WEBVTT NOTE Why You've Never Heard of the Great Depression of 1920 1 00:00:00.000 --> 00:00:02.900 Ladies and gentlemen, thank you very much. 2 00:00:02.900 --> 00:00:07.800 If the unthinkable should happen and Oprah should feature my book, 3 00:00:07.800 --> 00:00:12.500 I think we'll be able to stimulate a little bit of that depressed real estate market in Las Vegas 4 00:00:12.500 --> 00:00:16.600 with some of the proceeds, but I really don't think that's going to happen. 5 00:00:16.600 --> 00:00:21.600 I'm not very pro-Obama in this book, so I don't think that's going to happen, but it's quite all right. 6 00:00:21.600 --> 00:00:26.000 I'm happy to make an honest living. That's okay. I'm not looking for a get-rich-quick scheme. 7 00:00:26.000 --> 00:00:31.000 I'm happy to do that sober type of labor that Andrew Mellon talked about. 8 00:00:31.000 --> 00:00:34.800 Well, today I've got two parts. 9 00:00:34.800 --> 00:00:39.100 The first part is history and the second part is theory. 10 00:00:39.100 --> 00:00:43.700 I want to talk about an episode in American history everyone should know about, 11 00:00:43.700 --> 00:00:45.600 but hardly anyone does. 12 00:00:45.600 --> 00:00:52.000 And then secondly, I want to explain why it shouldn't surprise us 13 00:00:52.000 --> 00:00:53.900 that this episode turned out as it did. 14 00:00:53.900 --> 00:01:03.340 Why it was not a mere coincidence that the U.S. economy recovered so quickly in 1921 as opposed to other periods in American history. 15 00:01:03.340 --> 00:01:09.620 And a little bit of what I say in that section will seem perhaps elementary to some people in the room, 16 00:01:09.620 --> 00:01:16.940 but I hope might serve as a good introduction to those of you who are new to these ideas in the midst of this crisis looking for answers. 17 00:01:16.940 --> 00:01:22.660 I can, I hope, give a good foundation for future reading and learning. 18 00:01:22.660 --> 00:01:28.660 There have been copies of Meltdown out here that have since been replenished. 19 00:01:28.660 --> 00:01:35.660 So make sure and make your stampede out there afterward so as to contribute to the 20 00:01:35.660 --> 00:01:42.660 Tom Woods lighter luggage fund indirectly by your purchases. Thank you very much. 21 00:01:42.660 --> 00:01:51.660 So right, let me start with just with a description of what was going on in 1920. 22 00:01:51.660 --> 00:02:17.660 Now, just immediately beforehand, I was talking to John Cochran of Metropolitan College of Denver and Professor Cochran was telling me that it's either Richard Vedder or Lowell Galloway who refers to the episode in American history, 1920-21, where we had very depressed economic conditions as a stroke of luck. 23 00:02:17.660 --> 00:02:28.660 And what's meant by that is that toward the end of his second term, Woodrow Wilson had a couple of semi-debilitating strokes. 24 00:02:28.660 --> 00:02:34.660 Now, look, this is, you go find veteran Galloway, I'm just the messenger here. 25 00:02:34.660 --> 00:02:37.660 I didn't make this terrible statement up. 26 00:02:37.660 --> 00:02:45.660 But that because of that, and because in effect his wife was more or less running the country in the last year of his presidency, 27 00:02:45.660 --> 00:02:54.160 and there was very little activity going on domestically, very little was done by the government to arrest the economic decline. 28 00:02:54.160 --> 00:03:02.660 And by the time March 1921 came around, because that was the inauguration month for Warren Harding, 29 00:03:02.660 --> 00:03:09.160 the economy was actually starting to turn around and then by the summer it had turned around and the recovery was on its way. 30 00:03:09.160 --> 00:03:18.160 And so because Wilson was not able physically to help us out and solve the problem, the problem went away. 31 00:03:18.160 --> 00:03:26.160 Now that seems a little crude to me to think of a man's physical misfortune as the good fortune of the country. 32 00:03:26.160 --> 00:03:30.160 So I hereby rebuke that terrible insensitive statement. 33 00:03:30.160 --> 00:03:37.160 However, it is nevertheless instructive because we're told today routinely 34 00:03:37.160 --> 00:03:44.160 that if you experience an economic meltdown, or a recession, or whatever the term is they're using, 35 00:03:44.160 --> 00:03:49.160 you can't get out of it without some type of government counter-cyclical policy, 36 00:03:49.160 --> 00:03:52.160 without some type of fiscal policy, monetary policy. 37 00:03:52.160 --> 00:03:56.160 Otherwise, yeah, I mean, they'll concede that maybe in 50 years it might turn around, 38 00:03:56.160 --> 00:03:59.160 but, you know, a lot of us will be dead by then, basically. 39 00:03:59.160 --> 00:04:01.160 So we need the government to intervene. 40 00:04:01.160 --> 00:04:06.160 Well, it seems to me if I can just point to one historical episode in which that was not the case, 41 00:04:06.160 --> 00:04:11.640 Then we win. So it turns out this is such an episode. 42 00:04:11.640 --> 00:04:17.520 In 1920-21, the first year of what was about an 18-month downturn, 43 00:04:17.520 --> 00:04:23.240 the first year of that was actually worse than the first year of the Great Depression of 1929. 44 00:04:23.240 --> 00:04:28.240 When you look at it from the point of view of the statistics involving unemployment and production, 45 00:04:28.240 --> 00:04:35.440 you had production falling by 21 percent, GDP figures, you find a 24 percent reduction, 46 00:04:35.440 --> 00:04:42.720 There is unemployment going up from about 4% to about 12% very rapidly. 47 00:04:42.720 --> 00:04:45.160 So terrible conditions. 48 00:04:45.160 --> 00:04:50.080 And as I say, the president who succeeded Woodrow Wilson was Warren Harding. 49 00:04:50.080 --> 00:04:57.160 Now, we're all taught to hate Warren Harding because, I mean, in fact, in some ways, he was actually a very, very mild type progressive. 50 00:04:57.160 --> 00:05:01.600 He favored a kind of a world court. He had some sort of progressive inclinations. 51 00:05:01.600 --> 00:05:06.400 But by and large, we're supposed to hate Harding basically because he wasn't an activist president, you know? 52 00:05:06.400 --> 00:05:10.600 He wasn't trying to run people's lives, he wasn't killing people. 53 00:05:10.600 --> 00:05:13.200 You know, what a big bore this guy is. 54 00:05:13.200 --> 00:05:15.100 And also, he was corrupt. 55 00:05:15.100 --> 00:05:19.500 Well, it turns out that the corruption, more or less, okay, morally he had some problems. 56 00:05:19.500 --> 00:05:21.100 No one's going to dispute that. 57 00:05:21.100 --> 00:05:25.900 But at the same time, most of the corruption involved his subordinates. 58 00:05:25.900 --> 00:05:36.900 And in two cases, he rebuked subordinates so severely for their misdeeds that they went out and committed suicide afterward. 59 00:05:36.900 --> 00:05:40.140 What could he have said to them, for goodness sake? I mean, it's unbelievable. 60 00:05:40.140 --> 00:05:45.300 And in fact, when you think of the scale of some of the scandals, yeah, OK, yeah, they're scandals. 61 00:05:45.300 --> 00:05:51.060 There's somebody profiteering by selling off government hospital supplies. 62 00:05:51.060 --> 00:05:54.180 Well, if only that were the problems we were dealing with now, right? 63 00:05:54.180 --> 00:05:58.860 Hospital Supplies, people profiteering on them. I think we would all kill to have that 64 00:05:58.860 --> 00:06:03.100 be the scandal these days, but that's why we're supposed to detest Warren Harding. 65 00:06:03.100 --> 00:06:09.320 My secret suspicion is the reason they detest him is that by doing nothing, he was so successful 66 00:06:09.320 --> 00:06:13.500 that he's a rebuke to everything that historians believe in. They don't know what to do with 67 00:06:13.500 --> 00:06:20.500 this guy. What he achieved is not supposed to be possible, according to the textbooks. 68 00:06:20.500 --> 00:06:23.420 He's not supposed to have been this successful. 69 00:06:23.420 --> 00:06:26.060 So let's just smear him out of existence. 70 00:06:26.060 --> 00:06:27.180 Well, I've actually become, 71 00:06:27.180 --> 00:06:28.780 I've kind of warmed up to Warren Harding, 72 00:06:28.780 --> 00:06:30.500 just on the general principle 73 00:06:30.500 --> 00:06:32.860 that anyone the establishment hates, 74 00:06:32.860 --> 00:06:35.620 I'm at least gonna give the benefit of the doubt to. 75 00:06:36.620 --> 00:06:38.540 Now, sometimes they hate the right people, 76 00:06:38.540 --> 00:06:40.420 once in a blue moon. 77 00:06:40.420 --> 00:06:42.540 So it's not an apodictically certain law, 78 00:06:42.540 --> 00:06:45.680 but I've become kind of warm to this guy, 79 00:06:45.680 --> 00:06:47.220 read some of his speeches and I thought, 80 00:06:47.220 --> 00:06:51.380 Hey, I mean, he kind of, kind of gets it. 81 00:06:51.380 --> 00:06:53.780 And I'm actually gonna share some of this with you 82 00:06:53.780 --> 00:06:56.060 in a couple of minutes, but don't worry that I'm going soft. 83 00:06:56.060 --> 00:06:59.020 Like, Woods has been, I think, studying the year 1921 84 00:06:59.020 --> 00:07:01.460 a little bit too long here, if he's getting carried away 85 00:07:01.460 --> 00:07:02.940 with the speeches of a U.S. president. 86 00:07:02.940 --> 00:07:05.140 So don't worry, okay, this is all relative. 87 00:07:05.140 --> 00:07:07.920 In terms of presidents, I relatively like this guy, 88 00:07:07.920 --> 00:07:10.540 but don't worry, I'm still as pure as ever. 89 00:07:10.540 --> 00:07:14.940 Well, as I say, we have these indicators 90 00:07:14.940 --> 00:07:17.860 Telling Us the Economy is Turning Down. 91 00:07:17.860 --> 00:07:20.580 Well, what does Warren Harding do? 92 00:07:20.580 --> 00:07:24.420 Well, first we have what happens starting with Wilson and then Harding. 93 00:07:24.420 --> 00:07:28.700 We see that federal spending starts to come down. 94 00:07:28.700 --> 00:07:31.500 There's actually a cut in the US government budget. 95 00:07:31.500 --> 00:07:36.780 Now, I talk about this to some degree in my book Meltdown here, 96 00:07:36.780 --> 00:07:41.980 but I want to elaborate on that here and give some additional information. 97 00:07:41.980 --> 00:07:43.700 So the budget is cut. 98 00:07:43.700 --> 00:07:48.500 So in other words, instead of a stimulus package, so called, they actually cut the budget. 99 00:07:48.500 --> 00:07:51.700 And this is the opposite of what the textbooks today tell you. 100 00:07:51.700 --> 00:07:55.400 The textbooks say, oh no, that's the worst thing you can do in a depression. 101 00:07:55.400 --> 00:07:59.200 No, no, no, because that's going to compromise aggregate demand. 102 00:07:59.200 --> 00:08:03.200 We can't have that. You've got to keep the government spending going. 103 00:08:03.200 --> 00:08:06.300 Yeah, that's what we're told. So they cut the government budget. 104 00:08:06.300 --> 00:08:09.200 They did the opposite of what the textbooks tell you. 105 00:08:09.200 --> 00:08:13.600 One might hope that a silver lining to the crisis will be that some of these textbooks 106 00:08:13.600 --> 00:08:26.600 The Federal Reserve cuts the government budget, but surely the Fed must have been pumping money into the economy. 107 00:08:26.600 --> 00:08:30.600 There must have been some monetary stimulus going on. 108 00:08:30.600 --> 00:08:41.600 To the contrary, the Fed does not actually begin engaging in open market operations until 1922. 109 00:08:41.600 --> 00:08:49.600 ever in its history. It starts in 1922. So that's not happening. The Fed is largely passive during this crisis. 110 00:08:49.600 --> 00:08:59.600 So we've got federal spending going down, $6.3 billion in 1920, down to $5 billion in 1921, down to $3.2 billion in 1922. 111 00:08:59.600 --> 00:09:08.600 And the result is, by the summer of 1921, we already see the indications of a turnaround and a robust recovery beginning. 112 00:09:08.600 --> 00:09:19.600 Now, it's no surprise that economic historians treating this period have found it difficult to explain how this is possible. 113 00:09:19.600 --> 00:09:27.600 This can't be. Now, I've found some interesting ways that they've handled it, but first we'll deal with the honest ones. 114 00:09:27.600 --> 00:09:36.600 There's a Keynesian economist named Robert Gordon who honestly admitted that government policy 115 00:09:36.600 --> 00:09:42.600 The government policy to moderate the depression and speed recovery was minimal. 116 00:09:42.600 --> 00:09:45.600 The Federal Reserve authorities were largely passive. 117 00:09:45.600 --> 00:09:52.600 Despite the absence of a stimulative government policy, however, recovery was not long delayed. 118 00:09:52.600 --> 00:09:55.600 Now let's move on to the next episode. 119 00:09:55.600 --> 00:09:57.600 That's his treatment, by the way. 120 00:09:57.600 --> 00:09:59.600 Let's not draw any lessons from this. 121 00:09:59.600 --> 00:10:02.600 Let's not wonder if maybe we should tweak our theoretical models. 122 00:10:02.600 --> 00:10:05.600 Let's just pretend this never happened and go on. 123 00:10:05.600 --> 00:10:08.040 He admits it. 124 00:10:08.040 --> 00:10:13.040 We have another economic historian who very briskly concedes that the economy rebounded 125 00:10:13.040 --> 00:10:18.040 quickly from the 1920 to 1921 depression and entered a period of quite vigorous growth. 126 00:10:18.040 --> 00:10:21.040 Next chapter. 127 00:10:21.040 --> 00:10:22.040 I'm not making this up. 128 00:10:22.040 --> 00:10:25.340 I've got footnotes to these particular people. 129 00:10:25.340 --> 00:10:26.440 This is their treatment. 130 00:10:26.440 --> 00:10:31.240 They admit it, but no consequences, nothing we're not going to learn from this, we're 131 00:10:31.240 --> 00:10:34.200 not going to elaborate on it, and that's the end of it. 132 00:10:34.200 --> 00:10:40.040 Now here's by the way, here's my favorite though, this is the all-time, this is the 133 00:10:40.040 --> 00:10:42.800 all-time Lulu forever. 134 00:10:42.800 --> 00:10:47.000 This is from a book called The Presidency of Warren G. Harding. 135 00:10:47.000 --> 00:10:53.620 Now here you've got a president who for all his moral foibles has in effect done the impossible. 136 00:10:53.620 --> 00:10:57.760 He has ignored all the modern-day economic advice that thankfully wasn't around back 137 00:10:57.760 --> 00:10:59.520 then. 138 00:10:59.520 --> 00:11:03.840 He was ignoring his commerce secretary Herbert Hoover who was urging government intervention. 139 00:11:03.840 --> 00:11:07.000 He's going, yeah, yeah, yeah, why don't you go jump in a lake? 140 00:11:07.000 --> 00:11:08.400 And he achieves the impossible. 141 00:11:08.400 --> 00:11:12.040 And yet, here's how a mainstream historian deals with this. 142 00:11:12.040 --> 00:11:14.300 And you know how much economics historians know. 143 00:11:14.300 --> 00:11:16.640 I mean, it just knocks your socks off, man. 144 00:11:16.640 --> 00:11:17.640 Whoa! 145 00:11:17.640 --> 00:11:20.640 Do they know economics? 146 00:11:20.640 --> 00:11:23.160 That's sarcasm, by the way. 147 00:11:23.160 --> 00:11:24.600 So he says this. 148 00:11:24.600 --> 00:11:29.600 In the long run, so implicitly conceding that, yeah, OK, 149 00:11:29.600 --> 00:11:32.600 he got us out of that depression. 150 00:11:32.600 --> 00:11:38.600 In the long run, the administration's tax and economic policies proved ill-considered. 151 00:11:38.600 --> 00:11:43.700 And I should point out what the tax policies were. It was lowering taxes. 152 00:11:43.700 --> 00:11:47.900 They actually cut the national debt by about one-third in the 1920s. 153 00:11:47.900 --> 00:11:54.320 They cut taxes pretty substantially. The top rate had been 70... in the 70s percent, 77 or so, 154 00:11:54.320 --> 00:12:00.680 went down to about the top rate of 25 percent, which is still higher than it was before World War I. 155 00:12:00.680 --> 00:12:06.040 and during World War I at the beginning, but all the same, still a cut. 156 00:12:06.040 --> 00:12:10.440 So there were tax cuts that occurred and now we're told by this historian that 157 00:12:10.440 --> 00:12:12.920 that was really not a good idea in the long run. 158 00:12:12.920 --> 00:12:18.040 Normalcy, as Harding called it, consisted of pre-war solutions to post-war 159 00:12:18.040 --> 00:12:22.240 problems. Don't you love how they treat freedom and the free economy as being a 160 00:12:22.240 --> 00:12:26.880 sort of a quaint relic of the olden days that, you know, stupid simpletons always 161 00:12:26.880 --> 00:12:54.880 Harding wanted to return the country to an earlier era, the tax cuts, along with the emphasis on repayment of the national debt and reduced federal expenditures, combine to favor the rich. 162 00:12:54.880 --> 00:12:57.480 Yeah, because the poor don't benefit from that at all, right? 163 00:12:57.480 --> 00:12:59.680 No benefits are derived from that. 164 00:12:59.680 --> 00:13:03.680 Many economists came to agree 165 00:13:03.680 --> 00:13:08.480 that one of the chief causes of the Great Depression of 1929 166 00:13:08.480 --> 00:13:12.480 was the unequal distribution of wealth. 167 00:13:12.480 --> 00:13:17.080 Now, by the way, if that were true, there would be depressions non-stop 168 00:13:17.080 --> 00:13:20.680 in every country on earth forever. 169 00:13:20.680 --> 00:13:22.880 Because in practically every country on earth, 170 00:13:22.880 --> 00:13:27.440 You'll find the top 1% owns 25 or more percent of the wealth. 171 00:13:27.440 --> 00:13:30.800 Well, that's because these are the people who actually go out and do the creative work, 172 00:13:30.800 --> 00:13:34.880 who are the geniuses, who are the marketers, who market the geniuses. 173 00:13:34.880 --> 00:13:41.360 Well, naturally, I mean, if you're a janitor who's sweeping a floor in an office building in Hoboken, 174 00:13:41.360 --> 00:13:47.520 you're going to earn multiples and multiples less than somebody in charge of a company 175 00:13:47.520 --> 00:13:52.600 that is producing farm equipment that makes eating possible for 100 million people. 176 00:13:52.600 --> 00:13:57.600 I mean, how is that a surprise to anybody? But according to this, that causes depressions 177 00:13:57.600 --> 00:14:05.160 if there's unequal distributions of wealth. So let's continue with this. So 5% of the 178 00:14:05.160 --> 00:14:09.880 population had more than 33% of the nation's wealth by 1929. There are places and times 179 00:14:09.880 --> 00:14:15.000 in history where it's been far, far greater than that and there's been no depression. 180 00:14:15.000 --> 00:14:21.280 This group failed to use its wealth responsibly. Instead, they fueled unhealthy speculation 181 00:14:21.280 --> 00:14:24.320 speculation on the stock market, as well as uneven economic growth. 182 00:14:24.320 --> 00:14:29.160 Well, I don't know what uneven economic growth even means, and then fueled unhealthy speculation 183 00:14:29.160 --> 00:14:30.160 on the stock market. 184 00:14:30.160 --> 00:14:34.440 Gee, you think that might have a teensy-weensy bit to do with the Fed's monetary policy? 185 00:14:34.440 --> 00:14:35.480 I'm just wondering. 186 00:14:35.480 --> 00:14:37.200 You think that might have something to do with it? 187 00:14:37.200 --> 00:14:40.920 No, it's because the rich people were allowed to keep more of their money. 188 00:14:40.920 --> 00:14:45.640 So what this historian is saying is, when he says that the administration's tax policies 189 00:14:45.640 --> 00:14:49.560 proved ill-considered, what he's saying is, it was ill-considered to let people keep more 190 00:14:49.560 --> 00:14:57.560 For your own good, to prevent depressions, we just need to take three quarters of your money. 191 00:14:57.560 --> 00:14:59.560 Now, that you could say that with a straight face. 192 00:14:59.560 --> 00:15:06.560 Talk about a court historian whose job it is to shill for the powers that be, 193 00:15:06.560 --> 00:15:11.560 inventing bizarro rationales for why it's really in your own good for us to loot you. 194 00:15:11.560 --> 00:15:14.560 It's just, I mean, how could you sleep at night? 195 00:15:14.560 --> 00:15:16.560 I mean, you can't possibly believe this, right? 196 00:15:16.560 --> 00:15:30.560 I don't know what political connection this guy had, or perhaps won after he wrote this book, but my gosh, yeah, we've got to take your money away for the benefit of the economy. 197 00:15:30.560 --> 00:15:33.560 So, I mean, at least the mafia doesn't try to say that, you know? 198 00:15:33.560 --> 00:15:37.560 We're taking... this is protection money, and that's all it is. 199 00:15:37.560 --> 00:15:42.560 We're not taking it from you because we're afraid that if you keep it, you're going to wreck the local economy. 200 00:15:42.560 --> 00:15:53.320 Now, incidentally, in a book I cite in Meltdown called America's Search for Economic Stability, 201 00:15:53.320 --> 00:15:55.080 we have this confirmation of what I'm telling you. 202 00:15:55.080 --> 00:15:57.640 There's very little activity by the Fed. 203 00:15:57.640 --> 00:16:03.600 So we read, despite the severity of the contraction, the Fed did not move to use its powers to 204 00:16:03.600 --> 00:16:08.400 turn the money supply around and fight the contraction. 205 00:16:08.400 --> 00:16:11.080 And yet the contraction went away. 206 00:16:11.080 --> 00:16:16.680 Do we draw any conclusions from this? No! No, sir! Nope! 207 00:16:16.680 --> 00:16:22.240 Then, at the end, we have, this guy's been talking about inflationary monetary policy 208 00:16:22.240 --> 00:16:25.520 and how it's just the thing for a depressed economy. 209 00:16:25.520 --> 00:16:30.000 That is the whole idea of expansionary monetary policy as we see it today, to create an excess 210 00:16:30.000 --> 00:16:33.560 supply of money that spurs increased spending. 211 00:16:33.560 --> 00:16:39.480 But this was 1921, long before the concept of counter-cyclical policy was accepted or 212 00:16:39.480 --> 00:16:54.480 So we had a whole bunch of stupid heads in these days who didn't know that their overlords at the Fed can get you out of depressions, but why don't you then add, but somehow gee, they did get out of it, though, didn't they? And very quickly to boot. 213 00:16:54.480 --> 00:17:02.480 Now let me say a little something about Warren Harding, because again, I'm not looking to worship a president. I'm not going to wave incense in front of his image. 214 00:17:02.480 --> 00:17:10.480 I just want to say that it's interesting to listen to what he said, because we are never going to hear another US president say anything like this. 215 00:17:10.480 --> 00:17:16.480 Well, okay, maybe, maybe, maybe, maybe, maybe. But it's a huge, huge, huge maybe with an exponent in it. 216 00:17:16.480 --> 00:17:26.480 But let me quote for you first of all what enlightened opinion had to say about Harding's oratory, because I'm going to be quoting from his speeches. 217 00:17:26.480 --> 00:17:31.480 Harding was made fun of for his poor speaking skills, which by the way are not that poor. 218 00:17:31.480 --> 00:17:40.560 H. L. Mencken writes the worst English that I have ever encountered. It reminds me of 219 00:17:40.560 --> 00:17:46.440 a string of wet sponges. It reminds me of tattered washing on the line. It reminds me 220 00:17:46.440 --> 00:17:55.920 of stale bean soup, of dogs barking idiotically through endless nights. It is so bad that 221 00:17:55.920 --> 00:18:03.180 The sort of grandeur creeps into it. It drags itself out of the dark abyss of pish and crawls 222 00:18:03.180 --> 00:18:11.520 insanely up the topmost pinnacle of posh, etc., etc., and he goes on. Upon Harding's death, 223 00:18:11.520 --> 00:18:17.240 the poet E. E. Cummings said, The only man, woman or child who wrote a simple declarative 224 00:18:17.240 --> 00:18:25.160 sentence with seven grammatical errors is dead. Nevertheless, listen to his thoughts 225 00:18:25.160 --> 00:18:33.160 Now, he doesn't get everything 100% right. I wouldn't say anything like, you know, there isn't a single misplaced word in his remarks. 226 00:18:33.160 --> 00:18:40.160 But, listen to this all the same. Here's his acceptance speech as he accepts the Republican nomination in 1920. 227 00:18:40.160 --> 00:18:49.160 I would be blind to the responsibilities that mark this fateful hour if I did not caution the wage earners of America 228 00:18:49.160 --> 00:18:55.160 That mounting wages and decreased production can lead only to industrial and economic ruin. 229 00:18:55.160 --> 00:19:01.160 Can you imagine a presidential candidate saying wages might have to come down? 230 00:19:01.160 --> 00:19:06.160 And by the way, for anybody in this room who's kind of put off by this emphasis on wages have to come down, 231 00:19:06.160 --> 00:19:10.160 you're thinking, what are you, a bunch of scrooges? I mean, how are people supposed to make ends meet? 232 00:19:10.160 --> 00:19:16.160 The way wages are supposed to come down on a free market, or pardon me, are supposed to go up on a free market, 233 00:19:16.160 --> 00:19:18.800 is not by just artificially forcing them up. 234 00:19:18.800 --> 00:19:22.400 I mean, I may as well say, let's repeal the law of gravity so I can go fly. 235 00:19:22.400 --> 00:19:24.800 I wish life were that easy. 236 00:19:24.800 --> 00:19:29.360 The way you do it, and I explain this in 33 questions, which we've sold out of, 237 00:19:29.360 --> 00:19:33.760 but in 33 questions I've got this chapter, how did American wages rise? 238 00:19:33.760 --> 00:19:38.160 And the quick answer is that you leave businesses alone. 239 00:19:38.160 --> 00:19:41.920 They take their profits and sometimes they borrow 240 00:19:41.920 --> 00:19:44.480 and they use these funds to invest in machinery 241 00:19:44.480 --> 00:19:48.880 that makes production more abundant and at lower cost 242 00:19:48.880 --> 00:19:53.280 so that the goods created in the economy are created in greater and greater abundance 243 00:19:53.280 --> 00:19:58.280 so that the dollar wage that you earn is now stretched farther and farther and farther 244 00:19:58.280 --> 00:20:03.480 because today it requires far fewer hours of labor to earn the money necessary 245 00:20:03.480 --> 00:20:08.880 to buy a whole range of necessities than it did in 1950 or 1900. 246 00:20:08.880 --> 00:20:11.080 And this is how wages are increased. 247 00:20:11.080 --> 00:20:17.080 Now, we don't typically see falling prices that much in our economy because the Fed is always keeping prices up. 248 00:20:17.080 --> 00:20:20.680 But if it weren't for the Fed, we would see consistently falling prices. 249 00:20:20.680 --> 00:20:23.980 And that's how real wages are actually increased on a free market. 250 00:20:23.980 --> 00:20:25.480 There's no shortcut to that. 251 00:20:25.480 --> 00:20:28.180 That comes through investment. There is no shortcut to that. 252 00:20:28.180 --> 00:20:32.580 But all the same, let's get back to Harding. I just didn't want to let that pass. 253 00:20:32.580 --> 00:20:36.680 Gross expansion of currency and credit have depreciated the dollar, 254 00:20:36.680 --> 00:20:40.680 just as expansion and inflation have discredited the coins of the world. 255 00:20:40.680 --> 00:20:45.360 We inflated in haste, we must deflate in deliberation. 256 00:20:45.360 --> 00:20:50.800 We debase the dollar in reckless finance, we must restore in honesty. 257 00:20:50.800 --> 00:20:54.200 Deflation on the one hand and restoration of the one hundred cent dollar on the other 258 00:20:54.200 --> 00:21:00.400 ought to have begun the day after the armistice, but plans were lacking or courage failed. 259 00:21:00.400 --> 00:21:01.840 Why did nobody shoot this guy? 260 00:21:01.840 --> 00:21:02.840 Right? 261 00:21:02.840 --> 00:21:05.760 I mean, I'm just amazed he got away with this. 262 00:21:05.760 --> 00:21:08.800 We will attempt intelligent and courageous deflation. 263 00:21:08.800 --> 00:21:15.800 and strike at government borrowing which enlarges the evil and we will attack high cost of government 264 00:21:18.080 --> 00:21:24.160 with every energy and facility which attend republican capacity. We promise that relief 265 00:21:24.160 --> 00:21:28.780 which will attend the halting of waste and extravagance and the renewal of the practice 266 00:21:28.780 --> 00:21:33.960 of public economy, not alone because it will relieve tax burdens but because it will be 267 00:21:33.960 --> 00:21:38.960 is an example to stimulate thrift and economy in private life. 268 00:21:38.960 --> 00:21:40.960 The exact opposite of what we're being told now. 269 00:21:40.960 --> 00:21:43.960 We've got to blow $800 billion that doesn't even exist 270 00:21:43.960 --> 00:21:47.960 on a whole bunch of money-losing projects to keep the economy going. 271 00:21:47.960 --> 00:21:53.960 Yeah, I've got to bash the patient in the head with a hammer to keep him conscious, too. 272 00:21:53.960 --> 00:21:55.960 Or likewise, what we're all being told is, 273 00:21:55.960 --> 00:21:59.960 go out and spend, buy that plasma TV, empty your wallet. 274 00:21:59.960 --> 00:22:01.960 Harding says the exact opposite. 275 00:22:01.960 --> 00:22:11.960 Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, 276 00:22:11.960 --> 00:22:20.960 to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. 277 00:22:20.960 --> 00:22:27.960 There hasn't been a recovery from the waste and abnormalities of war since the story of mankind was first written, 278 00:22:27.960 --> 00:22:43.960 By the way, that's not such bad oratory, is it? I don't see that that's so bad. Why are we making fun of this poor guy? 279 00:22:43.960 --> 00:22:51.960 Now, here he is in his inaugural address. Now, we all read certain presidents' inaugural addresses, the presidents before whom we are expected to wave the incense. 280 00:22:51.960 --> 00:23:00.960 These are great men who get gigantic, larger-than-life monuments which I always believed are not befitting of a republic, needless to say, of any free people. 281 00:23:00.960 --> 00:23:09.960 You have a gigantic image of some guy, basically, looking down upon you like you're not even worthy to be in this statue's presence. 282 00:23:09.960 --> 00:23:15.960 Well, we don't read Warren Harding's inaugural. Here's what he said. 283 00:23:15.960 --> 00:23:21.460 We can reduce the abnormal expenditures, again, reduce them, and we will. 284 00:23:21.460 --> 00:23:24.460 We can strike at war taxation, and we must. 285 00:23:24.460 --> 00:23:29.960 We must face the grim necessity with full knowledge that the task is to be solved, 286 00:23:29.960 --> 00:23:38.960 and we must proceed with a full realization that no statute enacted by man can repeal the inexorable laws of nature. 287 00:23:38.960 --> 00:23:45.460 Our most dangerous tendency is to expect too much of government, and at the same time do for it too little. 288 00:23:45.460 --> 00:23:51.860 We contemplate the immediate task of putting our public household in order. 289 00:23:51.860 --> 00:23:56.560 We need a rigid and yet sane economy, combined with fiscal justice, 290 00:23:56.560 --> 00:23:59.660 and it must be attended by individual prudence and thrift, 291 00:23:59.660 --> 00:24:03.460 which are so essential to this trying hour and reassuring for the future. 292 00:24:03.460 --> 00:24:09.660 And finally, the economic mechanism is intricate and its parts interdependent, 293 00:24:09.660 --> 00:24:14.060 and has suffered the shocks and jars incident to abnormal demands, 294 00:24:14.060 --> 00:24:17.060 credit inflations and price upheavals. 295 00:24:17.060 --> 00:24:20.060 The normal balances have been impaired. 296 00:24:20.060 --> 00:24:23.060 The channels of distribution have been clogged. 297 00:24:23.060 --> 00:24:26.060 The relations of labor and management have been strained. 298 00:24:26.060 --> 00:24:30.060 We must seek the readjustment with care and courage. 299 00:24:30.060 --> 00:24:33.060 Our people must give and take. 300 00:24:33.060 --> 00:24:36.060 Prices must reflect the receding fever of war activities. 301 00:24:36.060 --> 00:24:40.060 Perhaps we shall never know the old levels of wages again, 302 00:24:40.060 --> 00:24:47.060 Because war invariably readjusts compensations, and the necessaries of life will show their inseparable relationship. 303 00:24:47.060 --> 00:24:51.060 But we must strive for normalcy to reach stability. 304 00:24:51.060 --> 00:24:56.060 All the penalties will not be light nor evenly distributed. There is no way of making them so. 305 00:24:56.060 --> 00:24:59.060 There is no instant step from disorder to order. 306 00:24:59.060 --> 00:25:05.060 We must face a condition of grim reality, charge off our losses and start afresh. 307 00:25:05.060 --> 00:25:08.060 It is the oldest lesson of civilization. 308 00:25:08.060 --> 00:25:17.060 I would like government to do all it can to mitigate. Then in understanding and mutuality of interest and concern for the common good, our tasks will be solved. 309 00:25:17.060 --> 00:25:23.060 No altered system will work a miracle. Any wild experiment will only add to the confusion. 310 00:25:23.060 --> 00:25:31.060 Our best assurance lies in efficient administration of our proven system. 311 00:25:31.060 --> 00:25:37.060 Are you as stunned by this as I am that a president is saying these things? He actually has a brain! 312 00:25:37.060 --> 00:25:45.060 It is unbelievable. He's saying exactly what needs to be said, you know, again, with a couple of tweaks here and there, but it's quite astonishing. 313 00:25:45.060 --> 00:25:55.060 And meanwhile, by the way, in the 1920s, you had the case of Japan, which did not have a Japanese Warren Harding, I'm sorry to report. 314 00:25:55.060 --> 00:26:04.060 Japan did not have the swift recovery that the United States had. Japan had, as it indeed had in the 1990s again, a prolonged depression. 315 00:26:04.060 --> 00:26:13.060 In 1920, the Japanese government, in effect, tried to keep prices artificially high, pump up the bubble, keep bubble conditions going. 316 00:26:13.060 --> 00:26:18.060 Benjamin Anderson, one of the economists Jeff Tucker talked about, said of Japan, 317 00:26:18.060 --> 00:26:25.060 The great banks, the concentrated industries and the government got together, destroyed the freedom of the markets, 318 00:26:25.060 --> 00:26:32.060 arrested the decline in commodity prices and held the Japanese price level high above the receding world level for seven years. 319 00:26:32.060 --> 00:26:36.060 Now we just heard from Harding, we're going to see prices and wages start moving down. 320 00:26:36.060 --> 00:26:42.060 Japan refuses to let that happen. During these years Japan endured chronic industrial stagnation 321 00:26:42.060 --> 00:26:49.060 and at the end in 1927 she had a banking crisis of such severity that many great branch bank systems went down 322 00:26:49.060 --> 00:26:53.060 as well as many industries. It was a stupid policy. 323 00:26:53.060 --> 00:26:59.060 In the effort to avert losses on inventory representing one year's production, Japan lost seven years. 324 00:26:59.060 --> 00:27:03.060 The U.S. by contrast, says Benjamin Anderson, was different. 325 00:27:03.060 --> 00:27:07.060 We took our losses, we readjusted our financial structure, we endured our depression, 326 00:27:07.060 --> 00:27:10.060 and in August 1921 we started up again. 327 00:27:10.060 --> 00:27:14.060 The rally in business production and employment that started in August 1921 328 00:27:14.060 --> 00:27:18.060 was soundly based on a drastic cleaning up of credit weakness, 329 00:27:18.060 --> 00:27:23.060 a drastic reduction in the cost of production and on the free play of private enterprise. 330 00:27:23.060 --> 00:27:27.060 It was not based on governmental policy designed to make business good. 331 00:27:27.060 --> 00:27:37.060 So that's a lesson from history. Now on the subject of economic theory. Why is it that this should make sense? 332 00:27:37.060 --> 00:27:49.060 As I say, the experts are puzzled. The experts try to ignore this episode. The experts even try to say that probably by cutting spending and taxes, we probably sowed the seeds for the Great Depression. 333 00:27:49.060 --> 00:27:53.060 The Great Depression 334 00:27:53.060 --> 00:27:57.060 Why should we expect this outcome? 335 00:27:57.060 --> 00:28:01.060 What I want to do is just say a couple of things briefly about 336 00:28:01.060 --> 00:28:05.060 so-called fiscal stimulus and then monetary stimulus. 337 00:28:05.060 --> 00:28:09.060 In fact, I think I'll actually do them in the reverse order. 338 00:28:09.060 --> 00:28:13.060 Of course we should expect these things are only going to prolong the agony of a depression. 339 00:28:13.060 --> 00:28:17.060 For the monetary part, 340 00:28:17.060 --> 00:28:21.300 Let me not assume that everybody in the room knows Austrian Business Cycle Theory. 341 00:28:21.300 --> 00:28:25.620 A lot of people are coming to this for the first time in recent months or in the past 342 00:28:25.620 --> 00:28:28.060 18 months or two years. 343 00:28:28.060 --> 00:28:30.500 And so I don't want to assume that you know that. 344 00:28:30.500 --> 00:28:34.300 Or if I say there have been misallocations of resources, how did that happen? 345 00:28:34.300 --> 00:28:39.060 So let me give the really, really stripped down Reader's Digest version. 346 00:28:39.060 --> 00:28:41.920 And for those of you in the room who are experts who are saying, I can't believe he didn't 347 00:28:41.920 --> 00:28:45.140 talk about the, well, you're right, and I deserve that rebuke. 348 00:28:45.140 --> 00:28:49.220 But I'll happily take an extra 15 minutes, but Doug French will never let me speak at 349 00:28:49.220 --> 00:28:53.220 one of these again, so just please just be patient with me. 350 00:28:53.220 --> 00:28:58.020 Let me just give the stripped down version, it basically goes like this, what Hayek was 351 00:28:58.020 --> 00:29:04.480 arguing in his important writing in the 1930s was that interest rates actually play a role 352 00:29:04.480 --> 00:29:05.480 in the economy. 353 00:29:05.480 --> 00:29:09.740 They're not just arbitrary numbers, they play a coordinating function. 354 00:29:09.740 --> 00:29:13.480 And when they are permitted to play this coordinating function, what they do is they coordinate 355 00:29:13.480 --> 00:29:43.480 production across time. So that is to say, when we save more and interest rates consequently decline, that is the very time that it makes sense for businesses to produce goods and to engage in projects that are going to bear fruit in the future, because when we save more, we're basically saying, I'm going to consume this portion of my income in the future. Well, that's the future that businesses are investing for. And why are they investing now? Because the interest rates are low and the 356 00:29:43.480 --> 00:29:54.480 The longer-term their production project is, the more interest rate sensitive it is, so it's going to give a disproportionate stimulus to longer-term types of investments. 357 00:29:54.480 --> 00:30:04.480 So the interest rate then coordinates this, my desire to consume in the present versus the future, and businesses' production processes oriented toward the present versus the future. 358 00:30:04.480 --> 00:30:34.480 Secondly, the very fact that I'm saving, that I've earned my money and have not returned back into the economy to take that money and claim all the resources to which, in a sense, I'm entitled, I'm actually leaving some of those resources out there in the economy, well, my deferral of consumption, my releasing of resources into the economy provides the material wherewithal to see all the new business projects undertaken by investors through to completion. So again, now the interest rate is coordinating this as well. In effect, the supply 359 00:30:34.480 --> 00:30:37.080 of Real Saved Resources in the Economy. 360 00:30:37.080 --> 00:30:39.680 And what Hayek said is that when you tamper 361 00:30:39.680 --> 00:30:43.080 with the structure of interest rates as the market sets them, 362 00:30:43.080 --> 00:30:47.280 you are introducing discoordination into this coordinating structure. 363 00:30:47.280 --> 00:30:50.080 So now, if the central bank, like the Federal Reserve, 364 00:30:50.080 --> 00:30:53.080 simply says, we're going to force interest rates down 365 00:30:53.080 --> 00:30:55.680 through our open market operations, 366 00:30:55.680 --> 00:30:57.880 the problem here is that in this case, 367 00:30:57.880 --> 00:31:01.880 the public has not necessarily indicated they want to consume in the future. 368 00:31:01.880 --> 00:31:05.400 What do they want to consume right now? They might want to consume even more right now. 369 00:31:05.400 --> 00:31:09.340 But yet, businesses are still being encouraged to engage in long-term investment. 370 00:31:09.340 --> 00:31:13.980 So people are demanding more of existing goods right now, but yet investors are being misled 371 00:31:13.980 --> 00:31:18.080 into engaging in long-term product development for new products in the future. 372 00:31:18.080 --> 00:31:19.760 It's a time mismatch. 373 00:31:19.760 --> 00:31:24.580 Likewise, just because Ben Bernanke or Alan Greenspan says, hey, we're going to force 374 00:31:24.580 --> 00:31:27.920 interest rates down, that doesn't release any more resources into the economy. 375 00:31:27.920 --> 00:31:32.920 So you have an unchanged resource pool to fund a whole bunch of new investment projects. 376 00:31:32.920 --> 00:31:35.920 Well, how are you going to do that? They can't all be completed. 377 00:31:35.920 --> 00:31:37.920 So there's going to be a bust that comes. 378 00:31:37.920 --> 00:31:40.920 So this is the super-duper, really fast overview of this. 379 00:31:40.920 --> 00:31:43.920 So that's why simply saying, let's create more money 380 00:31:43.920 --> 00:31:47.920 and let's jolt that money into the banking system and keep interest rates down, 381 00:31:47.920 --> 00:31:51.920 that's not a solution to a depression. That's the cause of the depression. 382 00:31:51.920 --> 00:31:55.920 That's what gets people onto these unsustainable investment trajectories. 383 00:31:55.920 --> 00:32:11.920 And if you continue to do it, all you're doing is encouraging people to continue building things that ultimately can't be finished, or won't be profitable, or there won't be sufficient consumer demand to in effect rationalize these investments at the end. 384 00:32:11.920 --> 00:32:22.920 So that's a super-duper-duper stripped down version of the theory. So there are implications here about what you should do during a depression. Again, stop the money creation. 385 00:32:22.920 --> 00:32:30.920 Now, Mises' example that he uses in Human Action of the master builder who's building a house, but he's under a misleading impression of how many bricks he has. 386 00:32:30.920 --> 00:32:34.920 He thinks he's got 20% more bricks than he has, and let's say he can't buy anymore. 387 00:32:34.920 --> 00:32:43.920 He starts building the house, but he's building a different kind of house than he would have built if he had known the real supply of saved resources in his microeconomy. 388 00:32:43.920 --> 00:32:47.920 So he's building a house that he won't be able to finish. 389 00:32:47.920 --> 00:32:52.920 So, if we say to him, well, in fact, let's think of it this way. 390 00:32:52.920 --> 00:32:55.420 What would be the best way to get this builder out of his predicament? 391 00:32:55.420 --> 00:32:58.620 It would be to alert him, you're building a house that you won't be able to finish. 392 00:32:58.620 --> 00:33:00.920 And alert him as soon as possible. 393 00:33:00.920 --> 00:33:04.220 Don't wait till he's at the last brick and say, ah, that was the last brick. 394 00:33:04.220 --> 00:33:06.120 Because now he's got to demolish the whole building. 395 00:33:06.120 --> 00:33:07.920 Now he's squandered all those resources. 396 00:33:07.920 --> 00:33:12.120 Now he's wasted all that labor time and he has made society poorer. 397 00:33:12.120 --> 00:33:15.720 So we see, first of all, from this example, that the boom period, 398 00:33:15.720 --> 00:33:21.720 The period where he's building the house, he's got employment, everything looks great, that's where the damage is done. 399 00:33:21.720 --> 00:33:31.720 The recession period when he realizes, whoa, whoa, I'm doing something unsustainable, I'm wasting resources, I'm wasting labor time, that's the return to health. 400 00:33:31.720 --> 00:33:36.720 And so likewise, now let's think of that in terms of the economy as a whole. 401 00:33:36.720 --> 00:33:44.720 If producers are engaged in projects, the economy as a whole is on a series of investment trajectories that are unsustainable in the long run. 402 00:33:44.720 --> 00:33:50.720 It's better that it find that out right now and that it not find it out in the distant future. 403 00:33:50.720 --> 00:33:57.720 So, in effect, the analogy I've used is when people say the solution is let's pump more money in the economy, 404 00:33:57.720 --> 00:33:59.720 let's put interest rates way down, let's put them down to zero. 405 00:33:59.720 --> 00:34:01.720 In fact, zero is too high. 406 00:34:01.720 --> 00:34:04.720 We're even hearing from some people, zero is too high. 407 00:34:04.720 --> 00:34:07.720 Whatever that means, whatever they want to do with that. 408 00:34:07.720 --> 00:34:13.720 But when they say that, what they're really saying is that the way out of the master builder's dilemma 409 00:34:13.720 --> 00:34:15.720 is that we should just get this guy drunk. 410 00:34:15.720 --> 00:34:19.720 You know, just liquor him up so he doesn't notice the dwindling supply of bricks. 411 00:34:19.720 --> 00:34:22.720 He just keeps on. He's having a great old time. 412 00:34:22.720 --> 00:34:24.720 But does that hold off the bust? 413 00:34:24.720 --> 00:34:26.720 The bust is inevitable. 414 00:34:26.720 --> 00:34:28.720 So likewise, by saying, oh, just keep pouring in more money, 415 00:34:28.720 --> 00:34:31.720 that doesn't change the fact that you've got an unsustainable structure. 416 00:34:31.720 --> 00:34:36.720 And when Alan Greenspan did exactly this in 2001, 417 00:34:36.720 --> 00:34:40.720 when he started, you know, with all these rate cuts and we're going to just get things going again, 418 00:34:40.720 --> 00:34:45.720 and he refused to let that recession take its course and that healthy process 419 00:34:45.720 --> 00:34:50.720 whereby these unsustainable investments are stopped and they stop impoverishing us 420 00:34:50.720 --> 00:34:55.720 and those resources are reallocated into sustainable projects, he wouldn't let that happen 421 00:34:55.720 --> 00:35:00.720 and that's the first recession on record in which housing starts did not decline 422 00:35:00.720 --> 00:35:06.720 and it's right at that time that people therefore drew the false conclusion, the Fed-fueled conclusion 423 00:35:06.720 --> 00:35:10.720 The conclusion that, you know, everything goes bust in a recession, apparently except housing. 424 00:35:10.720 --> 00:35:14.720 Housing prices never go down. A house is the best investment you can make. 425 00:35:14.720 --> 00:35:17.720 You should make a living flipping houses, because that's an easy way to make money. 426 00:35:17.720 --> 00:35:22.720 All those myths get started right at that time, because Greenspan is trying to hold off the recession 427 00:35:22.720 --> 00:35:25.720 by keeping the master builder liquored up. 428 00:35:25.720 --> 00:35:30.720 But now the master builder is on the last brick, and so the recession is all the worse. 429 00:35:30.720 --> 00:35:34.720 So we shouldn't look back at 1920 and say, what a big surprise! 430 00:35:34.720 --> 00:35:39.720 The Fed didn't try to keep the bubble going and yet somehow the economy got out of it. 431 00:35:39.720 --> 00:35:43.720 No, no, it's because the Fed didn't try to do that that the economy recovered. 432 00:35:43.720 --> 00:35:46.720 It's precisely for that reason that the economy recovered. 433 00:35:46.720 --> 00:35:50.720 Now secondly we have the fiscal stimulus argument. 434 00:35:50.720 --> 00:36:00.720 Now this one really I think you would have to be a professional economist who is basically just a full-time reader of Keynes. 435 00:36:00.720 --> 00:36:03.720 All you do is read John Maynard Keynes to believe in fiscal stimulus. 436 00:36:03.720 --> 00:36:04.720 and Fiscal Stimulus. 437 00:36:04.720 --> 00:36:09.440 I think the average person immediately detects there's something fishy about this. 438 00:36:09.440 --> 00:36:12.240 There's no way this can possibly work. 439 00:36:12.240 --> 00:36:17.280 Because basically the argument is, we're going to take $800 billion and just blow it on a 440 00:36:17.280 --> 00:36:21.440 bunch of money-losing projects, and that will turn the economy around. 441 00:36:21.440 --> 00:36:24.960 Now there are some Republicans, not all of them to their credit, but some of them, their 442 00:36:24.960 --> 00:36:29.560 response was, well, you know, if we had drafted the stimulus package, well, we would have 443 00:36:29.560 --> 00:36:32.220 blown that $800 billion on different things. 444 00:36:32.220 --> 00:36:38.620 That's the problem. The problem is the very idea that you can conjure up $800 billion. 445 00:36:38.620 --> 00:36:42.420 I mean, where is it coming from? I mean, why aren't we doing this all the time? 446 00:36:42.420 --> 00:36:44.720 And of course, they do have a kind of answer to that. 447 00:36:44.720 --> 00:36:48.420 But in effect, when you think about what the consequences of that are, 448 00:36:48.420 --> 00:36:53.020 first of all, remember that what the government is going to spend this on is money losing. 449 00:36:53.020 --> 00:36:56.320 They are projects that will make losses. 450 00:36:56.320 --> 00:36:59.920 And why do I say that? Well, the private sector would already be doing them 451 00:36:59.920 --> 00:37:04.400 If they were money-making ventures. These are money-losing ventures. That's why the government is doing them. 452 00:37:04.400 --> 00:37:09.240 And of course the government, because it gets its revenue not by selling you a product, 453 00:37:09.240 --> 00:37:11.760 it gets its revenue by seizing it from you, 454 00:37:11.760 --> 00:37:16.320 and it has no way to calculate profit and loss. Is it producing something that's adding value? 455 00:37:16.320 --> 00:37:19.160 Is it producing something that's destroying value? It has no way of knowing. 456 00:37:19.160 --> 00:37:22.720 Every spending decision it makes is totally arbitrary, 457 00:37:22.720 --> 00:37:27.320 because it's completely isolated from market exchange. So it's going to blow this money 458 00:37:27.320 --> 00:37:31.760 on, again, money-losing ventures, and that's supposed to make us wealthy. 459 00:37:31.760 --> 00:37:33.360 How can that be? 460 00:37:33.360 --> 00:37:36.520 Well, and then, of course, there's the opportunity cost. What would have happened to these funds? 461 00:37:36.520 --> 00:37:39.160 Even if they're borrowing them, okay, well, where would those 462 00:37:39.160 --> 00:37:43.080 loanable funds have gone to? Well, maybe something more worthy than this. 463 00:37:43.080 --> 00:37:45.760 Now, one argument that's made 464 00:37:45.760 --> 00:37:49.280 is that, by the more sophisticated fiscal stimulus people, is, well, 465 00:37:49.280 --> 00:37:51.320 our economy is filled with 466 00:37:51.320 --> 00:37:56.200 idle resources, and what we need to do is stimulate them back into activity again. 467 00:37:56.200 --> 00:37:58.160 That's what we need to do. 468 00:37:58.160 --> 00:38:02.280 Now, to the idle resources argument, I have a couple of thoughts. 469 00:38:02.280 --> 00:38:05.360 And the first one is derived from, though not the same as, 470 00:38:05.360 --> 00:38:08.440 an example that Peter Schiff uses in his book Crash Proof. 471 00:38:08.440 --> 00:38:11.720 Schiff gives the example of a restaurant owner 472 00:38:11.720 --> 00:38:15.640 who happens to live near where the circus comes to town. 473 00:38:15.640 --> 00:38:19.200 And the circus comes to town, and so all the clowns and the trapeze artists 474 00:38:19.200 --> 00:38:23.520 and the circus patrons all start going to his restaurant in great numbers. 475 00:38:23.520 --> 00:38:25.720 Now, this is not the brightest restaurant owner in the world. 476 00:38:25.720 --> 00:38:30.160 So he doesn't notice that a lot of these patrons are, in fact, wearing clown suits. 477 00:38:30.160 --> 00:38:35.440 So he thinks he's just enjoying an incredible upsurge in demand for his food. 478 00:38:35.440 --> 00:38:39.600 So in response to this demand, he builds a new addition onto his facility, or he builds 479 00:38:39.600 --> 00:38:41.320 a new location. 480 00:38:41.320 --> 00:38:43.880 And then the circus leaves town. 481 00:38:43.880 --> 00:38:47.720 And then he realizes he's not really as much in demand as he thought. 482 00:38:47.720 --> 00:38:53.240 This was sort of an artificially circus-induced boom that he was enjoying. 483 00:38:53.240 --> 00:38:58.480 Well now the question becomes, yes, now he's got idle resources. That addition is idle. 484 00:38:58.480 --> 00:39:03.440 Those additional employees he's hired are idle. That additional location is idle. Should 485 00:39:03.440 --> 00:39:09.480 we want to have a stimulus package to stimulate these resources back into use? No! They shouldn't 486 00:39:09.480 --> 00:39:14.400 have been built in the first place. It was a miscalculation based on an artificial boom. 487 00:39:14.400 --> 00:39:18.360 It's a waste of resources that needs to be liquidated. Those waiters and waitresses standing 488 00:39:18.360 --> 00:39:23.080 around all day not getting any tips and working for whatever the wage is, they should be redeployed 489 00:39:23.080 --> 00:39:26.860 elsewhere. In fact, you'd be doing them a favor, basically. They would want that. They 490 00:39:26.860 --> 00:39:31.400 need to be moved out of that. They are idle resources, those individuals, but we don't 491 00:39:31.400 --> 00:39:36.160 want to stimulate them back into activity because we would be wasting the scarce resources 492 00:39:36.160 --> 00:39:41.860 of society. We should instead be reallocating those resources where the market demands them, 493 00:39:41.860 --> 00:39:45.600 where we're producing things that are urgently demanded by consumers. 494 00:39:45.600 --> 00:39:52.600 Now, secondly, I would ask sort of the question, why are the idle resources idle? This question 495 00:39:52.600 --> 00:40:04.600 Why all of a sudden, why have all these businessmen, who are selected by the market for their skill at anticipating consumer demand, 496 00:40:04.600 --> 00:40:10.600 why have they done such a rotten job that they're all saddled with idle resources, that it's not even worth putting them to work? 497 00:40:10.600 --> 00:40:15.600 Why has that happened? As Ayn Rand would say, blank out, there's no answer given to that. 498 00:40:15.600 --> 00:40:21.600 But the Austrians would say, the reason you have all these idle resources in the first place was because of the central bank induced boom. 499 00:40:21.600 --> 00:40:27.600 and the induced boom that misdirected capital into projects that would not be sustainable in the long term. 500 00:40:27.600 --> 00:40:30.600 And now entrepreneurs are realizing their error. 501 00:40:30.600 --> 00:40:34.600 So we don't necessarily, again, want to stimulate these idle resources into activity. 502 00:40:34.600 --> 00:40:38.600 We want to redeploy them. We want a restructuring of the economy. 503 00:40:38.600 --> 00:40:42.600 But instead you get a stimulus package. It distorts this process. 504 00:40:42.600 --> 00:40:48.600 It makes it harder for the market to figure out what's real demand, what's phony demand, what's sustainable, what isn't. 505 00:40:48.600 --> 00:41:02.600 It keeps construction companies at work doing government make work when these companies themselves and their employees need to be either taken out of business and then their employees need to be redeployed elsewhere in the economy. 506 00:41:02.600 --> 00:41:09.600 So again, the stimulus only discombobulates the market further and makes it harder for market actors to make these adjustments. 507 00:41:09.600 --> 00:41:21.600 And then ultimately, and then my last little point would be, just to take one example from the stimulus package, apparently two million Americans are going to get their homes weatherized under the stimulus package. 508 00:41:21.600 --> 00:41:26.600 Now this is supposed to again stimulate idle resources back into activity. 509 00:41:26.600 --> 00:41:30.600 Well, okay, so we've got some resources in the financial sector that are idle. 510 00:41:30.600 --> 00:41:33.600 We've got some car production that's idle. 511 00:41:33.600 --> 00:41:35.600 We've got a lot of various types of unemployment. 512 00:41:35.600 --> 00:41:44.600 Do we have enough unemployed weatherizers in the country that a stimulus package could put them and only them back to work? 513 00:41:44.600 --> 00:41:52.600 Well, of course not. What in fact will happen is that you'll be drawing employment from private employers who were producing good things for consumers, 514 00:41:52.600 --> 00:41:56.600 but now they'll be bid away from private actors. 515 00:41:56.600 --> 00:42:03.600 And then when the economy starts turning around, private actors will find themselves having to bid against the government for laborers, 516 00:42:03.600 --> 00:42:25.600 So there's no way, even if any of this stuff made sense, to tailor the package so that the exactly correct kinds of capital and kinds of employment are specifically drawn back into use, even if the theoretical objections weren't there, the practical obstacles are impossible to meet, in effect. 517 00:42:25.600 --> 00:42:32.600 So, okay, and by the way, by the way, let's say there were two million weatherizers out of work, let's say it's one weatherizer per house. 518 00:42:32.600 --> 00:42:38.600 Let's say they were out of work, and there were two million people needing their homes weatherized, then why do we need the stimulus package? 519 00:42:38.600 --> 00:42:47.600 I mean, if wages and prices are allowed to fall to their equilibrium level, then people who need their homes weatherized will find the suppliers of weatherizing services on their own. 520 00:42:47.600 --> 00:42:49.600 And so the stimulus package is superfluous. 521 00:42:49.600 --> 00:43:00.600 I do elaborate more on the stimulus sort of thing in a couple of articles on my website, tomwoods.com. I have an articles page, so I'll refer you there for that. 522 00:43:00.600 --> 00:43:06.600 But let me close by this, because here's a question I get a lot. I've been doing a lot of talk radio in support of the book. 523 00:43:06.600 --> 00:43:17.600 I've been doing public appearances. And the question I often get is, look, you know as well as I do that the things you're proposing make perfect sense, and we know equally well the government's never going to do any of them. 524 00:43:17.600 --> 00:43:22.600 They're going to do the exact opposite, bail everybody out, whatever, interfere with prices and wages one way or another. 525 00:43:22.600 --> 00:43:26.600 They're going to keep pumping in money, they're going to do these stimulus packages. 526 00:43:26.600 --> 00:43:28.600 We know they're going to do all that. We know it. 527 00:43:28.600 --> 00:43:31.600 So, what can we as individuals do? 528 00:43:31.600 --> 00:43:36.600 Well, in terms of what you can do with your money and finances, well, I would refer you to an expert on that. 529 00:43:36.600 --> 00:43:40.600 I don't want to get in trouble if I say something that goes wrong, so that's not my field. 530 00:43:40.600 --> 00:43:45.600 But in terms of, you know, what can we do though, given that the government obviously doesn't really care what we think, 531 00:43:45.600 --> 00:43:48.160 I don't care what we think, and that should be obvious by now. 532 00:43:48.160 --> 00:43:53.280 I mean, September 2008, the Congressional bailout package was about to be passed. 533 00:43:53.280 --> 00:43:58.400 They were getting, congressmen were getting like two thousand to one calls against. 534 00:43:58.400 --> 00:44:01.200 And the first time, by the way, you know, they rejected it. 535 00:44:01.200 --> 00:44:06.720 And every piece of hysteria imaginable, you know, was heard in the media. 536 00:44:06.720 --> 00:44:13.760 That, oh my gosh, how could these stupid rubes possibly be against what their betters have told them is necessary for the economy? 537 00:44:13.760 --> 00:44:25.760 And parenthetically, by the way, wasn't it interesting to read the ex-chairman of AIG saying, oh, just the other day, saying, by the way, the bailout hasn't worked, and I think it probably would have been best to let AIG go bankrupt. Isn't that funny? 538 00:44:25.760 --> 00:44:37.760 Turns out the stupid rubes were right after all. Well, as usual. Well, in any case, in any case, you know, so we look at the situation we're in, they're not going to do any of the right things, they're going to do all these bailouts and everything else. 539 00:44:37.760 --> 00:44:54.760 So what can we do as individuals? How do we get out of this? And the answer, it seems to me, is that given that our government, you can petition them all day long, and ultimately they're still going to vote for the bailout, maybe we can get to a point where people will actually vote those people out. 540 00:44:54.760 --> 00:45:02.760 I don't know if that will ever happen. I was shocked that basically nobody was voted out after that. Everybody was against the bailout, they voted for it anyway, and then they all went back to work. 541 00:45:02.760 --> 00:45:05.760 I don't know. Something's going wrong. Something's kind of screwy here. 542 00:45:05.760 --> 00:45:09.760 But what can we do? I actually don't know the answer to my own question, believe it or not. 543 00:45:09.760 --> 00:45:14.760 I actually don't know what we can do in the sense that I only know what I, as an individual, can do. 544 00:45:14.760 --> 00:45:19.760 And the only thing I am even remotely good at, my wife can attest to this, the only thing. 545 00:45:19.760 --> 00:45:24.760 I mean, I'm not a good fix-it man. I mean, that's putting it mildly. I'm a good break things man. 546 00:45:24.760 --> 00:45:30.760 But I have no skills, really, other than writing. That's really all I can do. 547 00:45:30.760 --> 00:45:35.760 Therefore that's what I try to do and that's all I can do and try and spread the message the way I can through that. 548 00:45:35.760 --> 00:45:40.760 Other people are really good organizers. They can organize events. They can organize groups. 549 00:45:40.760 --> 00:45:47.760 They can get big rallies going and those people, the division of labor is demanding that that's what they do. 550 00:45:47.760 --> 00:45:52.760 Other people maybe don't have the time even to do this, but they may have some wealth. 551 00:45:52.760 --> 00:45:57.760 They can donate to worthy causes to push this forward, but each of us has some role to play. 552 00:45:57.760 --> 00:46:03.760 Because if each of us actually sat and did a kind of examination of conscience and said, 553 00:46:03.760 --> 00:46:06.760 What is it that I can contribute to this? 554 00:46:06.760 --> 00:46:11.760 Even if it's making a little donation, even if it's making a donation of my time, it's whatever. 555 00:46:11.760 --> 00:46:13.760 It's spreading the word to my neighbors. 556 00:46:13.760 --> 00:46:16.760 If everybody did this, it doesn't mean we would win. 557 00:46:16.760 --> 00:46:22.760 But we would at least be satisfied to know that we did everything we could. 558 00:46:22.760 --> 00:46:26.760 And I mean, that may be small consolation, but it's not nothing. 559 00:46:26.760 --> 00:46:37.760 That at least we fought against evil, we stood up against evil, I mean we faced evil in the face and we refused to be cowed by it and instead we spread the truth. 560 00:46:37.760 --> 00:46:50.760 There is something incredibly enlightening about reading Austrian economics because you finally realize that although I'm being told that this is all a big mystery that only the experts can understand and I better just stick to my own activities, 561 00:46:50.760 --> 00:46:59.760 The Elegance and Simplicity of it all is so moving, is so compelling, you're just drawn to it. 562 00:46:59.760 --> 00:47:03.760 We need to draw more people to it. And as I say, we won't necessarily win. 563 00:47:03.760 --> 00:47:06.760 We certainly can't make promises about this. 564 00:47:06.760 --> 00:47:11.760 But nevertheless, the truth does have an attractive power. 565 00:47:11.760 --> 00:47:14.760 And yeah, the Internet can be used by the other guys too. 566 00:47:14.760 --> 00:47:19.760 But who in his right mind wants to spend all day on the Internet reading about canes? 567 00:47:19.760 --> 00:47:25.260 Who in his right mind wants to spend a week of his summer at a Keynesian Institute? 568 00:47:25.260 --> 00:47:29.660 Whereas we have to turn people away from our Mises University over the summer, 569 00:47:29.660 --> 00:47:35.060 because when you read our stuff, it makes sense. The light bulbs go on. 570 00:47:35.060 --> 00:47:37.460 So, ladies and gentlemen, we're often told, you know, 571 00:47:37.460 --> 00:47:40.160 you don't learn the lessons of history, you're condemned to repeat it. 572 00:47:40.160 --> 00:47:44.360 Well, 1920 and 21 is a period of history I would love to repeat. 573 00:47:44.360 --> 00:47:48.860 I'm afraid we're going to repeat 1929. 574 00:47:48.860 --> 00:47:53.460 We're told that in 1929 we had a great depression, government wasn't able to get us out of it, 575 00:47:53.460 --> 00:47:56.260 therefore we need to do exactly what the government did in those years. 576 00:47:56.260 --> 00:47:58.260 That syllogism doesn't work. 577 00:47:58.260 --> 00:48:01.860 So instead it seems to me, why don't we try sanity for a change? 578 00:48:01.860 --> 00:48:04.660 Why don't we try the things that really did work? 579 00:48:04.660 --> 00:48:09.860 And the only way we can do that is simply through the old-fashioned method, 580 00:48:09.860 --> 00:48:14.260 amplified by the Internet, of spreading the message through our own efforts. 581 00:48:14.260 --> 00:48:16.460 And ladies and gentlemen, good luck to all of us. 582 00:48:16.460 --> 00:48:17.460 Thank you so much. 583 00:48:18.860 --> 00:48:20.860 Thank you very much.