Our next speaker is an adjunct scholar at the Mises Institute, faculty member at Mises University.
He is actually one of two speakers today that attended Mises University way back when, actually he didn't attend all that long ago, it was 2000-2001.
And, of course, I always make the point, and I'm going to continue to, that he was born the year after I graduated from high school, completed his Bachelor of Arts at Hillsdale College, more importantly his Ph.D. at NYU.
He defended a dissertation that Walter made reference to and was entitled,
Unanticipated Intertemporal Change in Theories of Interest, which would be terribly interesting if he could regurgitate that today.
Anyway, he's written a number of books, The Politically Incorrect Guide to Capitalism.
He's written a study guide for the Institute for Man, Economy, and State.
He's written a study guide for Human Action.
He's written a great little book that's out front called Chaos Theory.
And his latest book is The Politically Incorrect Guide to the Great Depression and the New Deal.
So please help me welcome, fresh off the Kudlow Show, I'm told,
speaking about unemployment, the 1930s and today, Dr. Robert Murphy.
Thank you, Doug. Thank you, everyone. It's good to be here. I just love these sorts of meetings. It's great to always, you know, to finally be in a room with this many people that are as crazy as I am. It's always reassuring. I was out in the, just to give you an example, we were out during the break and of course the line in the men's room was really long. This is not a joke. This really did happen and somebody said, it's because
So the price is too low, that's why this line is so long here for the urinals, so that's
the potty humor portion of my talk.
It's also fun to be here too because you get to learn things about the other speakers because
we don't get the same talk every time, we're doing these Mises circles and it's fun to
sort of go around the country and see pockets of resistance if you will, to see that there's
He's sort of embarrassed to be an economist or it's not a good time to be an economist and I
understand what he means but for me it's actually been the other way around that for me and partly
it's because he's in academia still and I'm sort of an economist at large you know doing talks and
and doing radio shows and things like that but for me my business is booming right because the
economy's in trouble and people want to know reporters call up they want someone to comment
on it so they come to me I tell people I actually feel sort of I guess this is what it would be like
The Theory of Money and Credit
and then Bruce Willis is sent back in time to try to prevent that or to actually get a sample of the disease so in the future they can figure out a cure for it and so he's going around talking to people in the past when he gets sent back and they of course think he's crazy but he knows no this is going to be awful I'm telling you disaster is about to strike and then there's a point in the movie when he actually for a minute believes that he's just crazy and he's relieved you know he's not disappointed that his predictions have turned out right
Wrong. He's very relieved he can go back and live a normal life with this girl that he met.
And so it's the same thing I think for a lot of us that on the one hand yeah it would be good if
it turned out that massive government interventions don't cripple the economy and that things turn
around and you know wouldn't it be great if all it really did take for us to be fairly say wealthy
is to run the printing press. I would want to live in that world right that would be good and
sure it'd be embarrassing that yeah I made some predictions but hey just print up a few thousand
And particularly just because of intellectual dishonesty, on his part, that this sort of gets to the point, and Peter Klein was talking about this a little bit, is to, you know, why is it that economics isn't, you know, there isn't this constant improvement over time, that they just weed out the bad theories, and that, you know, shouldn't it be the case, you got all these smart people that are economists, and they can see what worked and what didn't, and shouldn't their theories just get better over time? You would think that would happen, right, like that happens in other areas, that, you know, most people wouldn't say,
that, you know, oh yeah, physics was going great until that nut job, Albert Einstein, came along, right, and then he just took it down a cul-de-sac, right, that wouldn't, that wouldn't make sense.
You see what I'm saying? You might think, you might not like his politics or something, but in terms of, you know, physics taking a wrong turn, that kind of talk would be a little bit weird and you would sort of sound uneducated if you said that,
Because it does make sense for someone to say, yeah, psychology or psychiatry was good
until Freud came along, right?
Now, whether or not you agree with that statement, you could understand someone saying it, and
by the same token, you could understand someone saying economics was good when Adam Smith
was writing and Turgot and all these other people, but then Keynes really set us back
50 years.
And that sort of statement is plausible.
I actually think it's true, but you see how that doesn't sound nearly as crazy and sort
and a lot of it has to do with the fact that you can't have controlled experiments, and we see that's playing out in this current crisis, I'm sure many of you know this, but just for those who don't, so back when Obama gets inaugurated, he comes in, his economic team's trying to justify the stimulus, he comes in, he comes in, he comes in, he comes in, he comes in, he comes in, he comes in, he comes in, he comes in, he comes in, he comes in,
And they had a chart, and this was on, I had an article that came out this week on Mises.org, M-I-S-E-S.org for those of you listening online, you're not familiar with the website, that's what it is.
And they, what happened is back in, I guess this was January or maybe early February, they came out with these predictions.
And they showed, you know, they were looking forward in the future at that point, and they were saying, look, if we don't put this new stimulus in the action, you know, the unemployment rate might get up to almost as high as 9%, right?
That was what they were dangling in front of the voters to say, you better give us this, whatever it was, $787 billion, or else unemployment might get up to near 9%, and you wouldn't want that, would you?
And no, that's, at the time, that would have been awful. 9%, that's crazy. Unemployment shouldn't be that high.
And then they showed an alternate projection. However, if you do give us the stimulus, if you let us spend the money like our models say that we should, that's going to fill the gap in aggregate demand, and unemployment won't break 8%. It'll stay below that. That was their projection.
Well now, of course, we know what happened. They got their money, they spent some of it, and unemployment is 9.7% as of the last official measure.
So, to conclude that, to summarize, make sure you follow the point, the unemployment rate right now with the stimulus package is worse than what they were showing would have been the worst case scenario if we sat back and did nothing, right?
And so you would think, you know, what else could happen for them to say, wait a minute, maybe we're wrong, maybe these free market people are right, what more could have happened that the unemployment rate got worse even though they got the stimulus plan that they wanted?
So that's one example, a different example, and Doug when he was up here eluded the fact
that I was on Larry Kudlow's show the other day, and there, it's just classic what happened,
so it was in response, the reason we were there was it was me and a bunch of other talking
heads, and we were responding to Timothy Geithner's town hall, I don't know how many of you subjected
yourself to that, and they asked me, let me just repeat one of the jokes.
So for those of you who didn't see it, there's a hilarious point in there where the CNBC
hosts are needling him and they're... they actually, to be fair, I think they did a pretty
good job.
He would give some completely evasive, bogus answer and they didn't just move on.
They basically gave him a chance to once again repeat the bogus evasive answer.
So it was good that the American people could see, for those who were even remotely curious,
that he's really dodging the question.
So I have to say I did like that.
But there was this one point where the question from the audience concerned the possibility,
the appearance perhaps of corruption where, you know, it seems kind of a coincidence that
you let the competitors of Goldman Sachs fail and then you reward, you know, the decisions
you take in the national interest just so happen to align with the interests of Goldman
Sachs.
And isn't that kind of funny when these decisions were made that the former CEO of Goldman Sachs
was the Treasury Secretary, Paulson at the time, you know, isn't that a bit odd?
So of course they didn't say it the way I just did, it was much more open-ended and
vague but that was the idea.
And so Geithner was trying to defuse that and he was, first of all, his whole rationale
or his whole point of being there was to make sure everyone realized this was not my fault,
this was somebody else's fault.
And so what he actually said, I'm not putting words in his mouth, he was saying, no, I never
I've never worked in the financial sector, and he actually said, I never held a real job.
Right? And it was fun. And so the CNBC host kind of catches him. So he says, do you put that on your resume or something like that?
And so it was funny. But like I said, I don't know if it was self-deprecating humor to try to disarm the audience. Like, hey, I'm a guy like you.
You know, yeah, sure, I have billions of dollars in investment bankers, but I'm just like you. Or if he really didn't realize it.
Anyway, so, but the point was, so that's, you know, I'm on the Kudlow show and I opened
up with that line saying, yeah, the only accurate thing he said was when he admitted he never
had a real job.
And then, and so then, you know, Kudlow presses me, he said, well, what did, what was it,
what was the single worst thing he said, in your mind, the most inaccurate thing?
I said, well, this whole idea that they saved the credit markets, that, you know, if you
remember back when Paulson was arguing for the TARP, the $700 billion that they needed,
And I like, a few people have said that basically it was a ransom note, that Paulson sent the
note to Congress saying, give us $700 billion or we'll wreck the economy.
And if you think about it, that really was the rhetoric at the time, he said, you need
to give us this or the whole world's financial system is going to collapse.
And remember, the rationale though was not because, you know, wouldn't it be bad if all
these investment bankers were out of a job, obviously that wasn't the rationale, or wouldn't
it be bad if these shareholders lost a bunch of money, that wasn't the rationale.
The rationale was we need to keep the financial system flowing, the credit markets flowing
because there's all these medium and small sized businesses who had nothing to do with
the excesses of the housing boom that they wouldn't be able to get financing and then
they can't pay their employees.
Now at the time I was asking some small and mid-sized business people in my community
and over email, do you borrow money to pay your employees every month?
And they said no and if we did I'd be worried at night because my company's not in a good
Position. It's not a standard thing that you go and borrow money to pay your employees
every month. That's a little bit weird, but again, I'm not the Treasury Secretary, so
what do I know? It's really amazing. Again, this is on the Mises.org piece. I have the
chart to show you from the Federal Reserve, so it's not like I did it myself in Excel
and maybe I'm cooking the numbers. You can see the total volume of commercial loans,
Business and Industrial Loans, it was rising up, it was at an all-time high in October
of 2008, and since then, it has dropped 10%.
So again, in terms of what would it look like if these people were just completely lying
and everything they were telling us were false, I think it's like the same thing with the
unemployment data, isn't that what it would look like?
Now there, why did that happen, what's the theoretical explanation, well part of what
The Fed started paying banks to not make loans to people, right at the time when they allegedly saved us, and also right at the time when loans had peaked at an all-time high, and since then they've crashed.
So clearly, if they had done nothing, I am sure that Christina Romer and everybody else
would be showing us a chart that I just discussed, showing how loans, so from your point of view,
as time went on, loans go up to an all-time high, then Lehman fails, and they drop like
a stone, and they'd say, see, we should have intervened, but instead the ideologues among
us prevented us from helping, and that's why credit has fallen.
But since now they did intervene, credit fell like a stone.
That's not what they talk about.
They just give these vague generalizations, like we rescued the economy, and look at the
The Spreads on Certain Types of Debt Instruments
That's the way they prove that Paulson and then now Geithner have saved the credit markets
is that the spread between debt issued by financial institutions
the spread on that debt versus like a treasury bond has shrunk back down to pre-crisis levels
but that's not really so odd because the government is guaranteeing everything
No one knows now the conventional wisdom is, oh, it was a mistake to let Lehman fail, and so they think there's no way the government's going to sit back and let another major financial institution fail, and so it's not surprising that the premium on government debt versus their debt has shrunk back down since those things are all guaranteed. So the one thing you could look at to see, have they really saved the credit markets, got financing to regular-sized businesses, that has dropped 10%, even though they're telling us that they saved the day. So what's my point in all this? What's the common theme?
It's not like in physics where you could have a controlled experiment and if one physicist
says, oh, we think it's because of this factor, you could say, all right, let's hold everything
else constant, tweak that one thing and then run the particles through the accelerator
and see what happens and that's the way you can sort of weed out the bad theory or the
worst theory from the better one, at least that's in theory what's supposed to happen.
You can't do that with economics.
We can't turn the clock back and say, well, what happens if we did nothing?
And to finish the train of thought, that's what happened on the Kudlow show.
I made that point, and it wasn't that everyone there said, oh, you're right, we're all free
marketeers now.
They said, no, no, no, no, it would have been even worse.
If they hadn't intervened, then the drop of 10% that you just noted would have been a
drop of 50%, right?
So again, and maybe they're right, just the fact that the data show the story that I just
told you, we don't know what would have happened.
But my point is that that's why economists continue to argue with each other.
What we still disagree about what happened during the Great Depression is that somebody
like Paul Krugman has his story and he can always find some factor to back up what he's
saying and then of course the Austrians have their own explanation.
So let me talk a little bit, I'm supposed to discuss unemployment, the 1930s versus
today, so just generally speaking when people say how bad is it going to be, is it going
to be as bad as it was back then, I think it's going to be pretty bad.
I don't think it's going to be quite as bad as the 1930s, so let me just give you the
reasons for my general sense of doom, if you will.
Let me put it this way. Suppose the economy were just in a normal period and then for
some reason the government decided, hey, I know, how about we take all the biggest investment
bankers into a room with the Treasury Secretary and he says, we're going to inject several
hundred billions of dollars into your firms. What that really means is we're going to force
and I encourage you to take these loans, even if you don't want them, some of you, and then we're going to get warrants on your stock and some of you we're going to actually convert it into common stock ownership where the government itself is actually going to own a bunch of these investment banks, the biggest ones in the world, and we're going to micromanage you so much that we're going to tell you when you can use private jets, we're going to tell you how much you can pay your executives, in fact, give us a list of your top executive compensation packages and we're going to tell you if we approve of that. Alright, so we're going to do that. Then we're also going to take over
car companies, and we're going to fire people we don't agree with, and we're going to have
the president getting on national television and talking about car warranties.
We think that's something the president should be dabbling in.
And then what we're going to do is we're going to, maybe we should have Congress set a cap
on how many tons of carbon dioxide can be emitted by the economy every year, and we're
going to shrink that down so that by the year 2050, it's 83% below 2005 levels, which would
to be a level of emissions that the U.S. hasn't seen since the 1930s, that that's how much
carbon dioxide would be emitted under this new plan, that the economy would be emitting
as much as it did back in the 1930s.
And then maybe we'll have a trillion dollar plan to have the government get into the health
care system and maybe start a public option.
And maybe this year we'll borrow, I don't know, 1.5 trillion dollars, how about that?
And then, oh, I know, wait a minute, how about the central bank, the Federal Reserve, how
about they double the balance sheet within six months, let's say.
Let's give them some time, and we'll take, we'll cut interest rates.
What should we cut?
Zero?
How about we cut interest rates down to zero?
Okay now, what do you think, what's your prediction as an economist, do you think that's going
to be good or bad for the economy that we did all that stuff?
I think we'd say, that's inconceivable. How did this happen? Oh, the reason it happened
is the economy was in a very critical weak position on its knees. And then somehow they
managed to blame that on the free market. And then at that critical point when the economy
was already just getting slapped around and we needed to reallocate resources, and since
as never before we critically needed prices to adjust correctly, to shift resources around,
That was the situation, and then that's what justified all these things that they decided
to do to the economy right at that critical point.
Now tell me, what's your prediction?
Do you think that we've got green shoots?
You think that the worst is behind us?
You think that, oh yeah, that was going to be a bad seven or eight months, but now that
episode is behind us?
No, I don't think that's where we are, and so that's why I'm so pessimistic.
And then on top of all that, it's doing the research for this book, and by the way, if
If you haven't finished your Halloween shopping, it's not too late.
So I mean, obviously I was a free market economist when we started doing research for this book.
I didn't like the stuff that the Bush administration was doing in it that I knew the incoming Obama
administration would do.
But what really made me sort of fear for the country is to go back and see that that's
exactly the stuff they did back in the 30s.
Herbert Hoover, I knew he wasn't, I had read Rothbard's work on this and I knew he wasn't
a small government man as we were told in school, but to go back and having these events
fresh in my mind from what happened with the current housing boom and then the measures
the government was taking to then go back and see that that's exactly what they did
first under Hoover and then FDR just amplified it. So again the analogy is George Bush was
is not the free market guy that we've been told. He was a huge guy. I mean, if some South
American dictator decided to nationalize half of the banks, the right-wing guys on Fox News
would be calling him a socialist, right? But yet, that's what George Bush did, and that's
compassionate conservatism. So in defense of some of the Fox News guys, they were very
good, very critical of Bush once he was out of office, right? So we have to give them
And that, you know, after it didn't matter anymore, they were really strong and man that
TARP was annoying.
You know, they were for TARP when it went through, but then afterward they were really
disgusted with it.
So let me, let's see how much time we got here, okay.
Let me talk specifically, you know, why was it in the 30s, why did unemployment get so
high?
So you see, in general, I'm very pessimistic, but when people say is unemployment going
to get up to 25% as it did back in the early 1930s, no, I don't think it's going to be
I don't know exactly how high it's going to be, but you'll understand why in a minute,
besides the fact that I'm not God.
Let me give you the summary explanation and then I'll give you the details.
because of the relationship between the real economy being hurt because of all these measures
and so worker productivity dropping, but then the influence of what happens with the price
level.
All right?
And so I've been told I've got five minutes left, so I'll condense into that timeframe.
So what happened in the early 30s, the answer is going to be that real wages were pushed
extremely high in the early 30s now because Bernanke's pumping all the money.
If and when the banks start lending some of that out and you see prices go up, that's
going to cushion the blow, as it were.
So all the things the government's doing are crippling the labor market.
I didn't even mention the stuff about raising the minimum wage, and then I think unions
are a lot more empowered because of the stuff the Obama administration's doing.
So you're going to see wage rigidity really in place, but ironically, if Bernanke, as
I think is going to happen, allows prices in general in the U.S. to rise very quickly,
That will actually reduce the problem in the labor market because it will make workers
cheaper to hire because even though their paychecks are the same if prices in general
are going up at whatever, 8% a month for a while, that will actually make it easier to
hire them.
So that didn't happen.
The opposite of that happened back in the 30s.
So Hoover is in office.
He was actually sworn in in March of 29.
The stock market crashes October of the same year and of course we've all been taught that
Herbert Hoover sat back and did nothing, because he was like, no, I'd like to help, but I love
the Constitution, and so I can't do it.
Now, this is the point I always like to make, this point.
That doesn't make any sense, that you can't explain why was the Great Depression with
a capital D awful as opposed to the earlier financial panics or depressions with a small
D by saying because Herbert Hoover was a do-nothing guy.
Because even if that were true, the previous presidents were also do-nothing guys, right?
and it wasn't as if you had massive socialists in office and then Hoover came in and said
we're going to roll back the clock and we're going to shrink all these government programs
down to where they were before that crazy guy Harding came in and implemented socialism.
That's not what happened. The standard history book treatment of this is that the benighted
American people and the federal government were just extremely laissez-faire people until
FDR came in and saved the day with the New Deal. So even on its own terms it doesn't
Why should Herbert Hoover's laissez-faire policies have spawned the Great Depression, whereas the previous guys when panics hit, how come their laissez-faire policies didn't do the same thing?
What was it in particular? Hoover calls in all the big business leaders right after the stock market crash. I think the actual meeting was a week later.
He tells them, look, I don't want you guys cutting wage rates. He said that's the worst thing that can happen. Let me read you a quick quote here to give you his worldview.
to you.
So this is in 1926, so he was at the time Secretary of the Commerce under Calvin Coolidge,
Herbert Hoover was, and he explained to an audience here, and this is of course during
the boom time, the roaring 20s, he said, not so many years ago the employer considered
it was in his interest to use the opportunities of unemployment and immigration to lower wages
irrespective of other considerations.
The lowest wages and longest hours were then conceived as the means to obtain lowest production
Costs and Largest Profits.
But we are a long way on the road to new conceptions.
The very essence of great production is high wages and low prices because it depends upon
a widening consumption.
All right.
So that's Hoover's worldview.
He's saying, you know, these new economists have given us this new approach.
So as opposed to the bad, you know, dog-eat-dog ways of cutthroat capitalism where everybody
during a slump, every business person wants to, you know, improve his own bottom line.
So he cuts wages and lets people go.
Hoover's saying, well, if you think about it, in the grand scheme, you're all just hurting
each other.
Because, yeah, you lay off your workers or you cut your workers' pay, but then they can't
go and buy products from the other business people and vice versa.
So if you all could just agree to keep wages where they are, even though the stock market
just crashed in October of 29, don't worry, we'll get through this thing.
That was the mentality, and I don't have time to read, but there's quotes.
It wasn't just Hoover saying this.
And there were, I have quotes in the book from a labor union publication where it's
saying, you know, in the past this would have happened, but thank goodness we've got a progressive
like Herbert Hoover in office who realizes business needs to cooperate and not compete
at a time like this, right?
So before the program was a manifest failure, everyone was really excited about, thank goodness
we've got a real nice guy in office and not some cutthroat liquidationist.
So what happened?
The irony is you had prices falling, and can't get into it too much because of time, but
The reason prices are falling has to do with fractional reserve banking.
That as you know, when you go and give $100 to the bank, they don't have a little drawer
with your name on it that they put it in for safekeeping, they lend out most of it.
And so what that means is if people become panicked and they all want to turn their checkbook
deposits into actual currency, and they all rush to the bank to try to withdraw it, that's
going to shrink the overall money supply.
So it's also, you know, those individual banks that get hit are going to go out of business,
In general, the total amount of dollars held by the public, if you will, is going to shrink.
So what was happening is, right when Hoover was telling business people, don't cut your wage rates,
prices in general are falling. He said all these banking panics and so on in the early 30s.
And so that was an awful thing for him to do, that that was keeping wages fixed, money wages fixed,
while the purchasing power of money in general was increasing.
and so that what that means is labor became more and more expensive as time
rolled on so one way to put it is that if you kept your job during the early
1930s the amount that your paycheck would buy at the store you know that
you're given paycheck would go farther you actually your real wages increased
faster during the early 30s than it had during the roaring 20s right and so this
is this a period in their 30s when productivity is falling the economy's
and yet the workers who kept their jobs were seeing raises implicitly. Their paycheck was the same, but they could buy more with it year after year.
It was increasing faster than during the boom periods of the 20s. So that just shows you how big of an intervention this was.
And so that's why unemployment went up so much is because, you know, economics 101, if you have a price floor above the market clearing level, you're going to have a surplus.
And that's what in the labor market, that's what unemployment is. So that's why unemployment
got so bad in the early 30s, because to his credit, one of the few good things he did
is Hoover did not want to take the dollar off gold. He believed in the gold standard,
and so that did prevent, it tied the Fed's hands in a sense. They did try to inflate,
they did cut interest rates repeatedly right after the stock market crash, but then when
there started to be a run on gold from the Fed's vaults, they reversed policy and started
and the raising rates, because they didn't want to run out of gold.
And so that prevented the Fed from this completely flooding the market with paper, and so it
kept, and that's why prices were allowed to fall.
So that's not happening this time, it is a little bit, and again we're running out of
time here, but I think you're going to see prices rising, so that's why I don't think
unemployment is going to get as bad as it was back then, but the economy in general
I think is in store for many years of stagnation.
And again, the true irony in this is, as it keeps lingering on and this thing just drags
on and on, there's never going to be a point at which the interventionist economists are
going to say, I'm sorry, it was our fault, you guys were right, they're always going
to just come up with some, you know, continued weakness in the labor market and, you know,
consumer spending is still a little bit hesitant and we can only hope that, I mean, they always
have some way to spin it to explain, they don't see the big picture the way we like
to think that we do.
All right, well on that cheering note, enjoy your lunch. Thank you.