By 1932, there was even a net emigration of 77,000. Wage rates were still frozen and not allowed to drop, despite high unemployment. Late in the year, Hoover started to launch further attacks on the NYSE, specifically short-sellers. He forced the head of the NYSE, Richard Whitney, to ‘voluntarily’ withhold loans of stock for that purpose. While prices for farm goods did fall somewhat, the regulatory acts led to a price level some 50 or 100 % above world market prices – thus hampering exports.

The Public Works Agitation: Working its way through Congress and Senate in 1930, the Employment Stabilization Act was finally singed early 1931. Several USD billion public work programs were under discussion at that time.