on 30 March 2010
Popular belief is that Hoover was a firm believer in Laissez-Faire. This book sets out to clarify that he wasn't. Although he started to reverse his position late on in his presidency, most of his actions reflected an economic view not dissimilar to leaders in our present situation.
On the free markets, selling prices determine costs, not vice versa. This means that in a time of deflation, keeping wages high leads to more jobs losses, as wages reduce profitability, and in some cases even lead to closure of private enterprise. Yet, this was the course Hoover was on, declaring that wages should be kept high to retain spending power - ignoring that real spending power will increase during times of deflation, even with static wages. As an example - in the 1921 recession wages had been swiftly cut by 19%, and as a result, the United States were quick to emerge from the recession.
In the run-up to the depression (1927), Europe - and England especially - were in dire straits. The US Fed decided to cut interest rates, thereby artifially helping England, but also thereby boosting exports. However, once the European countries started faltering once again, the policy of cheap credit meant a substantial inflow of capital into the stock market, increasing stock prices and causing inflation. Furthermore, banks also shuffled deposits into time-locked accounts, thereby reducing reserve requirements, and allowing them to lend out even more money.
Once the depression hit, Hoover decided to increase public spending through infrastructure construction, and make cheap credit available to banks and heavy industry. The banks however, with interest rates on the decline, didn't find many opportune risk-reward scenarios, and cut lending thereby aggravating the situation. Furthermore, with the price of especially wheat and cotton prices on the decline, the government responded by artificially propping up the prices of both to keep farmers from going bankrupt. This led to farmers increasing acreage thereby compounding the problem. It also led to significant damage to US exports, as their competitiveness was reduced by this action. Ultimately, this led to losses and protectionism, which led to further damage to US exports.
But the similarities with the current situation doesn't stop there.
- Much like Gordon Brown's current policy, anyone questioning the policies where "unpatriotic" and "selling America short".
- Interest rates were swiftly cut, driving up the market temporarily, but ultimately only postponing the pain.
- Blame was placed with foreign immigrants, reducing wages (very similar to the cut in the H1B program).
- Short sellers were roundly condemned, and ultimately, restrictions put in place.
- Bankruptcy laws were weakened. This led to a reduction in available credit (risk/reward), and enabled people to refuse to pay their debts.
- Taxes increased significantly, thereby reducing the appetite of investors.
- "Hoarders" were blamed. As the gold standard is no longer used, today's equivalent would be the thrifty saver.
- Banks and heavy industry (railroads) were bailed out in secrecy, allegedly to keep "faith in institutions". Ultimately, however, the veil of secrecy was partially lifted, and substantial allegations of political collusions were made.
- Heavy industry responded in kind to the bailouts, by repaying loans to the banks. With loans repaid, the Missouri Pacific promptly went bankrupt.
And finally, when the US Fed pursued a strategy to purchase bonds to reduce interest rates (ie Quantative Easing), foreigners responded in kind by withdrawing gold as these policies would ordinarily lead to inflation. However, when this deliberate policy of inflation failed, the flow of gold was reversed.
However, there are significant differences. State spending a part of GDP was a fraction of what it is today, and all the way up to (and including) 1930, the United States ran a budget surplus, and debts were insignificant. This is widely different to today, where most of the Western World run a significant deficit. In 1932, the US Fed was given the power to change the value of the dollar in relation to gold late on in Hoover's presidency, and in 1933/34 under Franklin D. Roosevelt, the dollar was devalued from $20/ounce to $35/ounce. And if one were to speculate, this could very well be the path current world governments are attempting to put us on at present time.
A few things kind of nagged me about this book - it seems too hypothetical. It is considered that all regulation is bad, but surely it can be proven that this is not always the case, or we'd be up to our eyeballs in Chinese lead paint. It also works on the premise of a "fair" global economic landscape - but since regulations DO differ, this will produce unfairness. And finally, when the US finally emerged from the depression, it was due to the Second World War. And what is a war but public spending on a massive scale?
A sidenote about Keynes - he claimed pre-crisis that Hoover's currency management was "a triumph", and post (1930) that the US was "on track to recovery". And yet, we base our current economic policies on his ideas.
on 25 February 2011
America's great depression is much more than the Great financial depression that hit American shores circa 1929 - 1933; Rothbard and his splendid use of Austrian economics, paves the way for an understanding of why free markets work best, why capitalism may be flawed but is still the best we have and takes us on a brief history of financial booms and busts, showing the great depression was far from being the only depression and certainly will not be the last.
Saying that Rothbard does cover Americas Great depression very admirably, digging in to not only the underlying economics of how it was caused with solutions of how it may have been corrected more efficiently, but also the underlying politics of the day, something which tends to clash with sound economic recovery.
What I found most enjoyable is hearing about Austrian economics and why it is the more pragmatic of the economics disciplines. Our very recent boom and bust 1997 onwards forced economists to admit the rule books for economic theory need to be torn up and re-written, "A good time to study economics" stated Stephanie Flanders, Economics reporter for the BBC. What was neglected of course is only the traditional taught in western universities economics text books had to be re-written, in fact there is a boom in people currently reading their Hayek, `The road to serfdom' a political/economic treatise that I shall review at a later stage, but certainly worth a read.
Add to this the thorough de-bunking of what was classed as traditional economic theory, now shattered as stated previously, a good grounding in the business cycle theory, sometimes known as boom and bust economics and you have an excellent primer on pragmatic economics that works away from the ivory towers, as long as politicians keep their noses out of an Austrian economists business, very difficult I Imagine.
Highly recommended read for anyone that has an interest in either politics or economics and why, when Austrian economic theory is applied without outside interference from politicians, it is likely the best course of action we have to live as free individuals following a course of action that may seem counter intuitive, certainly upsets the masses that do not understand Austrian economics, but may well hail any leader brave enough to apply its principles, a hero.