Thank you all for coming and for supporting the Mises Institute, and what I'm going to have to say is I'm going to repeat something Murray Rothbard wrote in quite a few of his writings, that he always reminded us that the power of the state ultimately rests on ideas, even a totalitarian state like the Soviet Union was a situation where there really were a few thousand people in control of the state apparatus and they're outnumbered by millions, an important tool for
for keeping the millions subdued is propaganda and ideas, myths and superstitions about the grandiosity of the state, the benevolence of the state, and the evils of the civil society at the same time.
And the one myth that really is one of the underpinning myths of the American state is the FDR myth.
and in one of my books I quote Newt Gingrich is saying that the FDR was the greatest political figure of the 20th century because he got us out of the Great Depression
and of course that's totally wrong as far as getting us out of the Great Depression but that's the myth so even Newt Gingrich said this when he was the Speaker of the House of Representatives
And so this FDR myth lives on. And as David Gordon mentioned briefly a minute ago, the reason it's a myth is even the government's official statistics show us that in 1939, the unemployment rate was still 19%. And so in 1929, the year of the stock market crash, the unemployment rate was 2.9%. And so after an entire decade of the so-called New Deal, we still have
We all had unemployment that was about six times higher than what the unemployment rate was going into that situation.
And of course, as David said, World War II didn't get us out of the Great Depression.
The number of Americans unemployed at that time was about five million, and the government drafted 11 million men.
And so, of course, you can eliminate unemployment if you stick everybody into a foxhole somewhere
in Europe.
Yeah, they're not going to be looking for jobs in Chicago and California, they're in
a foxhole in Germany or someplace.
And not only that, but the Great Depression didn't end by World War II, but what finally
did end it was the end of Roosevelt and the end of the war.
During the end of the war the government budget was reduced from 1945 to 1947 from $95 billion
to about $35 billion, so about almost a two-thirds absolute reduction in the federal budget because
of the demobilization of the military.
And what that meant was the year 1946 was the most robust year for economic growth by
far in all of American history, in all of American history.
The private sector of the economy grew by 30% in that one year and has never grown anywhere
near 15% in any other year.
And this was totally the opposite of what all the Keynesians were predicting at the
time because of the massive cut in government spending while of course John Maynard Keynes
Unions would have predicted another Great Depression.
But no, it was the severe cutback in government,
and not only that, but the anti-business,
anti-capitalist Roosevelt regime was gone.
What replaced it was not that much better.
But it was better, and that helped a lot.
But nevertheless, these are the facts.
The FDR never did get us, the New Deal never did get
America out of the Great Depression.
In fact, it made things a lot worse,
especially the big government spending programs, taxing programs, the laws favoring labor unions
that allowed them to push wages up during the Depression, priced even more workers out
of jobs, and our friends Richard Vedder and Lowell Galloway who wrote a book some years
ago, a very good book called Out of Work, A History of Unemployment in America, they
estimated with an econometric model that the New Deal programs probably made unemployment
in America, at least 7 or 8 percentage points higher than they otherwise would have been.
So the New Deal made the Great Depression longer and more severe, is what it did.
And so, but we haven't, our policymakers haven't learned those lessons because they believe
in a myth.
They don't believe in the truth, they believe in a myth, the FDR myth.
And so the rest of what I'm going to have to say is an illustration of how today the
The response to the current, the majority of the responses to the current depression created by the government has been to repeat many of the same old failed programs that have actually made things worse rather than better during the Great Depression and are making things worse today also and there's another book that I would mention in addition to David Gordon's list is FDR's Folly by Jim Powell I think it was published in 03 or 04
And Jim Powell takes a look at a lot of these lessons. He surveys a lot of this economic literature that I've been alluding to.
And he says there are a number of lessons we should have learned, but policymakers haven't.
And the first one is that the basic problem with central banks is that they're based on what Hayek called the pretense of knowledge.
The idea that some central planner could possibly possess all the knowledge that's in the minds of all the participants in markets
and centrally plan the economy through monetary policy and other regulatory policies somehow.
Well, of course, that's impossible. It's a delusion that we could centrally plan our economy through monetary policy or any other means.
And so now that the Fed has created the bubble, which has burst, what is the Fed's response?
Well, of course, to give itself even more essential planning powers.
One of the things they're working on is creating a whole new bureaucracy that Ben Bernanke calls the systemic risk authority.
He wants the government to regulate all risk-taking in America.
in America. If you want to destroy capitalism once and for all, put a bullet in its head,
that's what I would recommend. If you wanted to sabotage American capitalism, I can think
of no better way than putting government bureaucrats in charge of regulating all risk-taking. And
at a hearing that I watched on C-SPAN, the debate between Bernanke and the other bozos
that were standing on the podium above him, some people call them senators, I call them
was, should the Fed be given this authority or should some new bureaucracy be created?
And that was the whole debate in Washington D.C.
That was the domain of acceptable debate, was who should do this stupid thing?
And so that's lesson number one, that it's the pretense of knowledge to pretend that the Fed could centrally plan the economy
Lesson 2. Deposit insurance must be priced to reflect the risks of the banks that buy it.
Having the federal government provide deposit insurance inevitably introduces political pressures to offer deposit insurance at the same price for all banks, regardless of risk taking by the banks.
And that's exactly what happened. And if you remember the savings and loan crisis of the 1980s, one of the causes of the crisis was a government regulation called Regulation Q.
The bureaucrats are very innovative with their language, aren't they? Wasn't that an imaginative name? Regulation Q, Regulation R.
But Regulation Q put a limit of 5% on what savings and loans could pay on interest and savings accounts.
and savings accounts, and with the inflation created by the Fed of 13% or more, interest rates, mortgage rates were around 20%, mutual funds were paying a lot more than 5%, and so there was massive disintermediation, money was just flying out of the SNLs because of regulation Q,
And so part of the way of saving the SNLs, they increased the limit on deposit insurance
from $40,000 per account to $100,000 per account.
So you had a lot of these banks that were in trouble.
And in order to try to make a profit, they knew they had to take a bigger risk to get
potentially a bigger reward, bigger profit.
And now here comes the government saying, go ahead and take that bigger risk and we'll
cover you.
Now your deposits are covered for $100,000 for every account, not $40,000.
And so they encourage much greater risk taking on the part of the SNLs, building housing
developments in the middle of the Arizona desert, under the idea that if you build it,
they will come, they being the customers, and of course a great many of these, no one
came.
And so it was a classic case of moral hazard, of trying to, the government proclaiming to
to reduce the risk of being in a savings and loan business, they inevitably increase the
risk taking by SNLs and this created a huge bust and of course another bailout. It was
said to be a $500 billion bailout at that time in the Bush administration in the 1980s.
And so what did we do in response to the current dilemma? Well, we raised deposit insurance
from 100,000 to 250,000, the exact same thing that caused the bust during the S&L crisis.
So lesson number two obviously hasn't been learned, and that was, that of course was
another of FDR's brilliant ideas.
Lesson number three, since taxes are the biggest burden that millions of people face today,
it's crucial to cut taxes.
Well, that's a big joke, isn't it?
The thing the government has done has been raising taxes, and as most economists, free
market economists will tell you, that government spending is a much more reliable measure of
tax than just tax, because one way or another the government is going to take money out
of the private sector to pay for whatever amount of spending it intends to do.
It's going to print money, it's going to borrow money, and no matter how it finances it, it's
It's going to be diverting resources out of the domain of private control by consumers,
entrepreneurs, investors and so forth to political control.
I was on a PBS show, television show a while back.
They wanted to talk about the stimulus bill and the host thought that he was being exceptionally
clever by saying, but they're going to finance it by borrowing, therefore it's not going
to cost us anything.
They're going to borrow the money from China.
And that's going to be cost-free. They're not going to raise taxes. How can you say
money will be taken out of the private sector? Well, I guess to this crowd, I probably don't
have to explain the lunacy to that, but he thought I was out of my mind and absolutely
crazy by saying that there's a cost involved in spending a trillion dollars and financing
if you're borrowing it. Of course there isn't. And so I was never invited back, to be sure.
And he said, gee, all the other commentators I've seen on TV today said nothing at all
like that.
And they're all supporting this sort of thing.
And so everything the government has been doing has been aimed at raising taxes, even
the trial balloons for a value-added tax.
I just learned two days ago that part of the Obama so-called stimulus bill involves the
phasing out of the indexing of income taxes to inflation.
That's something a lot of people probably haven't heard, because who has read this?
I don't know how long it is, 2,000 pages long or something like that.
But that's part of it.
They want to phase out the indexing of income taxes to inflation so that the entire middle
class will be pushed up into the Ted Kennedy tax bracket.
And so at that point, the argument will be made that, well, this is unfair, that middle
The middle class people are paying 39.6% income tax rates, therefore we must raise the top
rate to maybe 60 or 70% and put the millionaires there and keep the middle class at the 39%
rate.
That's what I see coming if we keep going down the same road that we're going down.
And so, and of course, no tax increase of any kind is good for the economy, but that's
all and of course state and local governments have been trying to raise taxes on everything
Lesson number four, efforts to soak the rich will backfire because investments of the rich
are needed to create jobs.
The whole philosophy of life of the current administration is income redistribution through
through the tax system.
Friedrich Hayek in the 1976 edition of The Road to Serfdom, his famous book The Road
to Serfdom, in the preface he wrote that at the beginning of the 20th century socialism
meant government ownership of the means of production.
But by the time you get to the mid-century it really meant income redistribution through
the welfare state and the progressive income tax.
That's what socialism really came to mean because the underlying purpose, the ostensible
The whole purpose of all of it was always egalitarianism, income redistribution, whether it was government ownership, government control, income redistribution, that's always the goal of the socialist, and of course the Obama administration, Obama as a socialist, before the election I wrote an article for lewrockwell.com entitled, Fascism or Socialism, Take Your Pick, about the ideology of McCain, which was country first, which is very creepy to me,
I've studied European history and I knew that the slogan or the philosophy of fascism was
common good comes before the private interest and so here's John McCain saying I'm running
for president on common good comes before the public interest or private interest come
vote for me and then what was our alternative, the senator from Acorn and so I need to say
Lesson 5. Public works and other jobs programs must be avoided because they increase the
cost and burden of government. Roosevelt actually employed about 10 million people
and Public Works jobs by the end of the 1930s, and yet the unemployment rate was still 19%,
as I said.
And this is because of the law of opportunity cost, or what some, what Henry Hazlitt called
the broken window fallacy.
You can't create jobs by taking a billion dollars out of the private sector through
taxes, for example, and letting the politicians spend that billion dollars.
You destroy jobs in the private sector and you, by giving out political jobs in the government
Sector. And that's what we're doing, of course. And economists have studied the FDR era stimulus
program and Hoover had one. Of course, Hoover had a stimulus bill as soon as he got into
office and it accounted for 13% of the entire federal budget and about twice the size of
Obama's so-called stimulus as a proportion of the federal budget. And of course, it didn't
and the Great Depression economically, but the Southerners didn't vote for a Republican until Ronald Reagan, because the Republican Party was the party of Lincoln, and so that was a safe Democrat seat for generations in Mississippi and all the other southern states.
And so, there's a book by William Shugart called The Political Economy of the New Deal that lays all this out about how politics was the main criterion for spending the New Deal money.
What a surprise, what a shocker that politics determines how government money is spent.
Milton Friedman once said on this topic that to expect politics to not be the overriding motive for how government money is spent,
is like expecting to hear a cat bark like a dog it's just it's just not going to
happen and of course the so-called stimulus bill you probably have read
that most of it the big majority of it is scheduled to be spent next year with
just by sheer coincidence is an election year and so so that's what's going to
happen it's a giant vote-buying scheme and it won't revive the economy it'll
just solidify the political power of the politicians who are handing out our
Lesson number six is that especially during a recession or depression, the government must not enact laws preventing prices from adjusting to circumstances.
Well, that's the whole purpose of the Fed printing up a trillion dollars, isn't it?
To try to prevent prices from falling and adjusting to market levels, especially in real estate, as far as that goes.
And so, once again, we're doing everything we can.
In Roosevelt's day, they passed a lot of labor legislation that stopped wages, the price of labor, from falling to free market levels and created a lot more unemployment by pricing people out of jobs.
But now it's primarily real estate and a few other markets that the government is trying to prop up in terms of prices and to keep the free market from working.
and Working. Lesson number seven, government must not enact laws preventing wages from
adjusting. I already read that. In lesson number seven, I guess an auxiliary lesson
to what I just said is that what's going on also now is there's legislation proposed
that may pass that will eliminate secret ballot elections for labor unions. And this will
enable the union thugs to intimidate workers, make sure they vote for the union. And they're
They're hoping it will revive union power, at least in some industries, and allow them
to push wages up, again, in a depression, which we're in now, which will create more
unemployment, inevitably, if you understand the laws of economics.
So that's not going to be a good thing, if that passes.
The final lesson I want to mention is, only if investors feel private property is secure,
will they be willing to make long-term financial commitments needed to spur recovery and boost
and Used Employment. This is what our friend Bob Higgs, the economist Bob Higgs called
Regime Uncertainty. During the Great Depression, there was so much anti-capitalist language
and threats of more regulation and more taxes and windfall profits taxes that it created
such uncertainty that long-term investing just was impossible. And so as a result, the capital
The Federal Stock of the United States declined by about $3 billion during the Great Depression years.
And it wasn't until Higgs argues that this uncertainty was lifted after World War II that investment took off.
And of course, it's hard to imagine more uncertainty being created in the minds of long-term investors
than what's been happening over the last couple of years with the threats of new taxes,
is a little more contemporary, it's not an analogy to the Great Depression, but one of
the things that did not help in terms of the current crisis is the fact that for some 30
years the U.S. government has had a policy of forcing, extorting, pressuring mortgage
lenders to make bad loans to unqualified borrowers under the Community Reinvestment Act. And
And this was greatly strengthened in the 1990s during the Clinton administration and also
the Congress required, that's when the Congress required Fannie Mae and Freddie Mac to buy
up trillions of dollars of these bad loans because they wanted to give the bad loans
to unqualified borrowers who were low income borrowers.
It was just a veiled expansion of the welfare state that was financed not by tax dollars
but by forcing banks to make bad loans.
And so, you know, that bubble, that didn't help.
The Fed is the main culprit in creating the bubble, but certainly forcing banks to make
trillions of dollars in bad real estate loans to not help things out at all.
One of my articles on lewrockwell.com, I quoted a Fed publication that was sent out to zillions
of mortgage lenders instructing them that if you want to avoid being sued for housing
Discrimination, you will forget about income requirements to low income and minority borrowers,
you'll forget about down payments, you'll forget about credit history, and they even
said if you get an appraisal of a house that doesn't give you the right number, get in
touch with us and we will get you another appraiser.
I've bought and sold quite a few houses in my lifetime and I know if I tried to do that
I could probably get in big trouble and maybe even go to jail, so that's fraud, that's real
and State Fraud, but here's the Fed instructing people to go ahead, it's okay as long as the
Fed is supervising the fraud and so they gave mortgage lenders these instructions on
how to make bad loans and then threatened them that you could be fined 1% of your net
value as a minimum if you don't comply with this stuff.
And so what are they doing now?
Well Congress is busy preparing legislation to expand the Community Reinvestment Act to
to apply to credit unions, insurance companies, and all mortgage lenders, not just banks,
certain banks, not just national banks, but all mortgage lenders of all kind. They want
to expand it. And so that's why I said the FDR myth is so powerful and must be destroyed
because it's used to justify this by the politicians in Washington, especially the Democrats. But
as I said, Newt Gingrich, she had Newt Gingrich saying FDR was the greatest political figure
in the 20th Century. So it's not just the Democrats who believe in this myth. I can
remember some years ago when someone from the Cato Institute wrote an article criticizing
FDR in the Wall Street Journal. One of the editorial board members of the Wall Street
Journal wrote a letter to the editor excoriating this person for daring to criticize FDR. So
apparently even in the past anyway, the editorial pages of the Wall Street Journal are sort
with FDR Worshippers.
It wasn't always like this.
Politicians didn't always respond to depressions,
of course, by expanding government.
And I want to close with a couple of examples
in American history of presidents
who did the right thing in response to economic crises.
David mentioned briefly that the Depression of 1920
was worse than the first year of the Great Depression,
and it was, but it only lasted one year.
And so what did President Warren Harding do to miraculously end a depression in one year?
He did nothing but cut spending. That's all he did. He cut government expenditures and
that's it. And the government ended, the depression ended in one year. Another example is Grover
Cleveland, his second term in 1893. He took office right when there was a depression.
By the way, the word depression was made up by the government. They used to call it panics.
And then after a panic, I think I believe it was Herbert Hoover who thought that was
a little too extreme. You don't want to call these panics. People might panic. So let's
call it depression. That's better. And so it was Hoover who called it. And then it was
was whittled down to be a recession, and so next it will be slowdown, something like, who
knows, Bob Murphy has a number of suggestions, I've heard him give a talk before, it might
be called a pineapple next week, who knows, something really that you can't figure out
what it is.
Well anyway, Grover Cleveland took power, the presidency, right at the time there was
a bad recession, depression, whatever you want to call it, what did he do?
He got tariffs, he opposed the income tax, he vetoed a bill for it to give $10,000 in
welfare to farmers, and he said this, it will weaken the national character, he said, so
he can't spend $10,000 on farm welfare.
He also vetoed over 300 spending bills, and that depression ended in two years.
He did that.
And finally, going back even further in American history, President Martin Van Buren had the
bad luck to take office right as a depression, in those days it was called a panic, was in
the middle of it.
And so, and he basically did nothing, but I'm going to close with a statement that he
said.
This is a speech that Martin Van Buren made in 1838 is when he took office.
And he said to justify, well what he was doing, to justify cutting spending, cutting taxes
and cutting tariffs as a response to depression, he said this, all former attempts on the part
of government to assume the management of domestic or foreign exchange have proved injurious.
What is needed is a system founded on private interest, enterprise and competition without
The Aid of Legislative Grants or Regulations by Law."
And that's what Martin Van Buren said to justify cutting back on government in order
to enlarge the sphere of private activity, private action, entrepreneurship, and capitalism.
And we're headed in exactly the opposite direction now, and I guess Ron Paul could be our Martin
Van Buren.
I've called him our Thomas Jefferson in one of my articles today, but no one seems to
be listening to Ron in Washington these days.
And so I tried to depress you even more
than the previous speakers have,
but now we have the very enlightening man, George Reisman,
coming up next who Doug will introduce,
and he's gonna tell us how to get out of this mess,
once and for all.
Thank you very much.