Why You've Never Heard of the Great Depression of 1920 | Thomas E. Woods, Jr.

ladies and gentlemen thank you very much if the unthinkable should happen and Oprah should feature my book I think we'll be able to stimulate a little bit of that depressed real estate market in Las Vegas with some of the proceeds but I really don't think that's going to happen 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 I'm happy to make an honest living that's okay I'm not looking for a get-rich-quick scheme I'm happy to do that sober type of labor that Andrew Mellon talked about well today I've got two parts the first part is history and the second part is theory I want to talk about an episode in American history everyone should know about but hardly anyone does and then secondly I want to explain why it shouldn't surprise us that this episode turned out as it did why it was not a mere coincidence that the US economy recovered so quickly in 1921 as opposed to other periods in American history and a little bit of what I say in that section will seem perhaps elementary to some people in the room 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 I can I hope give a good foundation for future reading and learning there are there have been the copies of meltdown out here that have since been replenished so make sure and make your stampede after out there afterward so as to contribute to the tom woods lighter luggage fund indirectly but by your purchases thank you very much so right let me start with just with the description of what was going on in 1920 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 Vetter 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 what's meant by that is that toward the end of his second term Woodrow Wilson had a couple of semi debilitating strokes now look this look this is you BLET you go find veteran Galloway I'm just I'm just the messenger here I didn't make this terrible statement up but that because of that and because in effect his wife was more or less running the country toward in the last year of his presidency and there was there's very little activity going on domestically very little was done by the government to arrest the the economic decline and by the time March 1921 came around because that was you know that was the inauguration month for Warren Harding the economy was actually starting to turn around them by the summer had turned around and the recovery was on its way and so because Wilson was not able physically to help us out and solve the problem the problem went away now that seems a little crude to me to think of a man's physical misfortune as the good fortune of the country so I hereby rebuke that terrible insensitive statement however it is nevertheless instructive because we're told today routinely that if you experience an economic meltdown or a recession or whatever the term is they're using you can't get out of it without some type of government counter-cyclical policy without some type of fiscal policy monetary policy otherwise yeah I mean they'll concede that maybe in 50 years it might turn around but you know a lot of us will be dead by then basically so we need the government intervene well it seems to me if I can just point to one historical episode in which that was not the case then we win so it turns out this is such an episode in 1922 21 the first year of what was about an 18-month downturn the first year of that was actually worse than the first the Great Depression of 1929 when you look at it from the point of view of the statistics involving unemployment and production yet production falling by 21% GDP figures you find a 24% reduction there is redundant going up from about 4 percent to about 12 percent very rapidly so terrible conditions and as I say the president who succeeded Woodrow Wilson was Warren Harding 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 he favored two kind of a world court he had some sort of progressive inclinations but by and large we're supposed to hate Harding basically because he wasn't an activist president you know he wasn't trying to run people's lives he wasn't killing people you know what a big bore this guy is and also he was corrupt well it turns out that the corruption more or less okay morally he had some problems no one's going to dispute that but at the same time most of the corruption involved his subordinates and in two cases he rebuked subordinates so severely for their misdeeds that they went out and committed suicide afterward what could he have said to them for goodness sake I mean it's unbelievable in fact when you think of the scale of some of the scandals yeah okay yeah their scandals there's somebody profiteering by selling off government hospital supplies well if only that were the problems we were dealing with now right hospital supplies people profiteering on them what I think we would all kill to have that be the scandal these days but that's why we're supposed to detest Warren Harding my secret suspicion is the reason they detest him is that by doing nothing he was so successful that he's a rebuke to everything that historians believe in they don't know what to do with this guy in what he achieved is not supposed to be possible according to the textbooks he's not supposed to have been this successful so let's just smear him out of existence well I've actually become I've kind of warmed up to Warren Harding just on the general principle that anyone the establishment hates I'm at least going to give the benefit of the doubt to now sometimes they hate the right people once in a blue moon so it's not an app addictively certain law but I become kind of warm to this guy read some of his speeches and I thought hey I mean he kind of kind of gets it and I'm actually going to share some of this with you in a couple minutes but don't worry that I'm going soft like Woods has been I think studying the Year 1921 a little bit too long here if he's getting carried away with the speeches of a US president so don't worry okay this is all relative as in terms of presidents I relatively like this guy but don't worry I'm still as pure as ever well as I say we have these indicators telling us the economy's turning down well what does Warren Harding do well first we have what what happens on starting with Wilson and then Harding we see that federal spending starts to come down there's actually a cut in the US government budget now I talk about this to some degree in in my book meltdown here but I want to elaborate on that here and give some additional information so the gut the budget is cut so in other words instead of a stimulus package so-called they actually cut the budget and this is the opposite of what the textbooks today tell you the textbooks they all know it's the worst thing you can do in a depression no no because because that's going to compromise aggregate demand we can't have that you've got to keep the government spending going yeah that's what we're told so they cut the government budget they did the opposite of what the textbooks tell you one might hope that a silver lining to the crisis would be that some of these textbooks will wind up in a bonfire somewhere but that's just a side observation so secondly okay well okay so they cut the government budget but surely the Fed must have been pumping money into the economy right me they must have been doing something there must have been some monetary stimulus going on right to the contrary the Fed does not actually begin engaging in open market operations until 1922 ever in its history it starts in 1922 so that's not happening the is largely passive during this crisis so we've got federal spending going down six point three billion dollars 1920 down to five billion in 1921 down to 3.2 billion in 1922 and the result is by the summer of 1921 we already see the indications of a turnaround and a robust recovery beginning now it's no surprise that economic historians treating this period have found it difficult to explain how this is possible this can't be now I found some interesting ways that they've handled it but first we'll deal with the honest ones a cain't there's a Keynesian economist named Robert Gordon who honestly admitted that government policy to moderate the depression and speed recovery was minimal the federal reserve authorities were largely passive despite the absence of a stimulative government policy however recovery was not long delayed now let's move on to the next episode that's his that's his treatment by the way let's not draw any lessons from this let's not wonder if maybe we should tweak our theoretical models let's just pretend this never happened and go on but at least he admits it we have another economic historian who very briskly concedes that the economy rebounded quickly from the 1920 to 1921 depression and entered a period of quite vigorous growth next chapter I'm not making this up I've got footnotes to these particular people this is their treatment they admit it but no consequences no nothing we're not going to learn from this we're not going to elaborate on it that's the end of it now here's here's by the way here's my favorite though this is this is the old time this is the all-time Lulu forever is if this is from a book called the presidency of warren g harding now here you've got a president who for all his moral foibles has in effect done the impossible he has ignored all the modern-day economic advice that thankfully wasn't around back then he was ignoring his Commerce Secretary Herbert Hoover who was urging government intervention he was gone yeah yeah I want to go jump in a lake and he achieves the impossible and yet here's how mainstream historian deals with this and you know how much economics historians know I mean it just knocks your socks off man whoa do they know economics that's sarcasm by the way so he says this in the long run so it's implicitly conceding that yeah okay he got us out of that depression in the long run the administration's tax and economic policies proved ill-considered and I should point out what the tax policies were it was lowering taxes they actually cut the the national debt by about one third in the 1920s they cut taxes pretty substantially the top rate had been 70 in the 70s percent 77 or so went down to about top rate of 25 percent which is still higher than it was before World War one but all this during World War one at the beginning but all the same still a cut so there were there were tax cuts that occurred and now we're told by this historian that that was that was really not a good idea in the long run normalcy as hard and called it consisted of pre-war solutions to post-war problems don't you love how they treat freedom and the free economy as being a sort of a quaint relic of the olden days that you know stupid simpletons always want to go back to but we sophisticates know that those days are over and the days in which you're going to be scientifically managed by Harvard PhDs are now in vogue Harding wanted to return the country to an earlier era again Oh unthinkable right can't ever have that no no we got to live in the rotten present all the time the tax cuts along with the emphasis on repayment of the national debt and reduced federal expenditures combined to favor the rich yeah because the poor don't benefit from that at all right no benefits are derived from that many economists came to agree that one of the chief causes of the Great Depression of 1929 was the unequal distribution of wealth now by the way if that were true there would be depressions non-stop in every country on earth forever because in practically every country on earth you'll find the top 1% owns 25 or more percent of the wealth well that's because these are the people actually go out and do the creative work who are the geniuses who are the marketers who market the geniuses well naturally I mean if you're a janitor who's sweeping a floor in an office building in Hoboken you're gonna earn multiples and multiples less than somebody in charge of a company that is producing in farm equipment that makes eating possible for 100 million people I mean what how is that a surprise anybody but but according to this that causes depressions if there's unequal distributions of wealth so let's let's continue with this so 5% of the population had more than 33 percent of the nation's wealth by 1929 there are places and times in history where it's been far far greater than that and there's been no depression this group failed to use its wealth responsibly instead they fueled unhealthy speculation on the stock market as well as uneven economic growth why don't know what uneven economic growth even means and then fueled unhealthy speculation on stock market sheet you think that might have a teensy-weensy bit to do with the Fed's monetary policy I'm just wondering you think that might have something to do with it no it's because the rich people were allowed to keep more of their money so what this historian is saying is when he says that the administration's tax policies proved ill-considered what he's saying is it was ill-considered to let people keep more of their money because that causes depressions so for your own good to prevent depressions we just need to take three quarters of your money now that you could say that with a straight face talk about a court historian whose job it is to shill for the powers that be inventing bizarro rationales for why it's really in your own good for us to loot you it's just I mean how could you sleep at night I mean you can't possibly believe this right I mean nobody nobody is this stupid nobody could believe this matter what this what political connections this guy had or perhaps one after he wrote this book but my gosh yeah we got to take your money away for the benefit of the economy so I mean at least the Mafia doesn't try to say that you know we're taking this is protection money and that's all it is we're not taking it from you because we're afraid that if you keep it you're going to wreck the local economy but we released our honest enough not to try to pull that bad on you now incidentally in a book I cite in meltdown called America's search for economic stability we have this confirmation of what I'm telling you there's very little activity by the Fed so we read despite the severity of the contraction the Fed did not move to use its powers to turn the money supply around and fight the contraction hmm and yet the contraction went away do we draw any conclusions from this no no sir nope then at the end we have that is the this is the guy's been talking about inflationary monetary policy and how it's just the thing for a depressed economy that is the whole idea of expansionary monetary policy as we see it today to create an excess supply of money that spurs increased spending but this was 1921 long before the concept of counter cyclical policy was accepted or even understood so we had a whole bunch of stupid heads in these days who didn't know that their overlords that 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 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 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 well okay maybe maybe maybe maybe maybe but it's a huge huge huge maybe with an exponent in it 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 it from his speeches Harding was made fun of for his poor speaking skills which by the way are not that poor but by the standards of those days it was just abysmal so HL Mencken said he writes the worst English that I have ever encountered it reminds me of a string of wet sponges it reminds me of tattered washing on the line it reminds me of stale bean soup of dogs barking idiotic Lee through endless nights it is so bad that a sort of grandeur creeps into it it drags itself out of the dark abyss of pish and crawls insanely up the topmost pinnacle of posh etc etc and he goes on upon Harding's death the poet EE said the only man woman or child who wrote a simple declarative sentence with seven grammatical errors is dead nevertheless listen to his thoughts on the economy 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 but listen to this all the same here's his acceptance speech as he accepts the Republican nomination in 1920 I would be blind to the responsibilities that mark this fateful hour if I did not caution the wage earners of America that mounting wages and decreased production can lead only to industrial and economic ruin can you imagine a presidential candidate saying wages might have to come down and by the way for anybody in this room who's kind of put off by this emphasis on wages have to come down you're thinking what are you a bunch of Scrooge's I mean how are people supposed to make ends meet the way wages are supposed to come down on a free-market is it or a partner you're supposed to go up on a free-market it's not by just artificially forcing them up I mean I may as well say let's repeal the law of gravity so I can go fly I wish life were that easy the way you do it and I explain this in 33 questions which we've sold out of but in 33 questions I've got this chapter how did American wages rise and the quick answer is that you leave businesses alone they you they take their profits and sometimes they borrow and they use these funds to invest in machinery that makes production more abundant and at lower cost so that the goods created in the economy are created in greater and greater abundance so that the dollar wage that you earn is now stretched farther and farther and farther because today it requires far fewer hours of labor to earn the money necessary to buy a whole range of necessities than it did in 1950 or 1900 or increased now we don't typically see falling prices that much in our economy because the Fed is always keeping prices up but if it weren't for the Fed we would see consistently falling prices and that's how real wages are actually increase on a free market there's no shortcut to that that comes through investment there is no shortcut to that but all the same let's get back to Harding education won't let that pass gross expansion of currency and credit have depreciated the dollar just as expansion and inflation have discredited the coins of the world we inflate it in haste we must deflate in deliberation we debase the dollar in reckless finance we must restore in honesty deflation on the one hand and restoration of the 100 cent dollar on the other ought to have begun the day after the Armistice but plans were lacking or courage failed why did nobody shoot this guy right I mean I'm just amazed he got away with this we will attempt intelligent and courageous deflation oh my gosh and strike at government borrowing which enlarges the evil and we will attack high cost of government with every energy and facility which attend Republican capacity we promise that relief which will attend the halting of waste and extravagance and the renewal of the practice of public economy not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life the exact opposite of what we're being told now we got a blow eight hundred billion dollars it doesn't even exist on a whole bunch of money losing projects to keep the economy going yeah I've got to bash the patient in the head with a hammer to keep him conscious to or likewise what we're all being told is go out and spend buy that plasma TV empty your wallet Harding says the exact opposite let us call to all the people for thrift and economy for a denial and sacrifice if need be for a nationwide drive against extravagance and luxury all right this is maybe going a little bit overboard to a recommittal to simplicity of living to that prudent and normal plan of life which is the health of the Republic there hasn't been a recovery from the waste and abnormalities of war since the story of mankind was first written except through work and saving through industry and denial while needless spending and heedless extravagance have marked every decay in the history of nations by the way that's not such bad oratory is it I don't see that that's so bad why we making fun of this poor guy now here he is in his inaugural address now we all read certain president's inaugural addresses the Presidents before whom we are expected to waive the incensed these are great men who get gigantic larger-than-life monuments which I always believed are not befitting of a republic needless to save any free people to have a gigantic image of some guy basically looking down upon you like you're not even worthy to be in this statues presence well we don't read Warren Harding's inaugural here's what he said we can reduce the abnormal expenditures again reduce them and we will we can strike at war taxation and we must we must face the grim necessity with full knowledge that the task is to be solved and we must proceed with a full realization that no statute enacted by man can repeal the inexorable laws of nature our most dangerous tendency is to expect too much of government and at the same time do for it too little okay see I told you he's not perfect we contemplate the immediate task of putting our public household in order we need a rigid gets and yet sane economy combined with fiscal justice and it must be attended by individual prudence and thrift which are so essential to this trying hour and reassuring for the future and finally the economic mechanism is intricate and its parts interdependent and has suffered the shocks and jars incident to abnormal demands credit inflation and price upheavals the normal balances have been impaired the channels of distribution have been clogged the relations of labor and management have been strained we must seek the readjustment with care and courage our people must give and take prices must reflect the receding fever of war activities perhaps we shall never know the old levels of wages again because war invariably readjusts compensations and the necessaries of life will show their inseparable relationship but we must strive for normalcy to reach stability all the penalties will not be light nor evenly distributed there is no way of making them so there is no instant step from disorder to order we must face a condition of grim reality charge off our losses and start afresh it is the oldest lesson of civilization 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 no altered system will work a miracle any wild experiment will only add to the confusion our best assurance lies in an efficient administration of our proven system are you a stunned by this as I am that a president is saying these things he actually has a brain it is unbelievable he's saying it is exactly what needs to be said you know again with a couple of tweaks here and there but it's quite astonishing 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 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 in 1920 the Japanese government in effect tried to keep prices artificially high pump up the bubble keep bubble conditions going Benjamin Anderson one of the economist Jeff Tucker talked about said of Japan great banks the concentrated industries and the government got together destroyed the freedom of the markets arrested the decline in commodity prices and held the Japanese price level high above the receding world level for seven years now we just heard from Harding we're going to see prices and wages start moving down Japan refuses to let that happen during these Japan during these years Japan endured chronic industrial stagnation and at the end in 1927 she had a banking crisis of such severity that many great branch bank systems went down as well as many industries it was a stupid policy in the effort to avert losses on inventory representing one year's production Japan lost seven years the US by contrast says Benjamin Anderson was different we took our losses we readjusted our financial structure we endured our depression and in August 1921 we started up again the rally and business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness a drastic reduction in the cost of production and on the free play of private enterprise it was not based on governmental policy designed to make business good hmm all righty so that's a lesson from history now on the subject of economic theory why is it that this should make sense 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 sow the seeds for the Great Depression I mean again I can't believe somebody believes that so why should we expect this outcome and what I want to do is just say a couple of things briefly about so-called fiscal stimulus and then monetary stimulus in fact I think I'll actually do them in the reverse order to show that of course we should expect these things are only going to prolong the agony of a depression now for the monetary part let me not assume that everybody in the room knows Austrian business cycle theory a lot of people are coming to this for the first time in recent months or in the past 18 months or two years and so I don't want to assume that you know that or if I say there have been Missal occasions of resource how did that happen so let me give the really really stripped-down Reader's Digest version and for those of you in the room who are experts or saying I can't believe you didn't talk about the well you're right and I deserve that rebuke but I'll happily take an extra 15 minutes but Doug French will never let me speak at one of these again so so just please just just be patient with me let's just give the stripped-down version it basically goes like this what Hayek was arguing in his important writing in the 1930s was that interest rates actually play a role in the economy they're not just arbitrary numbers they play a coordinating function and when they are permitted to play this coordinating function what they do is they coordinate production across time so that is to say when we save more and that an interest rates consequently decline that is the very time that it makes sense for businesses to produce goods and to engage in 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 are investing for and why are they investing now because the interest rates are low and they're and the longer term their 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 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 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 the in effect the the supply of real saved resources in the economy and what Hayek said is that when you tamper with the structure of interest rates as the market sets them you are introducing dis coordination into this coordinating structure so now if the central bank like the Federal Reserve simply says we're going to force interest rates down through our open market operations the problem here is that in this case the public has not necessarily indicated they want to consume in the future they want to consume right now they might want to consume even more right now but yet businesses are still being encouraged to engage in long term investment so people are demanding more of existing goods right now but yet investors are being misled into engaging in long term product development for new products in the future is a time mismatch likewise if just because Ben Bernanke or Alan Greenspan says hey we're going to force interest rates down that doesn't release any more resources into the economy so you have an unchanged resource pool to fund a whole bunch of new investment projects well how are you going to do that they can't all be completed so there's going to be a bus that comes so this is the super duper really fast overview of this so that's why simply saying let's create more money and let's jolt that money into the banking system and keep interest rates down that's not a solution to a depression that's the cause of the depression that's what gets people on to these unsustainable investment trajectories 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 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 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 he thinks he's got twenty percent more bricks than he has and let's say he can't buy anymore 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 micro economy so he's building a house that he won't be able to finish so if we say to him well in fact let's think it this way what would be the best way to get this Builder out of his predicament it would be to alert him you're building a house that you won't be able to finish and alert him as soon as possible don't wait till he's at the last brick and say uh that was the last brick because now he's got to demolish the whole building now he squandered all those resources now he's wasted all that labor time and he has made society poorer so we see first of all from this example that the boom period the period where he's building the house he's got employment everything looks great that's where the damage is done 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 and so likewise now let's think of that in terms of the economy as a whole 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 it's better that it find that out right now and that it not find it out in the distant future so in effect the analogy i've used is when people say the solution is let's pump more money in the economy let's put interest rates way down let's put them down to zero in fact zero is - I will be even hearing from some people zero is too hot whatever it whatever that means whatever they want to do with that but when they say that what they're really saying is that the way out of the master-builders dilemma is that we should just get this guy drunk you know just liquor him up so he doesn't notice the dwindling supply of bricks he just keeps on he's having a great old time but does that hold off the bust the bust is inevitable so likewise by saying we all will just keep pouring in more money that doesn't change the fact that you've got an unsustainable structure and when Alan Greenspan did exactly this in 2001 when he started you know with all these rate cuts and we're going to just get things going again and he refused to let that recession take its course and that healthy process whereby these unsustainable investments are stopped and they stopped impoverishing us and those resources are reallocated into sustainable project he wouldn't let that happen and that's the first recession on record in which housing starts did not decline and it's right at that time that people therefore drew the false conclusion the Fed fueled conclusion that you know everything goes bust in a recession apparently except housing housing prices never go down a house is the best investment you can make you should make a living flipping houses that's an easy way to make money all those myths get started right at that time because Greenspan is trying to hold off the recession by keeping the masterbuilder liquored up but now the master builder is on the last brick and so the recession is all the worse so we shouldn't look back at 1920 and say what a big surprise the Fed didn't try to keep the bubble going and yet somehow the economy get out of it no no it's because the Fed didn't try to do that that the economy recovered it's precisely for that reason that the economy recovered now secondly we have the the fiscal stimulus argument now this one really I think you would have to be a professional economist who is basically just a foot just a full time reader of Keynes all you do is read John Maynard Keynes to believe in fiscal stimulus I think the average person immediately detects there's something fishy about this there's no way this can possibly work because basically the argument is we're going to take 800 billion dollars and just blow it on a bunch of money losing projects and that will turn the economy around now there are some Republicans not all of them to their credit but some of them their response was well you know if we had drafted the stimulus package well we would have blown that 800 billion on different things like that's the problem the problem is the very idea that you can conjure up 800 billion dollars I mean where is it coming from I mean if we can why are we doing this all the time and of course they do have a kind of answer to that but in effect when you think about what the consequence of that are first of all remember that what the government's going to spend this on is money losing it they are there projects that will make losses and why do I say that well the private sector would already be doing them if they were money-making ventures these are money losing ventures that's why the government is doing them and of course the government because it gets its revenue not by selling you a product it gets its revenue by seizing it from you and it has no way to calculate profit and loss is it producing something that's adding value is it producing something it's destroying value it has no way of knowing every every spending decision it makes is totally arbitrary because it's completely isolate from market exchange so it's going to blow this money on again money-losing ventures and that's supposed to make us wealthy how can that be well and then of course there's the opportunity cost what would have happened to these funds even if they're borrowing them okay well where would those loanable funds have gone to well maybe something more worthy than this now one argument that's made is that by the more sophisticated fiscal stimulus people as well our economy is filled with idle resources and what we need to do is stimulate them back into activity again that's what we need to do now - the idle resources argument I have a couple of thoughts and the first one is derived from them not the same as an example that Peter Schiff uses in his book crash-proof Schiff gives the example of a restaurant owner who happens to live near where the circus comes to town and the circus comes to town and so all the clowns and the trapeze artists and the circus patrons all start going his restaurant in great numbers now this is not the brightest restaurant owner in the world he doesn't notice that a lot of these patrons are in fact wearing clown suits so he thinks he's just enjoying an incredible upsurge in demand for his food so in response to this demand he builds a new addition onto his facility or he built a new location and then the circus leaves town and then he realizes he's not really as much in demand as he thought this was sort of an artificially sort of circus induced boom that he was enjoying well now the question becomes yes now he's got idle resources that addition is idle those additional employees he's hired are idle that additional location is idle should we want to have a stimulus package to stimulate these resources back into use no they should have been built in the first place it was a miscalculation based on an artificial boom it's a waste of resources it needs to be liquidated those waiters and waitresses standing around all day not getting any tips and working for whatever the wage is they should be redeployed elsewhere them in fact you'd be doing them a favor basically they would want that they need to be moved out of that we don't they are idle resources those individuals but we don't want to stimulate them back into activity because we would be wasting the scarce Reese's or resources of society we should to be reallocating those resources where the market demands them where we're producing things that are urgently demanded by consumers now secondly I would ask sort of the question why are the idle resources idle as the questions never asked without idle resources let's let's go get them to work again well what made all these resources why all of a sudden why of all these businessmen who are selected by the market for their skill and anticipating consumer demand why have they done such a rotten job that they're all saddled with idle resources that it's not even worth worth putting them to work why is that happen well you know as Iran would say blank out there's no answer given to that 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 that misdirected capital into projects that would not be sustainable in the long term and now entrepreneurs are realising their error so we don't necessarily again want to stimulate these idle resources into activity we want to redeploy them we want a restructuring of the economy but instead you get a stimulus package it it distorts this process it makes it harder for the market to figure out what's real demand what's phony demand what's sustainable what isn't it keeps let's say 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 so again the stimulus only discombobulates the market further and makes it harder for market actors to make these adjustments and then ultimately then my last little point would be just to take one example from the stimulus package apparently 2 million Americans are going to get their homes weatherized under the stimulus package now this is supposed to again stimulate idle resources back into activity well ok so we've got some resources in the financial sector they're idle we got some car production that's idle we've got a lot of various types of unemployment do we have enough unemployed weatherize errs in the country that a stimulus package could put them and only them back to work of course not what in fact will happen is that you'll be drawing employment from private employers who we're producing good things for consumers but now they'll be bit away from private actors and in fact when and then when the economy starts turning around private actors will find themselves having to bid against the government for laborers laborers who are doing things that aren't even in demand so there's no way even if any of this stuff made sense to tailor the package so that the exact exactly correct kinds of capital and kinds of employment are specifically drawn back into use even if even if the theoretical objections weren't there the practical obstacles are impossible to meet in effect so okay and by the way by the way let's say there were two million weatherize errs out of work let's say it's one weatherize er per house let's say they were out of work and there were 2 million people needing their homes weatherized then why do we need the stimulus package I mean if 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 and so the stimulus package is superfluous now I do elaborate more on the stimulus sort of thing in an art a couple of articles on my website Tom woods calm I have an articles page so I'll refer you there for that but let me close by this because you know here's a question I get a lot I've been doing a lot of talk radio in support of the book of doing public appearances and a 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 they can do the exact opposite bail everybody out whatever interfere with prices and wages one way or another they're going to keep pumping in money they can do these stimulus packages we know they're going to do all that we know so what can we as individuals do well in terms of what you can do with your money and finances well I would refer you to an expert on that I don't want to get in trouble if I say something that goes wrong so that's not it's not my field but in terms of you know what can we do though given that the government obviously doesn't really care what we think and that should be obvious by now I mean September 2008 the congressional bailout package was about to be passed they were getting congressmen were getting like 2,000 to 1 calls against and the first time by the way you know they they rejected it and and every hit piece of hysteria imagine you know whatever was was heard in the media that all my gosh how could these stupid rubes possibly be against what their betters have told them is necessary for the economy in parenthetically by the way wasn't it interesting to read the ex chairman of AIG saying oh by just Joe Day saying by the way the bailout hasn't worked and I think it probably would have been best to let AIG go bankrupt and that funny turns out the stupid rubes were right after all well as usual well in any case in any case um you know 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 bales everything else so what can we do as individuals well how do we how do we get out of this and the answer it seems to me is that given that we are government you know 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 you know vote those people out 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 vote for it anyway and then they all went back to work so I don't know something's going wrong so I'm kind of screwy here but what can we do I actually don't know the answer to my own question believe it or not I actually don't know we can do in the sense that I only know what I as an individual can do and the only thing I am even remotely good at my wife can attest to this the only thing I mean I'm not a good fix-it man I mean that's putting it mildly I'm a good break things man but I'm not I've no skills really other than other than writing that's really all I can do so that so therefore that's what I try to do and that's all I can do and try and spread the message the way the way I can through that other people are really good organizers they can organize events they can organize groups they can get big rallies going and those people the division of labor is demanding that that's what they do other people maybe don't have the time even to do this but they may have some wealth they can donate to worthy causes to push this forward but each of us has some role to play because if each of us actually sat and did a kind of examination of conscience and said what is it that I can contribute to this even if it's making a little donation even it's making a donation of my time it's whatever spreading the word to my neighbors if everybody did this doesn't mean we would win but we would at least be satisfied to know that we did everything we could and I mean that may be small consolation but it's not nothing 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 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 you realize wait a minute no no the elegance and simplicity of it all is so is so moving is so compelling you're just drawn to it we need to draw more people to it and as I say we won't necessarily win I can't we certainly can't make promises about this but nevertheless the truth does have an attractive power and yeah the Internet can be used by the other guys too but who in his right mind wants to spend all day on the internet reading about Keynes right who in his right mind wants to spend a week of his summer at a Keynesian Institute whereas we have to turn people away from our Mises University over the summer because when you read our stuff it makes sense the light bulbs go on so ladies and gentlemen we're often told you know you don't learn the lessons of history you're condemned to repeat it well 19 20 and 21 is a period of history I would love to repeat I'm afraid we're going to repeat 1929 we're told that 1929 we had a Great Depression government wasn't able to get us out of it therefore when you do exactly what the government did in those years that syllogism doesn't work so instead it seems to me why don't we try sanity for a change why don't we try the things that really did work and the only way we can do that is simply through the old-fashioned method amplified by the Internet of spreading the message through our own efforts and ladies and gentlemen good luck to all of us thank you so much Oh

Channel: misesmedia

Views: 290,167

Rating: 4.8545456 out of 5

Keywords: Tom, Thomas, E., Woods, Meltdown, Ludwig, von, Mises, Institute, Great, Depression, 1920, Recession, American, History, Limited, Government, Forum, Colorado, Springs, Liberty, Property, Peace, Freedom, President, Warren, Harding

Id: czcUmnsprQI

Length: 49min 12sec (2952 seconds)

Published: Fri Apr 10 2009

Reddit Comments

[u/Ezraleblanc]

Thank you.