One common guiding assumption characterized the Keynesians, socialists, and fascists of the 1930s: that laissez-faire, free-market capitalism had been the touchstone of the US economy during the 1920s. FULL ARTICLE by Murray N. Rothbard
Source link: http://blog.mises.org/11292/reliving-the-crash-of-29/
Reliving the Crash of ’29
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It took me some years, and help from the von mises institute, to see that Republicanism today is what it has always been since Lincoln. There are no lassiez faire or fiscally conservative roots for it to go back to–though perhaps it can go there for the first time through the efforts of Ron Paul.
Of course Rothbard is right as far as he goes but the 1920s were a mixed bag.
WWI had devastated Europe and so their primary need after the end of the war (June 1919) was to rebuild not only their infrastructure, but the international economic order. But the nations of the world destroyed the world economic order as each tried to gain an advantage over other countries, or to maintain an advantage over other countries that had come from the war.
German reparations strangled any recovery in Germany as the European Allies confiscated German capital directly and imposed punative payments. But nearly all of the countries massive debts from the war and the only way they could hope to retire the debt was to return to active international trade.
Because of the end of spending on the war and the retrenchment to rebuild the infrastructure of Europe the world economy went into a slump, the recesion of 1920.
This is the significant time when the world economies diverged. In the US President Harding appointed Andrew Mellon as Treasury Secretary and he immediately implemented supply side policies an the US economy immediately began to recover. The US recession only lasted about 18 months ending in 1921. Prosperity returned in the form of the Roaring Twenties. But the rest of the world kept wages high and implemented social policies that prevented recovery. The Great Depression began for most of Europe right after WWI and ran through WWII.
Rothbard is absolutely correct about the destructive relationship between Benjamin Strong and Montegu Norman, but had Mellon not implemented supply side policies the US would have also had economic problems, and Strong could not have intervened on behalf of Norman and the pound.
Congress also got into the act. After the war the nations of Europe began to once again produce and so their demand for US products declined. In response congress struck a huge blow to the world economic recovery by passing the Fordney-McCumber tariff. They did also provide loans for European recovery, but the result was that the international credit problems were simply compounded by countries borrowing from the US to make payments to the US on earlier loans. The nations were using credit cards to pay off credit cards.
The whole thing came to a head in 1929 when congress rather than reducing tariffs to allow European recovery actually began working on the Smoot-Hawley tariff increasing the already huge international tariff wedge.
Rothbard is also correct about the disastrous economic policies of Hoover.
But Rothbard, like the Keynesains and monetarists, placed too much blame on monetary conditions. Had the fiscal problems been resolved the Great Depression would have never happened. Even though the world was not on an actual gold standard, the golden anchor still existed and would have held world currencies together so that trade would not have suffered from monetary distortions. Rothbard missed the fact that Mellow actually engineered a recover in the US stronger than any monetary impact. The fact that the Roaring Twenties was an American phenomenon is significant proof that American domestic economic policies were succesful while world economic policies were a disaster.
The bottom line is the free market died in the US in 1913 with the passage of the Federal Reserve act and the federal income tax amendment, but a return to free markets as evidenced by the successful policies of Andrew Mellow would have prevented Great Depression. The primary driver toward the Great Depression was the destruction of international trade. Rather than the 1920s being evidence of an artificial boom, American success in the 1920s was strong evidence proving the success of free markets.
@ Dick Fox:
How can you say the Roaring Twenties is free market success if “the free market died in the US in 1913 with the passage of the Federal Reserve act and the federal income tax amendment”?
htran,
Looks like the roaring twenties were high on easy credit supplied by the postwar FED.
Had the fed not existed, the twenties might have roared less but the great depression might not have happened.
htran,
I am not an absolutist. There are forces for good and bad working all the time in economies. That was my point.
If you are going to take the position that the American Roaring Twenties were created by credit expansion then you have to explain why the rest of the world did not experience the same thing. This is my primary point. The American experience was different from the rest of the world and the only difference were the supply side policies of Andrew Mellon. The contrast is other countries held taxes high and wages high. The US allowed both to fall during the 1920s and that was the difference.
I recognize the problem created by Strong trying to prop up the pound sterling but that does not explain the prosperity of the 1920s. The failure in Strong’s efforts can be seen in the continuing decline in the pound even with his attempts to counter it and you can see the failure of congressional insolationist trade policy in the continued decline of agricultural prices during the 1920s. With those two so bad what made the 1920s so good? I nothing other than Mellon’s supply side policies.
I believe too often Austrians see the ABCT as a hammer and everything else as a nail. In thruth the ABCT is an important concept but it can be taken to the extreme. My reading of Mises tells me that he understood the difference.
Dick, Austrians don’t claim that all the expansion during a boom is artificial. The phony boom typically piggy-backs on top of something real.
Tom,
Thanks for the response.
While what you say is true, most Austrians follow Rothbard’s lead and ignore the supply side actions of Andrew Mellow that made the US prosperous while the rest of the world declined. I repeat something I wrote earlier. If you are going to say that the Roaring Twenties were an artificial boom you are going to have to explain why it was confined to the US.
By the way, I consider myself a supply side Mises Austrian.
Dick Fox
Supply side economics only has a positive effect if you are moving from a more interventionist policy to a less interventionist policy, it would drag down a true free market economy. It is relative levels of freedom that count, absolute freedom would beat anything supply siders could come up with.
Dick Fox
Andrew Mellow made the US prosperous the same way a doctor who abstains from bleeding a seriously ill patient can be said to have cured the patient.
Dick Fox
Rothbard did not miss anything in his analysis of the Roaring Twenties, Andrew Mellows supposed supply side policies, and all of supply side economics, are only a subset of austrian theory. Austrian business cycle theory includes the possibility that governments can so extensively intervene in the economy that they squash all economic growth, even with expansive monetary policy. That Andrew Mellows did not follow the interventionist policies of the rest of the world and allowed the credit expansion of the twenties to play out in an atmosphere of RELATIVE freedom is alone enough to explain the difference between the US and the rest of the world in that time period. Andrew Mellows only affected the economy negatively, he did not intervene. He did not promote any positive effect, he simply did not drag the economy down further. Had he followed the rest of the worlds policies the US would have, as Austrian theory describes, fallen into a state of economic stagnation, just as it eventually did given Hoovers and Roosevelts policies.
Credit is not money, it is a claim on money. That is the ultimate lesson of the 1929 crash, every crash before it and the crash we’re going through today.
It is the over-issuance of credit that drives speculative asset values fostering a false sense of wealth accumulation and the excessive buildup of debt that brings it down. Whether it’s tulips or subprime mortgages, hard currency or 100% fiat, the process remains the same. The only variable in this process is the government’s response after the fact.
In our case, the government has decided that the best course of action is to expropriate what little economic credit we have left and pile more debt upon our already debt saturated economic shoulders in the hopes that the credit they are stealing from our economy and reissuing as debt will drive debt saturated lenders into loaning to debt saturated borrowers, rekindling excessive debt expansion. Meanwhile existing debt continues its relentless quest, seeking its true value.
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