Theorie des Geldes und der Umlaufsmittel by Ludwig von Mises

A few days ago, the Wall Street Journal ran a story titled The Man Who Predicted the Depression. This one is worth your time.

We’re naive to think our economic issues are over. We’re also incredibly stupid not to have seen it coming. (Ok, some of us were better prepared than others.) I firmly believe that when we ignore history we repeat those mistakes once every generation. It’s a founding principle of the Kondratiev Wave. (I’ve made decent money over the years by identifying a similar small cursive “r” pattern in stocks and riding them down on a short.)

We could learn another lesson from Mises. From the article:

Mises’s solution follows logically from his warnings. You can’t fix what’s broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don’t encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I’m going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

How sad it would be to prolong this economic downturn by the same mistakes made a generation ago during the Great Depression. Really, it’s time to be smarter Congress. Cut out the lobbied handouts and we’ll make it through in much better shape.

Hey, even one of my kids knows better. Remember this?

You can read more about Mises from his organization.

Comments

  1. In other words, your solution to this crisis is allow to let the world fall down around us in order to punish past excesses?

    The Hoover Administration tried this for awhile. I don’t think I have to remind anybody how that turned out.

    The WSJ op-ed page continues to completely misunderstand Keynes. As does the majority of Americans for that matter.

  2. Well thank goodness we have you to straighten us out JS. (smirking face here but I don’t know how to make one.)

    Hoover tried it – baloney. People panicked and pushed the disastrous programs that still burden America. Progress. Harumpf.

  3. Well sure he did. Hoover (listening to Mellon at the time) believed that by liquidating the excesses of the roaring 20’s, people would return to a more values-oriented life. It’s basically the same liquidationist movement that exists today.

    Hell, many Americans seem to attach some sort of morality label to economic events like, for example, “this country needs a recession” , as if we should throw a few million people out of work as a lesson to behave properly in the future.

    I assume your last sentence was a reference to New Deal legislation. Contrary to revisionist ideas about the New Deal, much of it was very successful in bringing down unemployment. It was only when Roosevelt tried to balance the budget, under pressure from Congress worried about deficits and inflation, that unemployment spiked back up to 20% in the late 30’s. Luckily for us, the Japanese and Germans, managed to force us into a government spending program that finally ended the Depression.

  4. Predictable JS. You are consistent.

  5. “Hoover tried it – baloney. People panicked and pushed the disastrous programs that still burden America. Progress. Harumpf.”

    I’d like to hear you flesh out your argument on Hoover a little more Cindy as it seems you’ve revised history just a tad. Maybe I just read wrong though.

  6. JS said the Hoover Administration tried a hands off approach to the depression which is advocated in the original article by Mises.

    I said baloney. Hoover pushed a bunch of stuff including tariffs and debt to build infrastructure. (To wit: Hoover Dam) FDR expanded it all and added entitlements and the depression was prolonged.

  7. So then it’s a question of scope. On the whole, I think you’ll agree that Hoover was a do-nothing.

    And the tariffs didn’t really do anything because no one was buying anyhow.

    FDR didn’t just expand, he was much more proactive in fighting the depression. The prolonging part is debatable too, but I don’t really want to rehash a historical stalemate.

  8. No, Lorax, I don’t agree that Hoover was a do nothing. And yes, the 1930 tariffs were a problem.

    Who’s revising history?

  9. My language on the tariffs might have been confusing–the tariffs didn’t FIX anything is what I meant, they were a bad thing.

  10. Smoot-Hawley didn’t cause the Great Depression. I’ll assume that’s what tariff you’re referring to.

    Hoover’s insistance upon defending the gold standard in the late 20’s/early 30’s turned what would have been a bad recession into the Great Depression (he actually went as far as to raise interest rates during the financial panic to defend it). The nasty downward spiral of deflation that resulted put 1 in 5 Americans out of work in less than 4 years.

    One of FDR’s first acts as President was to rid ourselves of the gold standard and the economy bounced back almost immediately. The New Deal era that followed saw huge year-over-year GDP growth (almost double digits from 1933-37). Then the budget/inflation hawks stepped in around 1937 and demanded a balanced budget….and down, down we went again. 1937-38 is, of course, what all revisionists use to justify there posiitons on New Deal legislation. In reality, it’s a perfect example of what happens when you remove government stimulus from the economy prematurely.

    Luckily, one of the most respected economists in the world regarding the Great Depression and the negative impacts of defending a pegged dollar happens to be Chairman of the Federal Reserve. Hence, we didn’t make the same mistake twice last fall.

  11. No one said the tariffs CAUSED the Great Depression. I argue the tariffs were a bad response to the depression and prolonged the length.

    Your argument would be better served with some backup, JS. Until you prove otherwise, it’s going to be pretty hard for me to believe Hoover single handedly caused it all.

    My argument remains that we should back away from propping up corners of the economy here and there and let the fallout finish up so we can get on with it.

  12. Randy in Richmond says:

    I would suggest it was the lack of private investment that was the primary cause of the Great Depression. All of Roosevelt’s plans and spending did grow the GDP but not nearly enough to reduce the unemployment to acceptable levels. The uncertainty and radically changing policies of the New Deal kept private investment on the sideline. This is turn kept unemployment at extreme levels and thus many people had little or nothing to spend.
    It was WW II, which created a huge need for goods and services, that lowered the unemployment levels and at the same time raised the GDP, that pulled us from the Depression.

    Similar things are at play now. First of all the Stimulus money has morphed into a giant slush fund for the Congress and President. Remember all thoses ‘shovel ready’ projects that were mentioned to help get support for the Stimulus ? Where should that help most ? In the constuction sector. In October unemployment in the construction industry rose to 18.7%–almost double the overall national average.

    http://enr.ecnext.com/coms2/article_bmwf091106Unemployment

    Also, policies like Cap & Trade, national health care, relaxed immigration, caps on private industry incomes, government takeover of private industry, raising the minimum wage, union card check approval, corporate tax increases, global warming policies for something that doesn’t even exist, other enviromental policies that increase operating costs, etc., along with the psychological impact that accompanies this mindset puts the brakes on private investments of all types from being injected into the economy. Until this changes unemployment will remain at unacceptable levels

  13. Randy: Then why did the recession bloom under an administration that didn’t support any of the proposed policies you cite?

  14. Cindy, the references below give a good overview of my position regarding Hoover’s gold standard policy and the grips of deflation and depression that resulted almost immediately therafter. Not exactly what most people consider enjoyable reading though(except for me I guess).

    Golden Fetters: The Gold Standard and the Great Depression, 1919-1939
    -Barry J. Eichengreen

    The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison

    -Bernanke/James

    There are a number of other essays by Bernanke that can be found in “Essays on the Great Depression” too.

  15. “It was WW II, which created a huge need for goods and services, that lowered the unemployment levels and at the same time raised the GDP, that pulled us from the Depression.”

    I didn’t know you were such a strong supporter of Keynes Randy! You just made my day.

    That statement is somewhat incorrect though. The time period you mention experienced widespread war rationing. Their was not a huge need for goods and services. There was, however, a huge need for guns, tanks, ammunition, etc. which was produced by the private sector (re-organized to a large degree by the government) and paid for by government DEBT. Yes, we did export a lot in this time period, but we also ran deficits as high as 140% of GDP as well. In short, that need for “goods and services” was produced by the private sector but paid for by Uncle Sam.

    This, as you say, brought the nation back to full employment. It’s also, Randy, Keynes 101.

  16. Randy in Richmond says:

    Lorax
    The ‘blooming’ occured because of many reasons with most agreeing the kickoff was Black Tuesday in 1929. The misuse and abuse of buying on margin is at the top of the list. So is the purchasing of goods on credit by millions of Americans. The 1920’s reduced the middle class in this country to it’s lowest level ever. Toward the end of the the 20’s there was a huge overproduction in American manufacturing creating a large surplus of goods. Farmers in the 1920’s produced more wheat than ever before and they had nowhere to sell it. Banks became ‘cocky’ and practiced reckless lending policies. Europe was having it’s own economic troubles as a result of WW I and therefore not buying as many American goods. Hoover pushed the passing of the Smoot-Hawley Tarriff Act to protect American businesses with the results catastrophic. Throw in the dust bowl and Hoover’s lack of leadership and wallah–The Great Depression. Roosevelt’s policies were simply throwing gasoline on the fire that was already burning.

  17. Wallah!

    ..the French would be so proud.

  18. Wallah or Whallah is a long-standing SE Wisconsin tradition. Besides, spell check just let wallah go through without incident.

    So there.

  19. I’m in no position to criticize anyone’s spelling. I will just say that ‘wallah’ is a word and it’s kind of cool that the spell checker recognizes it. It means worker or monger, as in “tea wallah.”

  20. I’m well-aware of the tradition, and wallah is a far-cry from voilà. I was poking fun before you got all defensive. Thanks for the assist, though.

  21. Randy in Richmond says:

    Well, my dictionary has what I meant it to be:
    wal·lah also wal·la (wä’lä, wŏl’ə)
    n.

    An important person in a particular field or organization: “the Ritz, a favorite haunt of Republican wallahs” (John Robinson).

    http://dictionary.reference.com/browse/wallah

  22. You sure cover your butt with “poking fun” a lot lately.

  23. “Throw in the dust bowl and Hoover’s lack of leadership and an important person in a particular field or organization–The Great Depression.”

    I’m confused. Are you saying he didn’t have enough experts?

    And, Cindy, I’d hope it didn’t take you this long to figure out that, when in doubt, I’m poking fun.

  24. The seriously best thing you can do to mature is admit when you’re in over your head.

  25. You win. I’m way in over my head.

    Now can I set aside your latest ageist jab and try to understand how the word fits in context?

    I mean, I believe Randy when he says that he meant to use ‘wallah’ (mea culpa, sir) properly, but I’m still confused and am looking for clarification.

    I take understanding language seriously. So, unless you can help me with that, I won’t argue with you over nothing (yet again) and wait to have the conversation with Randy.

  26. Sorry to go backward but I wanted to address something from Randy’s comment #12 but didn’t have enough time earlier:

    “All of Roosevelt’s plans and spending did grow the GDP but not nearly enough to reduce the unemployment to acceptable levels.”

    If you look at the data, this is simply not true. The official end to the contraction during the Depression occured the month after Roosevelt’s Innauguration (and elimination of the gold standard) and, therafter, GDP growth expanded at an average of almost 10% from 1934-37. In fact, the 13%+ GDP growth rate in 1936 alarmed certain elements of Congress who believed quite insanely that inflation was the major concern. From 1932-1936, unemployment went from around 24% down to around 14%. There’s a popular myth that GDP contracted during the New Deal and unemployment remained above 20%. This is simply not fact. In reality, GDP growth accelerated and unemployment came back very quickly but not quickly enough to erase the Hoover collapse. War spending eventually accomplished that some time later.

    http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1932&LastYear=1937&3Place=N&Update=Update&JavaBox=no

  27. “Also, policies like Cap & Trade, national health care, relaxed immigration, caps on private industry incomes, government takeover of private industry, raising the minimum wage, union card check approval, corporate tax increases, global warming policies for something that doesn’t even exist, other enviromental policies that increase operating costs, etc., along with the psychological impact that accompanies this mindset puts the brakes on private investments of all types from being injected into the economy. Until this changes unemployment will remain at unacceptable levels.”

    Private investment hasn’t come back because their has been a collapse in aggregate DEMAND.

  28. Perhaps there’s been a “collapse in aggregate DEMAND” because people are scared of what future “policies like Cap & Trade, national health care, relaxed immigration, caps on private industry incomes, government takeover of private industry, raising the minimum wage, union card check approval, corporate tax increases, global warming policies for something that doesn’t even exist, other enviromental policies that increase operating costs, etc.,” are going to do to them. They are saving because they are afraid for the future.

    I think it’s an Obama problem. You think it’s not. We’re going to have to disagree here and get over it.

  29. The collapse in demand was world wide and started to occur back in Sept./Oct. of 2008 before Obama was even elected. Every shread of economic data you can find supports this. While it is now his problem, it was not his creation (nor was it solely Bush’s either).

    People are scared of what the future holds because they can’t borrow against their house anymore, are worried about their future employment and haven’t seen significant real wage growth that top-end tax cuts were supposed to create for the middle class. They are saving because they have to. While this is a necessary process, it creates serious problems in the short run (paradox of thrift). That’s where the government plays a key role.

    …and we’re right back where we started.

  30. Randy in Richmond says:

    Strupp
    Isn’t it interesting how statistics can be used. Why did you stop in 1936 as you account how the unemployment rate dipped. In 1938 unemployment was back up to about 19% and in 1939 it was at 17.2%. Mostly gearing up for the war in late 1939 started the sustained drop in unemployment.
    Who on this site said the the GDP did not rise during the new deal ? You quote a myth that neither Cindy nor I allude to. I said the GDP didn’t rise enough to reduce unemployment to acceptable levels and the facts do bear me out. Maybe we have differing opinions as to what are “acceptable levels” of unemployment as I do not consider 17 and 19% acceptable. And any reduction after 1939 must consider the effect of the war buildup which was the driving force that eventially put people back to work, regardless of how or where.

  31. Obama wasn’t elected, but he was the Democratic nominee and it was widely believed a Democrat would take the presidency. It’s an Obama problem, but we’ll need to disagree – obviously.

    BTW – people can’t borrow against their house anymore? So you propose excessive debt is the only way to support an economy? The paradox of thrift isn’t a problem to an economy that can stand on its own, only to one addicted to spending.

  32. “All of Roosevelt’s plans and spending did grow the GDP but not nearly enough to reduce the unemployment to acceptable levels.”

    ..and I showed you that the American economy grew close to 10% which is the same rate as China is growing currently (which is remarkable). You were using this comment to downplay New Deal policies. The fact is GDP growth was huge during the New Deal. Was it enough to bring Hoover’s 24% unemployment rate back to near full employment in less than 3 years? No. But shaving 10% off the rate in that time period was remarkable from an economic perspective. I do applaud your high standards of our leadership though.

    “Isn’t it interesting how statistics can be used. Why did you stop in 1936 as you account how the unemployment rate dipped.”

    As I stated before, in 1937-38, Republican budget hawk’s (knowing nothing of liquidity traps obviously) exploited the continued (but swiftly falling) high unemployment rate to force FDR into budget balancing legislation (surprise, surprise, they accused him of a communist takeover to win public support against his policies) The economy promptly responded by throwing the country back into the grips of depression.

    Roosevelt responded by abandoning this insane idea as soon as the “depression within the depression” took hold, increase public spending once again and the economy quickly recovered.

    “And any reduction after 1939 must consider the effect of the war buildup which was the driving force that eventially put people back to work, regardless of how or where.”

    You mean when the government ramped up deficit spending even more than the New Deal spending program and the economy swiftly returned to full employement? I’m glad that we can agree on something.

  33. “people can’t borrow against their house anymore? So you propose excessive debt is the only way to support an economy? The paradox of thrift isn’t a problem to an economy that can stand on its own, only to one addicted to spending.”

    When interests rates are up against the zero bound (also known as a liquidity trap) and real interest rates are negative, public deficit spending is absolutely the way to support the economy. Economic multipliers are most effective at this time. The governent can borrow at near zero rates, inject much needed spending into the economy, thus creating jobs which increase consumer spending and business investment which creates more jobs and then more spending. These positive “feedback loops” are EXACTLY what should be created during a liquidity trap. It worked in the 30’s and it will work again (if we spend more than what we’re currently spending that is). Short run deficit spending during this time period is arbitrary to our long term deficit problem as the CBO and just about every creditable economist will tell you.

    The paradox of thrift is not a problem in a healthy economy. Agreed. But again, burning the house down to fix a leaky faucet like the Austrian School economists believe defies all logic. You can deficit spend to offset the collapse in aggregate demand while the private sector undergoes the deleveraging process. Collapsing the economy altogether will make things worse (paradox of thrift).

  34. Please remember this is your opinion and not gospel.