WEBVTT NOTE 'America’s Great Depression' 50th Anniversary 1 00:00:00.000 --> 00:00:05.000 I'd like to thank Joe Salerno for inviting me to participate in this panel. 2 00:00:05.000 --> 00:00:11.000 I think he was afraid with the emeritus status that I was getting bored with absolutely nothing to do. 3 00:00:11.000 --> 00:00:18.000 The invitation was really appreciated because with no time on my hand, 4 00:00:18.000 --> 00:00:24.000 it gave me an opportunity and a reason to go back and reread this great book, America's Great Depression, 5 00:00:24.000 --> 00:00:35.000 and then from some of the footnotes in the book to reread much of what was in Man Economy and State and Human Action related to the business cycle in here. 6 00:00:35.000 --> 00:00:49.000 Murray was semi-important in my career, more by influence on Fred Glahey. I only had the opportunity to meet him once, which was in about 1981 or 82, 7 00:00:49.000 --> 00:00:56.720 when Fred had him come in to make a presentation in Boulder on the Laffer 8 00:00:56.720 --> 00:01:03.560 curve and the tax policy at that time. At that time I had just begun research on 9 00:01:03.560 --> 00:01:09.640 what became my Hayek-Keynes debate book and was essentially stuck out in 10 00:01:09.640 --> 00:01:14.120 Colorado trying to learn Austrian economics on my own by primarily by 11 00:01:14.120 --> 00:01:36.120 by reading primarily original sources and Fred introduced me to Murray and told him I was working on Hayek versus Keynes and I got a look from Murray that I've later interpreted, well that's a nice start but you'll learn better once you get on to Mises and Rothbard in here. 12 00:01:36.120 --> 00:01:46.020 So, I draw a lot of my comments out of the first three chapters of America's Great Depression, 13 00:01:46.020 --> 00:01:53.480 but I also think one of the important things in the New Scholar's Edition is that you 14 00:01:53.480 --> 00:02:03.140 have four introductions that Rothbard wrote to the book as it went through various iterations, 15 00:02:03.140 --> 00:02:09.860 And that is an incredible source to kind of watch Rothbard's changing and thinking on 16 00:02:09.860 --> 00:02:16.620 the importance of the things in the book as the economic conditions change from 1963 to 17 00:02:16.620 --> 00:02:22.860 the onset of the stagflation in the 70s. 18 00:02:22.860 --> 00:02:30.500 And then unfortunately his last comment or introduction is written right in 1982 as we 19 00:02:30.500 --> 00:02:39.180 We were experiencing the recession that was triggered, the 8182 back-to-back recessions 20 00:02:39.180 --> 00:02:44.460 that I think too many of us now jump over and compare this to the Great Depression. 21 00:02:44.460 --> 00:02:49.300 I think there's much more relevant things in there. 22 00:02:49.300 --> 00:02:53.860 I'll focus in here on essentially four aspects. 23 00:02:53.860 --> 00:02:57.540 Joe asked for one, but I want to run out of time. 24 00:02:57.540 --> 00:03:05.260 So there are four things that kind of influenced my work, particularly from this book. 25 00:03:05.260 --> 00:03:14.540 One, there's an emphasis that Rothbard puts that we shouldn't be focusing on the interest 26 00:03:14.540 --> 00:03:17.860 rate when we talk about the Austrian business cycle. 27 00:03:17.860 --> 00:03:22.980 It's true that the cycle causes the interest rate to drop below the natural rate, but it's 28 00:03:22.980 --> 00:03:29.060 It's a misplaced metric, to look at that, that the problem of the business cycle is 29 00:03:29.060 --> 00:03:36.460 caused by created credit or extension of credit through fiduciary media. 30 00:03:36.460 --> 00:03:44.400 I became aware of this about 1994, Fred Glahey and I had written what's still probably one 31 00:03:44.400 --> 00:03:50.480 of my favorite papers was the use of abuse of equilibrium in business cycle theory and 32 00:03:50.480 --> 00:03:57.080 Murray had had a copy of that paper and had written, Fred, that he liked the paper and 33 00:03:57.080 --> 00:04:01.720 he made a comment that the only deviation I could find in your paper was the idea taken 34 00:04:01.720 --> 00:04:09.000 from Hayek that a cycle can begin because banks are not diligent enough in raising interest 35 00:04:09.000 --> 00:04:14.460 rates when the natural rate increases, he goes on to some comments in there. Essentially 36 00:04:14.460 --> 00:04:18.140 Hayek argues that there's an interest rate break, particularly if there's a productivity 37 00:04:18.140 --> 00:04:27.300 Shock, that banks extend credit and I still think that argument of the extension of credit 38 00:04:27.300 --> 00:04:33.160 responds to shocks, Roger Garrison will speak later, I think really does a nice job that 39 00:04:33.160 --> 00:04:42.220 cycles tend to occur not necessarily because the Fed initiates a credit expansion but because 40 00:04:42.220 --> 00:04:47.940 and he's struggling with terms, that they tend to piggy bank or turbocharge events that 41 00:04:47.940 --> 00:05:03.940 Rothbard in that referred us to a note in Mises' Human Action that I think is really, really relevant for today's low interest rate. 42 00:05:03.940 --> 00:05:13.940 The actual note reads, if banks do not extend or expand circulated credit by issuing additional fiduciary media, 43 00:05:13.940 --> 00:05:19.040 Media, either in the form of banknotes in the form of deposit currency, it cannot generate 44 00:05:19.040 --> 00:05:25.360 a boom even if it lowers the amount of interest rate charged on the unhampered market. 45 00:05:25.360 --> 00:05:28.200 It merely gives gifts to debtors. 46 00:05:28.200 --> 00:05:32.600 The inference to be drawn from monetary theory of cycle by those who want to prevent the 47 00:05:32.600 --> 00:05:38.280 recurrence of the boom and of the subsequent depression is not that banks should not lower 48 00:05:38.280 --> 00:05:43.920 the rate of interest, but they should abstain from credit expansion. 49 00:05:43.920 --> 00:05:51.080 When I first started doing research, I was influenced by Hayek and I thought the major 50 00:05:51.080 --> 00:05:56.960 focus ought to be on the capital structure, capital-based macroeconomics, but this letter 51 00:05:56.960 --> 00:05:58.860 kind of triggered Fred and I back. 52 00:05:58.860 --> 00:06:05.780 There's an awful lot of monetary related issues that still need further expansion on what's 53 00:06:05.780 --> 00:06:12.060 the appropriate metric for determining whether credit has been expanded, and I think it was 54 00:06:12.060 --> 00:06:15.820 easier when we run a gold standard than where we're now in this 55 00:06:15.820 --> 00:06:19.740 and my first three QJE articles were attempting to 56 00:06:19.740 --> 00:06:23.340 address that and that was those became kind of the foundation of 57 00:06:23.340 --> 00:06:27.340 testimony I just gave to Congress for one of Ron Paul's committee. 58 00:06:27.340 --> 00:06:33.340 A second important feature, I'll try to move forward in here, 59 00:06:33.340 --> 00:06:39.660 is a misperception that the Austrian business cycle theory 60 00:06:39.660 --> 00:06:43.060 says nothing about the depression phase of the cycle. 61 00:06:43.060 --> 00:06:44.920 And I've even written, and I think 62 00:06:44.920 --> 00:06:47.260 I've cribbed this from, again, Roger, 63 00:06:47.260 --> 00:06:52.140 that the cycle theory itself is a theory of the upper turning 64 00:06:52.140 --> 00:06:52.980 point in the cycle. 65 00:06:57.220 --> 00:07:02.780 Rothbard really, particularly in the first chapter or two, 66 00:07:02.780 --> 00:07:06.660 clearly differentiates, and I think 67 00:07:06.660 --> 00:07:16.740 This is an important concept that what should follow a business cycle is a term he used somewhere as a garden variety recession. 68 00:07:16.740 --> 00:07:19.140 Market forces will correct. 69 00:07:19.140 --> 00:07:27.940 Continuing depression or long slow recoveries are always the consequence of government interventions in the market, 70 00:07:27.940 --> 00:07:31.660 particularly labor markets, other areas in there. 71 00:07:31.660 --> 00:07:36.580 He has quite a list of don't-do for recovery. 72 00:07:36.580 --> 00:07:38.660 And those are just almost a list of everything 73 00:07:38.660 --> 00:07:42.860 we've done in this recovery in here. 74 00:07:42.860 --> 00:07:48.460 He does also, though, argue for positive things 75 00:07:48.460 --> 00:07:51.460 that the government can do for a recession. 76 00:07:51.460 --> 00:07:56.300 And those are essentially cutback government spending 77 00:07:56.300 --> 00:07:58.460 and cut taxes. 78 00:07:58.460 --> 00:08:01.620 And I'll see later those are also his preferred recommendations 79 00:08:01.620 --> 00:08:03.380 for Deficit Reduction. 80 00:08:03.380 --> 00:08:18.100 So my third point that I'll jump over fairly quickly is, well, 81 00:08:18.100 --> 00:08:21.060 other one, is we need to clearly differentiate shocks 82 00:08:21.060 --> 00:08:23.860 from cycles. 83 00:08:23.860 --> 00:08:26.220 That, he argues, is the very first thing, 84 00:08:26.220 --> 00:08:33.100 that economic theory can clearly explain 85 00:08:33.100 --> 00:08:37.700 shocks or fluctuations in the economy. What needs to be better explained is the business 86 00:08:37.700 --> 00:08:41.820 cycle, which is the overall, and the business cycle 87 00:08:41.820 --> 00:08:48.340 is essentially a monetary-cause, credit-created phenomena. 88 00:08:48.340 --> 00:08:52.860 I think Austrians need to pay a little more attention to some of the real business cycle 89 00:08:52.860 --> 00:08:54.240 theory. 90 00:08:54.240 --> 00:09:04.900 They overdo it, okay, that in their research, they actually, you want to look at it in empirical 91 00:09:04.900 --> 00:09:11.040 terms, they kind of come up with some empirical data that about 70% of the fluctuations in 92 00:09:11.040 --> 00:09:15.100 the economy could be explained just by market responses. 93 00:09:15.100 --> 00:09:20.960 That still leaves 30% to be explained by Austrian business cycle and that's the most important. 94 00:09:20.960 --> 00:09:30.000 And then the one conundrum that I think shows up, and I'll probably jump to the end of 95 00:09:30.000 --> 00:09:39.520 these slides here, is that in that fourth edition introduction, Rothbard writing in 96 00:09:39.520 --> 00:09:51.200 1982 is very, very pessimistic about how the economy is going to recover. 97 00:09:51.200 --> 00:09:55.520 And here, essentially, the Reagan administration knew, of course, that the inflationary expectations 98 00:09:55.520 --> 00:10:00.800 had to be reversed, but where they miscalculated was relying on propaganda without substance. 99 00:10:00.800 --> 00:10:07.240 Indeed, the entire program of Reaganomics may be considered a razzle-dazzle of showmanship 100 00:10:07.240 --> 00:10:16.240 about Taxes, Spending, Behind Which the Monetarist and Crow of the Fed were Supposed to Gradually Reduce the Rate of Monetary Growth. 101 00:10:16.240 --> 00:10:19.340 Two minutes here, okay. 102 00:10:19.340 --> 00:10:28.440 So his prospect for the economy is that Reaganomics was doomed to be a fiasco in what is likely to happen. 103 00:10:28.440 --> 00:10:31.740 And, oops, I think I skipped that over. 104 00:10:31.740 --> 00:10:36.540 But since the graduateism will not permit a sharp enough recession to clear out the debt, 105 00:10:36.540 --> 00:10:41.600 This means that the American economy will be increasingly faced with two alternatives, 106 00:10:41.600 --> 00:10:48.700 either massive deflationary 1929 type depression to clear out the debt or a massive inflationary 107 00:10:48.700 --> 00:10:50.340 bailout by the Fed. 108 00:10:50.340 --> 00:10:56.040 We can look forward therefore not to precisely a 29 type recession but to inflationary depression 109 00:10:56.040 --> 00:10:59.660 of massive proportions. 110 00:10:59.660 --> 00:11:04.640 I think this is an area that needs an awful lot more research. 111 00:11:04.640 --> 00:11:09.880 I think there's a clue provided by Robert Higgs in some of his discussion right now 112 00:11:09.880 --> 00:11:17.440 on his concept of regime uncertainty, that if businessmen are unconfident about the prospects 113 00:11:17.440 --> 00:11:24.860 of maintaining property rights in future because of government policy, that they will postpone 114 00:11:24.860 --> 00:11:30.700 Postpone investment, postpone hiring. 115 00:11:30.700 --> 00:11:38.140 This to me points out and in this clarification he argues that the rhetoric coming out of 116 00:11:38.140 --> 00:11:45.220 an administration is as important as the actual government program and he focuses particularly 117 00:11:45.220 --> 00:11:50.740 in this one on the Obama administration that he might look some of the things they've done 118 00:11:50.740 --> 00:11:56.380 are not as, they're intervention and enough, but they're not as severe as things have 119 00:11:56.380 --> 00:11:58.460 been in other times in here. 120 00:11:58.460 --> 00:12:00.780 Why aren't people reacting? 121 00:12:00.780 --> 00:12:06.660 And because the rhetoric is much like the rhetoric in 1937 that caused a recession within 122 00:12:06.660 --> 00:12:09.260 a recession. 123 00:12:09.260 --> 00:12:14.940 Here I think an explanation could be that the rhetoric in the Reagan administration 124 00:12:14.940 --> 00:12:21.260 was very, very pro-market, very, very, and we got more of a recovery than would have been expected. 125 00:12:21.260 --> 00:12:22.260 Thanks, Paul.