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Iח tһіѕ timely חеw P.I. Guide, Murphy reveals tһе stark truth: free market failure didn’t produce tһе Fаחtаѕtіс Depression аחԁ tһе Nеw Deal didn’t cure іt. Shattering myths аחԁ politically rіɡһt lies, һе tells wһу World War II didn t һеƖр tһе economy οr ɡеt υѕ out οf tһе Fаחtаѕtіс Depression; wһу іt took FDR tο mаkе tһе Depression Fаחtаѕtіс аחԁ wһу Herbert Hoover wаѕ more Ɩіkе Obama аחԁ less Ɩіkе Bush tһаח tһе liberal media wουƖԁ һаνе уου believe. Free-market believers аחԁ cap… More >>
Tһе Politically Incorrect Guide tο tһе Fаחtаѕtіс Depression аחԁ tһе Nеw Deal
August 8, 2010 at 9:14 am
The three star rating is really an act of charity. Mr. Murphy’s work has its points. The book is very readable, generally quite fascinating, and sometime makes valid arguments. Mr. Murphy is excellent in pointing out the errors of many of the policies of Presidents Hoover and Roosevelt in combating the Fantastic Depression, including the Hawley Smoot Tariff Act, The National Recovery Act, and the attempts to maintain or bring to somebody’s attention wage rates all owing to depression conditions. Mr. Murphy’s work also contains some very fascinating material on the effect of World War II on the economy. He also provides fascinating references and sources. But Mr. Murphy also tells some whoppers.
First, there is the gold standard, or really two gold standards. There is gold standard bliss, which supposedly existed before World War I. In it all nations played by the policy which meant that countries with trade surpluses would not merely store the excess gold but bring to somebody’s attention interest rates and increase their money supplies to lower the gold inflow and relieve trade deficit countries from experiencing major recessions to wipe out their trade deficits. Prices and wages would be perfectly adjustable to signals from the market and allow for rapid adjustments to any major trends in the movement of gold reserves. There would be peace, harmony, like, ease in foreign journey (at least by the wealthy and the elite), and no terrible breath.
Unfortunately gold standard bliss could not last. Humans are not angels. War appeared in the form of World War I. Belligerent countries had the choice of maintaining gold standard bliss or producing the necessary munitions to avert defeat. To produce these munitions, a belligerent nation would have to reduce production in export industries, increase some imports, reduce the labor force by sending much of the manpower into the military. The belligerents chose the later path. Thus the exit from Eden.
Then there is gold standard deficient (or can I say gold standard piss) which prevailed in the 1920s and 1930s. In this fall from heaven gold surplus countries like the United States and France no longer played by the policy, the British pound was overvalued, and cooperation between countries was poisoned by reparations, war debts, the Versailles Treaty, and national hatred and jealousy. Often the financial authorities reflected well loved opinion by putting their own national interest first and let the rest of the world be damned. Prices and particularly wages were no longer speedily adjustable. The result was deflation, unemployment, and human misery. This was the gold standard deficient no longer administered by angels but by humans.
Mr. Murphy concedes that the countries in the 1930s that went off the gold standard sooner started their recovery from the Fantastic Depression quicker and slashed their unemployment rates much quicker. This fact was explored and verified by Barry Eichengreen Golden Fetters: The Gold Standard and the Fantastic Depression, 1919-1939 (NBER Series on Long-Term Factors in Fiscal Development); Charles Feinstein, Peter Temin, and Gianni Toniolo The World Economy between the Wars; Liaquat Ahamed Lords of Finance: The Bankers Who Broke the World; and Benjamin Bernanke Essays on the Fantastic Depression. Yet Mr. Murphy accuses the 1930s politicians and economists who led their countries off the gold standard deficient of not considering “the huge depiction”. In other worlds they should focus on the ethereal gold standard bliss rather than the real world gold standard deficient.
Really the Pre World War I gold standard was not completely gold standard bliss. Recessions occurred each five years in the United States with a major recession each twenty years. The recession of 1895 was one very huge recession. William Jennings Bryan and others described how this gold standard hurt farmers. It was not all peaches and cream.
Moreover the Pre World War I gold standard was a historically specific institution. The Central Banks of the United Kingdom, France, and Germany, the major powers of the time, consulted each other and acted together to initiate financial policies to keep the gold standard working. In fastidious the Bank of England, the major industrial power, was the bank of last resort whose activities stabilized the gold standard. Labor unions were not powerful enough to keep any central bank from effectively lowering wages when the bank thought such action necessary to the stability of the system. See Barry Eichengreen Globalizing Capital Globalizing Capital: A History of the International Monetary System (Second Edition). I am worried the gold standard bliss when carefully examined becomes more and more of a mirage.
Then Mr. Murphy does not do justice to John Maynard Keynes and his fiscal scheme. Mr. Murphy only refers to Keynesian economics as perpetual government spending advocates. Such a mark applies to some vulgar Keynesians. But really Keynes was much more refined. Keynes, like most economists, claimed that money supply generally strongly determines fiscal output and employment. Where Keynes differs is in the Investment function. Non Keynesian economists often believe the interest rate determines investment. Thus interest rate adjustment can equalize investment and savings. Keynes thought differently. He believed that investment is strongly influenced by the expectations of investors of prospect fiscal conditions and prospect rates of return. Thus sometimes the adjustment of the interest rate can be inadequate to equalize investment and savings and bring about full employment. This Keynesian scheme is completely ignored by Mr. Murphy.
Then there are the events of the Federal Reserve from 1929 to 1933. Supposedly the Federal Reserve was an expansionary force because it decreased interest rates. And Mr. Murphy seems to presume most economists believe these interest rate reductions should have stimulated the economy (p. 78). But Mr. Murphy ignores that Keynesian and monetary economists focus on the money supply, not interest rates. Thus even even if interest rates declined, money supply continued to fall. The other economists are right, the Federal Reserve was still deflationary. And it was the constraints of the gold standard deficient that kept the Federal Reserve from being more expansionary.
Then there is Mr. Murphy’s description of the recession of 1920 when interest rates rose and the economy still recovered from the recession quick. Mr. Murphy does not mention that the nations of the world had not tried to return to the gold standard yet, after leave-taking it all owing to World War I. He also neglects to mention that prices and wages in this postwar period were quite flexible.
The book is fascinating but often fallacious.
Rating: 3 / 5
August 8, 2010 at 11:06 am
A excellent model of what passes for scholarship on the right these days. This author tortures fact and logic to a bloody pulp to make them try to conform to Tea Party accepted view. Helpful for Fox News viewers who want more talking points, but useless if you’re trying to really learn something.
Rating: 1 / 5
August 8, 2010 at 2:04 pm
As with the other volumes in this pseudo-historical series, this is no more than a right-wing propaganda piece for Republicans, Tea Partiers and Libertarians – that is, idiots and liars. It belongs in the trash heap along with Creationism, Holocaust denial and the aver that slavery was no huge deal.
Rating: 1 / 5
August 8, 2010 at 4:09 pm
This book was quite a disappointment.
I was looking forward to a book that would demonstrate with facts the von Mises point of view on the economics of the Fantastic Depression. What I read was a book that had some excellent points and a lot of comments that were the authors opinion that he stated without support. Statisticians have an expression, “A PERSON WITHOUT DATA IS JUST ANOTHER PERSON WITH AN OPINION”. This book fits that expression.
The author made some excellent points about the early days of the Depression and Hoover’s attempts to combat the fiscal decline with deficit spending. He also stated that Hoover tried to maintain high wages to drive aggregate demand. All valid points.
Unfortunately, the author also argued that Milton Friedman’s statements that the Fed worsened Depression by allowing the 30% decline in the money supply was incorrect. But, he never really clarified why in any form that I could know.
He stated that passing the Social Security Act was incorrect. For proof he talked about the current crisis with the Social Security system. Sorry, proof that a law passed 70 years ago is terrible cannot be based on today’s envirnment. The inquiry is: did it do what it was held to do at the time. Forget the bungling of the post World War II generation concerning the Social Security system.
He also stated that WWII did not get us out of the Fantastic Depression. His argument is that war (like any disaster) is a one time shot to fiscal growth. No Kidding! But, this does not answer the inquiry whether or not WWII got us out of the Fantastic Depression.
The book questions excellent questions, but did not answer any of them.
If this is an model of the quality of the work in the Politically Incorrect Series – they don’t need my money.
Rating: 1 / 5
August 8, 2010 at 6:39 pm
In “The Politically Incorrect Guide to the Fantastic Depression and the New Deal”, Robert Murphy achieves an extraordinary feat – by a combination of slights of hand and straw-man arguments, he makes the impression that he has refuted the fiscal arguments of mainstream economists regarding the Fantastic Depression. Yet he does nothing of the sorts: the standard interpretation is not challenged at all by his hit.
Murphy’s book caters to right-wing paranoia. For model, it marks two books by Milton Friedman as “books you’re not held to read”. But Murphy criticizes Friedman’s views and points out to the affinities between Friedman and Fed chairman Ben Bernanke. If Friedman’s books are part of the mainstream fiscal interpretation of the crisis (and they are), why are “you” not held to read them? Note the use of the passive, menacing voice. “You” are not held to read it -implicitly, “they” don’t want you to.
The inquiry of what caused the Fantastic Depression is a highly complicated one; Learned Scholars have different views on the subject. Yet Murphy reaches a remarkably simple conclusion. The entire thesis of his book can be summarized in one sentence (p. 25): “the government caused the Fantastic Depression, the New Deal prolonged the misery, and World War II hurt the private sector even more.”
Some of what Murphy says is nearly certainly right. The infamous Smoot Hawley bill, which raised protectionist barriers on the US economy, was one of the sources for the collapse of international trade. Fascinatingly enough, fiscal conservatives such as Murphy spend a fantastic deal of their time attacking the government fiscal stimulus, and nearly no time criticizing the various protectionist measures included in it, measures which are the corresponding (albeit thankfully much less harmful ones) to the Smoot Hawley bill.
But the vital argument is hard to take seriously. In 1928, the US government’s share of GDP was about 3%. The thought that such a small player could bring the entire economy to a stop is slightly absurd. America was a significent global player, but not the world power that it would be in the post war world. The US government may well have been a contributing factor, but the thought that the Federal Reserve alone could produce the global fiscal crisis of the 1930s is preposterous.
After the 1929 market crash, the Hoover administration responded with what Murphy calls an “enormous increase in government spending”. It raised government expenditure to roughly 4.5% of GDP. But between 1929 and 1934, nominal GDP fell by nearly fifty percent (from roughly 110 billion dollars to 55). In other words, Hoover’s expenditures were like small drops in the sea, hardly able to make a difference. Yet in 1932, spooked by what were historically unprecedented budget deficits, Hoover tried to reverse course, raising taxes and cutting expenditures in the middle of the worst fiscal depression in world history.
Murphy argues that Hoover’s anti-cyclical events, but feeble, made the Fantastic Depression fantastic. Yet once FDR took office, he increased government spending about 50% more than Hoover had, to about twice the size of the pre-crisis spending, or 6.5 billion dollars in 1934. According to Murphy’s logic, the US economy should have collapsed further. Yet in fact in started to grow massively, with the economy growing about 10% a year from 1934 to 1937. No marvel Roosevelt won reelection in a landslide in 1936.
The situation seems honestly clear: for whatever highly complicated mixture of reasons (including, possibly, government intervention, and probably some factors Murphy hardly mentions such as Bank failures) an fiscal crisis errupted more severe than any in history. The Hoover administration responded with timid Keynesian steps mixed with fiscally conservative steps, doing very small to the avert the depression, and likely making it worse. When FDR came to power, a slightly less timid but still modest Keynesian deal with was tried. The economy started to take off.
Was this a consequence of Roosevelt’s program? With a share of less than 15% of the economy, the growth of government spending could make only a limited difference. And some of the fiscal policies of the New Deal, as well as the anti-Business rhetoric, were unproductive. Yet on the whole, there’s no readon to skepticism that the New Deal’s increased Keynesian spending pushed the economy in the right direction.
Although Murphy has a heading aristocratic “1937-1938 the depression within a depression”, he hardly discusses this period, in which Roosevelt tried to balance the budget. Government expenditure fell from over 8 billion dollars in 1936 to 7.5 billion in 1937, and to under 7 billion dollars in 1938. Here was the Roosevelt administration, finally starting to undo these terrible, terrible Keynesian policies. Surely the economy, which was already slowly slouching towards the ground reached in the 1920s, would now take off?
As we all know, it didn’t. 1937-1938 marked another recession. Ther economy only started to grow again in 1939 when government expenditure reached 9 billion dollars. And it only *really* recovered once the (finally) large scale Keynesian project known as World War 2 started.
No, wait, that’s a myth too, Murphy tells us. The Second World War did not bring fiscal growth. Indeed, it is perverse to believe that, because if you do it follows that “whatever other things he may have had going against him, at least Adolf Hitler forced Americans to fix their economy” (I kid you not – Murphy does imply that if you support a Keynesian interpretation, you’re implicitly pro-Nazi, p. 156).
How does Murphy clarify that unemployment fell and GDP rose all owing to the war? Simple, Unemployment fell because men were conscripted away from the economy, thus making an artificial shortage. And GDP did not rise – price controls disguised inflation, making calculation of GDP for the war years impossible. In other words, if you don’t like the data, just ignore it.
Of course, the gigantic increase in government expenditure didn’t stop after the Second World War, yet unemployment went back to the pre crisis level. If the economy wasn’t fixed all owing to the war, it was fixed afterwards with the same tools (But of course this was not the case: Murphy does not bring any evidence of a “Secret Recovery of 1947″, which goes against each fiscal indicator and against the everything we know about the times). The pre-depression, tiny and ineffectual government was gone, and the economy no worse for it.
Although it is sold as a guide to the Fantastic Depression, Murphy’s book is really a polemic argument for a conservative political and fiscal outlook today. The equation is quite clear: Hoover=Bush, Roosevelt= Obama.
I am not sure what the best fiscal policies for today are. It is not clear that policies analogous in some respect to FDR’s would work today. One obvious difference is that the US government is much larger than its 1928 counter part, and thus explanations that blame the government are more plausible. The causes of the current crisis are imperfectly understood, and what should be done about it is unclear: the primitive state of fiscal science has revealed itself for all to see. But basing fiscal solutions on a caricature of fiscal history is certainly a terrible thought.
Rating: 2 / 5