Turn it on in Settings › Safari to view this website.
This message will be pushed to the admin's iPhone instantly.
Harding cut the budget nearly in half between 1920 and 1922. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The depression ended quickly. FULL ARTICLE by Thomas Woods
Thank you Thomas Woods for an insightful and mind opening article. It’s indeed amazing that Warren Harding has been ridiculed by most historians as the worst president of the 20th century, if not the worst in the history of the U.S. If judged by the wisdom of his words, the actions taken consistent with those words to combat the always #1 problem of economic stability, and the ultimate success of those actions, I would judge him to be one of the greatest presidents of the 20th century. Harding, Reagan and perhaps Taft are the only 20th century presidents with the intellect, confidence, and courage to fight the advance of power hungry politicians and bureaucrats. Brings to mind the words of historian Arthur Schlesinger which I will do my best to paraphrase: “Those who control the present control the past. Those who control the past control the future.” The importance and power of history in justifying and determining the course of current events is not to be underestimated. In fact, the written record of accepted history is to be questioned boldly with an open mind. For all too often, agenda has been found to trump truth in marking the official historical record.
The article overlooks one important factor which ostensibly nullifies its thesis, namely the carry trade funneled by Weimar Germany during the same period of time which effectively served as a source of copious free liquidity for the United States and the world, the ramifications of which eventually were hyperinflation, bankruptcy, and the decimation of the Germany economy and the morale of its people, leading to the populist rise of Hitler, and of course the greatest world war. There are always unintended consequences to unsound monetary policy and in this instance globalization ensured those would be felt everywhere and would be of the severest magnitude.
Reading this together with “Martin Van Buren: What Greatness Really Means” shows a very distinct pattern.
Where government is smaller, where there is less intervention, recovery is rapid.
(cue ominous music)
And then there’s Hoover, FDR and everyone in the Fed.gov who has come since.
…except Ron Paul.
“Harding’s inchoate understanding of what was happening to the economy and why grandiose interventionist plans would only delay recovery is an extreme rarity among 20th-century American presidents.”
I gather that this has something to do with the fact that having had a successful career outside of government, as a newspaper publisher, he did not hate and fear the prospect of a smaller government. Whereas the rest of the sad sacks, hatchetmen and stooges occupying the presidency had little or no accomplishments or ability outside of government or government-controlled industries. For the latter type of president, sabotaging the economy is a boon, not a bane. Pursuing bad policies, while harming the public, is a completely rational act for someone whose living is made in the monopolistic “cleanup crew” of socialistic planners and fixers.
“namely the carry trade funneled by Weimar Germany during the same period of time which effectively served as a source of copious free liquidity for the United States and the world, the ramifications of which eventually were hyperinflation, bankruptcy, and the decimation of the Germany economy and the morale of its people, leading to the populist rise of Hitler, and of course the greatest world war.”
There’s no such thing as hyperinflation. Germany had 500,000,000,000,000,000,000 (500 quintillion) Marks of IOUs and lots of gas chambers, so all the notes were backed. Thus they were backed by the gassing ability of the Reich. There would have been significant inflation when the rebels blew up the gas chambers.
Here’s Joseph Schumpeter, who draws the same conclusions I do, on the 1920-21 depression: “[The case of 1920] also shows better than any theory could how the system pulls itself out of troughs under its own steam and how it succeeds in doing so while the price level is falling.â€
I recently wrote a paper for an economic history course where I attempted to explain the Great Depression with Austrian economics. (Naturally, I cited Mr Woods, along with Rothbard and Robbins.) In it, I brought up this exact point, and specifically how unemployment fell drastically from 1921 to 1923. However, my professor remarked that this fall “can be attributed to the end of the post-war recession. A similar phenomenon was observed in other countries which followed different fiscal and monetary policies.” Is there any truth to this? This article brought up Japan, but they really weren’t as involved in WWI as Europe was. Did countries like England, France, Canada, or Russia experience anything similar to this in 1920-24?
Ash: I’ll have to dig around, but the prof’s explanation sounds fishy. Does the “end of the post-war recession” itself have any explanation, or is this “end” an extraneous force of some kind that simply occurred? This “end,” which has no apparent cause, is so powerful that it overrides and renders nugatory all competing fiscal and monetary policies?
What about the forgotten depression of the late 1980′s? After the 1987 stock market crash liquidity was pumped into the market and confidence was restored.
G Plecki said:
“The article overlooks one important factor which ostensibly nullifies its thesis, namely the carry trade funneled by Weimar Germany during the same period of time which effectively served as a source of copious free liquidity for the United States and the world, the ramifications of which eventually were hyperinflation, bankruptcy, and the decimation of the Germany economy and the morale of its people, leading to the populist rise of Hitler, and of course the greatest world war.”
I don’t know what you’re talking about. The money supply crashed in 1920, as the United States went back on the gold standard, leading to massive liquidations and then a revival. There wasn’t plentiful liquidity for the United States whatsoever.
“After the 1987 stock market crash liquidity was pumped into the market and confidence was restored.”
It is impossible to “pump liquidity into the market”. The government can only redistribute it. You can increase liquidity for bankers, but everyone else pays for it through inflation (i.e., everyone else ends up with less liquidity). Nothing is free.
I have always hoped that the discussion on the 1920 depression would become less shallow.
The downturn was sharp, the turn around was quick – but perhaps the crucial question was what if the Fed did not allow the money supply to contract. My main problem with Rothbard is that he insists that this is the only feasible way to foster an economic recovery.
So among the Austrians, you have the Mises, Rothbard, Salerno et al. camp who are proponents of this approach. While the other camp – among them Hayek, Ropke, Garrison et al. – who would suggest that the money contraction should be arrested to prevent a “secondary deflation”, and government works might be necessary in that regard.
This is a worthy question to pursue i.m.o. – even if government policies will always be dictated by political considerations. Of course, the second camp’s views would present considerable difficulties – e.g. the mechanisms by which you prevent a monetary contraction is important (and you can never do this “correctly”), twiddling with the price mechanism etc.
But this crisis is of a far greater magnitude than the 1920 one – just look at the sheer amount of debt, and the Fed having weaker control over the money supply for a while now.
Some good discussions on the Austrian Economists blog – with emphasis on the 1920 depression:
Anon: I hardly think the present discussion is superficial just because it doesn’t entertain the “what if the Fed had inflated us out of the crisis” thesis; surely there is a place for the evaluation of what actually did happen, isn’t there? Sheesh.
“So among the Austrians, you have the Mises, Rothbard, Salerno et al. camp who are proponents of this approach. While the other camp – among them Hayek, Ropke, Garrison et al. – who would suggest that the money contraction should be arrested to prevent a “secondary deflation”, and government works might be necessary in that regard.”
I don’t know what you’re talking about. Nowhere does Hayek say that the money supply shouldn’t contract. He does say, in lecture four in Prices and Production, that if the banks could increase the money supply to satisfy the demand for money as money, and not as capital, then it would have positive effects. But he warns that it would be too difficult to do, and as such, shouldn’t really be attempted. Hayek was a liquidationist, just like Mises and Rothbard. Honestly, people try to turn Hayek into Keynes.
I thought the paper was an excellent example of the Austrian position on recessions/depressions. Would it be correct to suppose that Austrian monetary and fiscal advice now in this current recessionary phase would be as follows:
Have the Fed reduce bank reserves and seek to raise interest rates.
For fiscal policy, reduce taxes (payroll taxes, corporate taxes, income taxes, etc.) while more drastically reducing government spending across the board.
The article states that “Harding cut the government’s budget nearly in half between 1920 and 1922.” Since he wasn’t President until March 4, 1921, was he just continuing Wilson’s policies or did his policies actually result in visible signs of recovery within six months?
i think anon is right on the money here. you’ve got to look beyond p&p. hayek was not always consistent on deflation, as you’ll see in bagus’ analysis (p. 11 onwards).
this is the faultline that divides the gmu/ money equilibrium/ freebanking camp and the opponents of frb, notably the mises institute, and anon does well to highlight it.
You might as well point me to an article written by Galbraith; it’s meaningless. Nowhere does Hayek ever say that monetary contractions should be “arrested,” not in his earlier or later works. Liquidation is the corner-stone of ABCT, as the misdirections of the original means of production must be freed for more economical uses, and the market rate of interest must rise to the natural rate. As far as the free-bankers are concerned, they can’t be taken seriously until they reconcile their theories with the Mises-Hayek framework. Keeping “MV stable” is meaningless to anyone who’s ever read the Theory of Money and Credit, or Human action. Just a lot of people putting words into dead economists mouths.
did you actually read the article? here’s an excerpt:
“In other lectures that same year, Hayek makes more interesting comments about his new attitude towards deflation (Hayek 1979). There he explicitly confesses that he has changed his opinion about it. A threatening deflation must be stopped because due to the disappointment of expectations, it tends to induce a “secondary deflation,â€ that “performs no steering functionâ€ (p. 15). Hayek states that were he responsible for monetary policy, he would prevent deflation by announcing that he would fight deflation
with all means. This very announcement, he believes, would help to stave off a deflation. And he again shows his new inflationary bias by pointing out that “monetary policy must prevent wide fluctuations in the quantity of money or in the income streamâ€
if bagus were a keynesian and not an austrian, then i’d not be interested in his critique.
Ash Navabi: “my professor remarked that this fall can be attributed to the end of the post-war recession.”
Mainstream economists have a zillion explanations for business cycles, but they will poke their eyes out before looking at any monetary theory. Don’t waste any time trying to persuade your professor. But it’s important to convince yourself. A good place to start is Hayek’s “Monetary Theory and Trade Cycles” available in pdf on this site under Literature. Hayek summarizes all of the theories and his summary includes all that are popular today, he was that far ahead of his time.
As for the depression of 1920, your professor should have understood that it was 2 years after the end of the war. There was a mild depression right after Armistice Day in 1918, but then the economy recovered. The recession of 1920 had little to do with WWI. But even if it had been nothing but a continuation of the depression that began with the end of the war, the point still remains that the government did not rescue the economy with monetary of fiscal stimuli.
If all the professor said was that the drop in unemployment can be attributed to the end of the post-war recession, then he contributed nothing to the explanation of why the recession ended. Standard theory today says that it is impossible for recessions to end without government stimuli. The 1920 recession ended without government stimuli, regardless of when or how it started and ended.
As for other countries, Germany enjoyed the hyperinflation of 1920-1923.
You’re misunderstanding Hayek. He’s talking about the demand for money as money, and not as capital. The latter is what causes inter-temporal disequilibrium. The aggregate price levels is not what’s important; the focus must be placed on the market rate of interest relative to the natural rate (increasing the supply of money as capital causes a divergence between the two). The free-bankers have to show how this happens, how the money supply could be controlled and funneled to actors to serve its purpose as money and not as capital (I’m not saying money is capital, just that it can act as capital temporarily).
Also, I have some questions about that article.
“In other words if there is a deflation during the depression, it should not be prevented. That seems to contradict his statement, that the money supply should be invariable.”
Hayek never says that the money supply should be invariable. He says that it’s merely one condition theoretically needed to end trade cycle’s. Hayek explicitly states that the trade cycle can never be eliminated, but that free market policies can serve to reduce their duration and severity. I think this is the quote he’s referring to:
“It is quite conceivable that a distortion of relative prices and a misdirection of production by monetary influences could only be avoided if, first, the total money stream remained constant, and second, all prices were completely flexible, and, third, all long term contracts were based on a correct anticipation of future price movements. This would mean that, if the second and third conditions are not given, the ideal could not be realized by any kind of monetary policy.” â€“Page 304, Prices and Production.
Furthermore, Bagus writes:
“He (Hayek) fails to see that deflation is not depressing to all businesses and does not necessarily decrease overall production. Only the business owners who depend on further inflation will get into serious trouble, while those entrepreneurs who correctly anticipate the deflation will receive gains. The ownership of companies can change but the “real rate of return remains the sameâ€ (Rothbard 1993, p. 696).”
I don’t understand what he’s trying to say here. Is he saying that Hayek believed falling prices are a problem? Or that profits have anything to do with the price level? Prices and Production explains why falling prices are not a problem, and why “voluntary savings” is something all dynamic economies depend on for growth.
One unintended consequence of that recession was that it ended Truman’s business career and started his political one.
in regard to this hayek quote (which to me seems unequivocal):
“monetary policy must prevent wide fluctuations in the quantity of money or in the income streamâ€ (p.17)
- bagus lists as his reference:
1979. Unemployment and Monetary Policy. San Francisco: Cato Institute.
again from bagus:
In 1975, after having received the Nobel prize he mentions the “secondary depressionâ€
in which unemployment leads to a decrease in aggregate demand and therefore
more unemployment. “Such a â€˜secondary depression’ caused by an induced deflation
should of course be prevented by appropriate monetary countermeasuresâ€ (Hayek
1985, p. 210).
1985. “Speech at the East Leeds Labour Clubâ€ (1975). In New Studies in Philosophy, Politics,
Economics and the History of Ideas. Chicago: University of Chicago Press.
the boldface is mine.
bottom line: i don’t understand why the (later) hayek would bother to fight deflation, or even mouth those empty words in order to stave off a salutary process market process.
Because some deflation, according to the free-banker’s is bad. I’m not entirely familiar with their positions, but I think it’s this: if the money supply falls below the demand for cash holdings, individuals will begin selling goods in order to achieve the level of cash they deem necessary for transactions (prices for consumer goods will fall), but that this will push the market rate of interest above the natural rateâ€”that is, individuals will save less without a change in their their time preference. If money is created in order to satiate its demand as money, that is, as cash holdings, then it will lessen the fall in the prices of consumer goods, maybe even entirely prevent it, but it won’t prevent a fall in the price of producer goods. The price of producer goods must fall if there is to be a correction (liquidation). (This is my interpretation of their argument, from what I’ve read Hayek’s work).
So it’s not the case that Hayek thought the general price level shouldn’t fall–the price of producer goods have to fall (money as capital); but I guess the price of consumer goods don’t have to fall too dramatically. Again, it’s all about the position of the market rate relative to the natural rate.
Furthermore, to say that Hayek thought the general price level determined profit would mean that he rejected the Bohm-Bawerkian framework–in essence making him a Marxian.
There are a lot of questions unanswered though..
EIS: I don’t understand what he’s trying to say here. Is he saying that Hayek believed falling prices are a problem? Or that profits have anything to do with the price level? Prices and Production explains why falling prices are not a problem, and why “voluntary savings” is something all dynamic economies depend on for growth.
if you look at what hayek says here, the implication is unambiguous, that hayek saw deflation as bad (though not worse than inflation):
“it is, however, rather doubtful whether, from a long-term point of view, deflation is really more harmful than inflationâ€
p.330 The Constitution of Liberty. Chicago: University of Chicago Press. 1971
“if you look at what hayek says here, the implication is unambiguous, that hayek saw deflation as bad (though not worse than inflation)”
I think we’re using two different definitions of deflation. Deflation, according to Hayek, is a fall in the money supply below the demand for cash holdings, and not just a fall in the general price level.
“”it is, however, rather doubtful whether, from a long-term point of view, deflation is really more harmful than inflationâ€”
I don’t know what he means. He was old, who knows?
this is hayek, from the preface to monetary theory and the trade cycle, p.19:
There can, of course, be little doubt that, at
the present time, a deflationary process is going
on and that an indefinite continuation of that
deflation would do inestimable harm. But this
does not, by any means, necessarily mean that the
deflation is the original cause of our difficulties
or that we could overcome these difficulties by
compensating for the deflationary tendencies, at
present operative in our economic system, by
forcing more money into circulation.
another example of where i find hayek contradictory (or wrong). i’m assuming hayek is defining deflation as a decrease in the money supply, not a change in prices. in referring to the depression, he makes a damning comment (boldface) about deflation, but here he doesn’t support countermeasures. he doesn’t finger deflation as the cause of the problem, but doesn’t celebrate it as the reactionist, liberating process of the preceding inflation.
so many diefinitions of inflation or deflation,whatever.
if just before i died, i destroyed all my cash..lets say it was 1000 dollars…a reduction in the money supply, iow..is that deflation of cash??? would the remaing cash in the economy have a teensy bit more purchsaing power??
if cash deposits stop making there way into credit expanding type accounts ( i have been told this is what really occurs) and cash or currency inflation ceases…i assume the rate of credit growth would slow and eventually, as loans are repaid credit-money would also disappear…would this be credit-borne money deflation??? is that correct when discussing any type of deflation that occurs?
hayek, tiger by the tail, p. 102 (my boldface):
It is, however, rather doubtful whether, from a long-term point of view, deflation is really more harmful than inflation. Indeed, there is a sense in which inflation is infinitely more dangerous and needs
to be more carefully guarded against. Of the two errors, it is the one much more likely to be committed. The reason for this is that
moderate inflation is generally pleasant while it proceeds, whereas deflation is immediately and acutely painful.34
…see why i don’t think hayek is always logical on this point? why is deflation an error? the only reason he gives is that is involves pain. on that basis, coronary bypass surgery is out. hurts too much. better to risk death and suffer agonizing angina.
Hayek in a 1979 interview:
“I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.”
Quoting Mario Rizzo:
“So now we have not only the logic of Hayekian economics (both micro and macro) and the words of the man himself that deflation (of the increase in the relative demand to hold variety) should be avoided. I claim infallibly that this is the Hayekian position. We can argue about whether he was right but we cannot profitably argue about whether this was his position. QED.”
It’s never been made clear to me why Mario Rizzo’s pronouncements on this matter are to be taken authoritatively.
No one’s pronouncements deserve to be taken authoritatively, for that matter. Once that happens, you get dogma – and you certainly can be dogmatic even about the truth.
But if someone is posturing that Hayek didn’t support the notion of stabilizing the money supply – it’s an indefensible position because it contradicts fact.
newson: “why is deflation an error?”
Hayek wrote a lot and covered similar ground in different circumstances. So it will be easy to find apparent contradictions. Second to Mises, Hayek is the most consistent economist I have ever read. The apparent contradictions in Hayek’s writings can usually be reconciled by context.
Hayek saw deflation as worse because of the assymetry of the business cycle. During the boom, it’s easy to convert liquid assets into fixed assets. However, the bust phase involves trying to convert fixed assets back into liquid ones which is very difficult and that’s where the malinvestments show up. It seems to me that Hayek didn’t want to stop the liquidation that had to take place, but to alleviate the secondary effects of it to some degree with monetary policy.
Hayek, Prices and Production pp 275
“In theory it is at least possible that, during the acute stage of the crisis when the capitalistic structure of production tends to shrink more than will ultimately prove necessary, an expansion of producers’ credits might have a wholesome effect. But this could only be the case if the quantity were so regulated as exactly to compensate for the initial, excessive rise of the relative prices of consumers’ goods, and if arrangements could be made to withdraw the additional credits as these prices fall and the proportion between the supply of consumers’goods and the supply of intermediate products adapts itself to the proportion between the demand for these goods. And even these credits would do more harm than good if they made roundabout processes seem profitable which, even after the acute crisis had subsided, could not be kept up without the help of additional credits. Frankly, I do not see how the banks can ever be in a position to keep credit within these limits.”
Hayek was highly inconsistent. His views on monetary policy and banking in later works are in direct contradiction to what he said in “Prices and Production” and “Monetary Theory and the Trade Cycle”, his by far best works.
Reading “Prices and Production” and “Monetary Theory and the Trade Cycle” – indeed you get a glimpse of a younger Hayek, with less consolidated views.
you can make your own value judgment as you see fit. You have a right on your private value judgments about Hayek, but you don’t have a right on your own private facts about Hayek. Early Hayek clearly and unequivocally rejected the stabilization of money supply as appropriate policy. Period. Rizzo is wrong, clearly and unequivocally. stabilization was not a Hayek’s position in the 1930s.
Deflation is when the market rate of interest is above the natural rate, it’s a disequilibrating position. When is the market rate above the natural rate? Practically never. Never during the boom, and during the bust it’s rising back to the natural rate; but, it may rise above the natural rate if the deflationary correction is extremely dramatic or too abrupt. Hayek was insinuating that if this is the case, there may be some kind of room for monetary expansion in order to ease this transitional phase, but nowhere does he ever mention preventing liquidations, or stabilizing prices. Furthermore, he says that this would be too difficult to do, and shouldn’t really be attempted. I don’t care what Hayek said in the 60′s or 70′s, his work speaks for itself.
The effects of an elevated market rate of interest (above the natural rate) is interesting, and should be explored. But today, it’s pretty irrelevant. The free bankers have to show how this situation could be remedied without pushing the market rate below the natural rate, causing misdirections, and altering the capital structure.
Any Austrian here want to tell me exactly what Obama and the Fed should be advised to do right now, Nov. 29, 2009?
“Any Austrian here want to tell me exactly what Obama and the Fed should be advised to do right now, Nov. 29, 2009?”
They should stand down, and face the calamity they created.
i can’t see where you’re getting hayek’s peculiar definition of inflation/deflation. in the thirties it was generally understood as a expansion/contraction in the money supply.
“Early Hayek clearly and unequivocally rejected the stabilization of money supply as appropriate policy. Period. Rizzo is wrong, clearly and unequivocally. stabilization was not a Hayek’s position in the 1930s.”
I agree with you on the first part. Rizzo’s point was that Hayek thought otherwise- clearly and unequivocally – later in life.
We would probably need a debt jubilee of some sort.
“I agree with you on the first part. Rizzo’s point was that Hayek thought otherwise- clearly and unequivocally – later in life.”
That’s not really clear from the quote you provide; there seems to be no clear distinction there between early and later Hayek, Rizzo seems to be speaking of a Hayekian position as such.
Also, if memory serves, on the debate surrounding this quote on the GMU blog, some commentator noted that later in that 1979 interview, Hayek made statements in conflict with the view embraced by the Austro-inflationists; I can’t dig up the link at the moment, but I’m fairly certain that even here there is some conflict in Hayek’s statements that should give the Austro-inflationists pause.
Greg Ransom (hayekcenter.org) probably has done the most research on Hayek’s beliefs concerning this matter.
There are bound to be disagreements within any group of individuals – which is perhaps why it can be dangerous to label a particular view (or a particular prescription) as being “Austrian”. There can be issues on which there are no consensus.
Thomas Woods however seems to be the public face of Austrian economics nowadays.
“Greg Ransom (hayekcenter.org) probably has done the most research on Hayek’s beliefs concerning this matter.”
Who cares? If you want to understand Hayek go read him; it’s in English. You don’t have to take Greg Ransom’s word for it.
“There are bound to be disagreements within any group of individuals – which is perhaps why it can be dangerous to label a particular view (or a particular prescription) as being “Austrian”.”
Fortunately for us, we don’t have to label any views. The Austrian economists did it for us, and they put together a very specific and clear framework.
“Who cares? If you want to understand Hayek go read him; it’s in English. You don’t have to take Greg Ransom’s word for it.”
I certainly don’t care about yours.
All I’m saying is that we don’t need some kind of intermediary telling us what Hayek “said” or what he “really meant.” It’s clear as day; nowhere in Monetary Theory and the Trade Cycle, Prices and Production, The Paradox of Saving, Contra-Keynes and Cambridge, or in Monetary Nationalism and International stability does he ever advocate stabilizing prices. What he does say is that the credit superstructure shouldn’t run away “in either direction,” but that’s a far cry…
1920/1929 = 2000/2009
There are plenty of similarities.
Carter (D) – 32.5% federal debt/GDP at end of presidency
Reagan (R) – 53.1% federal debt/GDP at end of presidency
Bush, Sr. (R) – 66.1% federal debt/GDP at end of presidency
Clinton (D) – 56.4% federal debt/GDP at end of presidency
Bush, Jr. (R) – 83.4% federal debt/GDP at end of presidency
The President proposes the budget. Congress rarely appropriates more than what the President requests.
All content Copyright Mises Economics Blog
Powered by WordPress + WPtouch 1.9.41