The latest video in our Principles of Macroeconomics course at MRUniversity covers Understanding the Great Depression. I like this video a lot. It starts by illustrating the great fall in aggregate demand using the AD-AS model but also looks at the dust bowl, the Smoot-Hawley tariff and the National Industrial Recovery Act (NRA). The section on the tariff beautifully illustrates the argument that trade is like a technology that allows us to almost-magically transform one good into another. And the final section on the awful NRA has some great visuals.
If only macroeconomics consisted of something more than being wise after the event. if wise it be.
To understand the great depression you must first understand that it was simply a recession managed by a Government following Keynesian theory. Everything the government did made it worse. It wasn’t until WW II when the government had to apply it’s great powers to something else that the great depression ended. This is what happened in 2009-2016 too. A simple recession made worse by a ill advised government using failed Keynesian theories to “fix” it.
I think you are correct.
Like Obama et al, FDR’s and his gangster’s main objectives were not economic recovery, but “fundamental transformation” and displacing elites with different elites.
FDR believed his legislative achievements were: Social Security (a scam at inception and soon to be bankrupt); collective bargaining; and bank regulation (without which the subprime crisis and great recession would have been impossible). We don’t see economic growth and prosperity among them.
For academia, the deep state/Wall Street, the recession ended in 2009. For the rest of America it hasn’t been as positive. .
Your have a timeline problem when blaiming FDR, He did not become president until 1933 and by then the real GDP had been falling for nearly 4 years and the unemployment rate was over 20%.
Not only that, the economy began to grow rapidly in 1933 when certain policy measures were in place (the currency devaluation, bank holiday, FDIC, HOLC). It did so in spite of the bad policy measures put in place alongside the good policy measures (the NIRA).
You are looking at this from a Republican vs Democrat point of view. Hoover was president and he did a poor job on the recovery because he depended on the advice of others who were believers in a Keynesian form of economics. There was a kinda bounce around 1933 but later FDR quashed that with his harsher brand of Keynesian economics.
To really understand what happened you have to think about “how gained” from those policies. More taxes, more regulation more power for the president and cabinets. This is how the elite think. It is not in their mindset to ever give up anything and as Hillary said let no crisis go to waste. FDR used the great depression to take powers that were not his and to dole out favors to Democrats.
What the government should do is cut the budget, cut taxes, cut regulations and allow the pent up energy and desire of the people to flourish. That is what they should do today and in 2009 too. But they don’t because it feels to the elite as though they are giving up something that is rightfully theirs. Our government would prefer to have stagnation or recession over cutting taxes and reducing the power of government to over regulate. You can be assured that the elite aren’t suffering and they are what matters.
Imagine how the economy would grow if we eliminated federal business/corporate taxes. Imagine how happier the working class would be with much lower federal income taxes. It won’t happen so you will have to imagine it.
Hoover was president and he did a poor job on the recovery because he depended on the advice of others who were believers in a Keynesian form of economics.
This is a fantasy.
People have been saying social security will go bankrupt “soon” for decades now.
They keep confounding it with a private pension plan (and assessing its problems with bad math).
Now in its 83rd smash season!
Anyhow, the progressives “sold” the Federal Reserve as the end of the business cycles. How has that worked out?
After the October 1929 crash, the Fed (torpedoing the Republican administration?) made things worse by reducing reserves and raising rates, when the opposite was required.
Wikipedia says the GD lasted from 1929 to 1939. So, 1933 to 1939 are on FDR.
In fact, there are charts. Unemployment was around 15% in 1939/40. Who knows when wages and median household incomes returned to 1920’s levels?
I know. I know! It’s not a recession when GDP growth is positive. Tell that to the generation that lived through it.
The Emergency Banking Act of 1933, enacted March 9, 1933, three days after FDR declared a nationwide bank holiday, combined with the Federal Reserve’s commitment to supply unlimited amounts of currency to reopened banks, created 100 percent deposit insurance. Among other benefits, this allowed banks to pay interest rates at risk-free rates and, more importantly, ended depositors’ concerns over the financial conditions of the banks into which they deposit their savings. Banks reopened on March 13, 1933 with depositors returning stashed cash to the banks. When did that result in full employment and a restored GDP? After 1945/WWII.
I don’t know that confiscating all Americans’ money (gold coins) and only allowing them to earn and pay with 69%-devalued green confetti (not backed by the full credit of the US government) helped or hindered. The numbers don’t support it helping.
Maybe the US would more quickly have come out of the GD if the lucky few (who had jobs mostly with significantly lower wages) workers’ taxes hadn’t risen.
Righto! The SSA will be liquid (unlimited printed green confetti/FR Notes and magic bank reserves) and paying benefits but insolvent – liabilities soon will exceed assets and income. Things will be ok until the fit hits the shan . . .
SS was a scam at inception in that workers paid taxes (taxation is theft) into it and could retire at age 65. In 1934, the avera’ taxes ge life-expectancy was just about 65.
Ten thousand baby-boomers retire each week.
Bad math: How soon before the working classes’ FICA salary contributions/cash flows are lower than benefits payments/cash flows?
Then, of course, the government/Fed can unlimited green confetti print money, and pay benefits, but the SSA will be insolvent. The Fed printed $4 trillion for its QE’s.
However, with eternal deficits and the rising, unsustainable $20+ trillion national debt facts of life, the SSA only can unnaturally convert its UST assets to cash – Likely The Fed will take it and credit the SSA checking account.
Wikipedia says the GD lasted from 1929 to 1939. So, 1933 to 1939 are on FDR.
There was a collapse of production on the order of 30% between 1929 and 1933. Growth of production exceeded 9% per year over 8 years between 1933 and 1941. I have no clue what you expect would have happened in your ideal state of the world.
To understand the great depression you must first understand that it was simply a recession managed by a Government following Keynesian theory. Everything the government did made it worse. It wasn’t until WW II when the government had to apply it’s great powers to something else that the great depression ended. This is what happened in 2009-2016 too. A simple recession made worse by a ill advised government using failed Keynesian theories to “fix” it.
1. It was hardly managed at all prior to March of 1932, when the Fed began attempting open-market operations. There were some unimportant attempts to manipulate commodity prices and a tax hike. Otherwise, bank examiners shuttered failed institutions and left the bankruptcy courts to work it out.
2. The Roosevelt Administration did some injurious things (attempting to enforce high minimum wages, attempting to set up cartels in prior to 1936 and promoting a suboptimal model of industrial relations from 1935 forward). It also undertook some tonic policies (the bank holiday, currency devaluation, an end to private trade in gold, revised banking regulations including deposit insurance, innovations in housing finance, HOLC sponsored workouts of sour mortgages, attempts to soak up surplus labor with public works programs. and moderate fiscal stimulus; the ratio of the federal deficit to GDP never exceeded 0.04 and he turned in at least one balanced budget)
3. Growth was rapid during the period running from 1933 to 1941 and production levels had by 1941 returned to the long term trend-line. The labor market remained injured. The notion that ‘World War II ended the Depression” is nonsense. It was over and the country in 1941 was more affluent than it had been in 1929. It had labor problems. War orders did re-employ idled labor.
4. Nearly all the decline in production occurred prior to the Spring of 1933. You cannot attribute any of it to New Deal Keynesianism.
Attempts to deal with the Depression didn’t start with FDR. Hoover set deficit records multiple years in a row trying to stimulate the economy. He backed off in his last year because his opponent in the general election was accusing him of bankrupting the country with all the borrowing.
He wasn’t ‘trying to stimulate the economy’. Federal revenues imploded along with production, hence deficits. ‘Record deficits’ amounted to 3.0% of gdp in 1931, 2.7% in 1932, and 2.1% in 1933.
Congress adjourned in March 1931 and did not re-assemble until December. It adjourned for four months in 1932 as well.
Art Deco is crushing it here, credit where it’s due.
There is so much wrong with what you said I don’t know if I could possibly respond to it all.
As was pointed out the economy had been creeping back by 1933 and FDR did indeed squash that small recovery and pointed the economy straight down hill.
Public works programs are the epitome of the wrong thing to do. The broken windows theory in action.
“an end to private trade in gold” Oh far worse than that. They made it illegal to own gold and you had to sell it to the government for a set price much lower than it’s true value. Unconstitutional!!! FDR should have been impeached for that (and about a dozen or so other high crimes).
“sponsored workouts of sour mortgages” Interesting terminology. The ONLY right thing to do was to allow the law to apply and let the chips fall where they may. Any effort to do anything else with those mortgages merely prolonged the depression. Let them fail, sell them at 2 cents on the dollar and the new owner can immediately begin to prosper.
Growth as NOT rapid until the war drums were beating so loud they reverberated in everyone’s head. The war saved FDR’s reputation and brought jobs and prosperity. Certainly NOT FDR.
“You cannot attribute any of it to New Deal Keynesianism” I’m just happy you called it what it was. The new deal was 90% unconstitutional and 10% crony politics. It was America’s dip in the socialist pool. God knows what would have happened if WW II didn’t reverse most of it.
My suggestion is that you consult actual production statistics and quit talking out of your ass.
Statistics… must be accurate, right? Statistics have never been used to confuse or divert and history is never changed by the elite, right?
I was born in 1943. My parents got married in 1933. My father was 24 years old in 1929 when the market crashed. My grandfather lost a lot of money in 1929, I can remember playing with a lot of those stock certificates when I was growing up. My grandfather and grandmother lost their business in 1930. Our family history that I grew up with revolves around the Great Depression and WW II. My father and six of his siblings and his mother and father got the family through the Depression by farming their small city lot and some working and daily food handouts at the city hall. Up into the 50’s the great depression was a normal subject of discussion at the dinner table. There is so much more to know than what the statistics tell you.
I think what you have done is a cursory search of the internet to find some statistical data that would support what you believe and that is the full extent of your knowledge of the Great Depression. The country did not pull out of the depression until it began ramping up for WW II. Once that happened the difference was like night and day. Until that happened most people in America were still suffering. Doesn’t matter what the statistics say, we all know statistics can be twisted to tell whatever story you want.
“The slogan into which the Nazis condensed their economic philosophy, viz., Gemeinnutz geht vor Eigennutz (i.e., the commonweal ranks above private profit), is likewise the idea underlying the American New Deal and the Soviet management of economic affairs. It implies that profit-seeking business harms the vital interests of the immense majority, and that it is the sacred duty of popular government to prevent the emergence of profits by public control of production and distribution.”
von Mises, Ludwig. (1947) Planned Chaos
Exactly! The only real question is was the motive the same. I think FDR was a Marxist socialist in a wheel chair. I think he intended to run the country into the ground and take power while the country foundered. The difference between him and Stalin was that FDR was unable to kill the opposition. Once FDR died and the war was in full swing The American socialist and communist went underground. The mood of the country had changed. After the war was over the economic crisis was over too and the opportunity had passed.
” I think FDR was a Marxist socialist in a wheel chair. I think he intended to run the country into the ground and take power while the country foundered. The difference between him and Stalin was that FDR was unable to kill the opposition.”
It’s stuff like this that makes it easy to throw you in the bin full of kooks and cranks. Any correct thinking you have about the size of government is swamped by this kind of idiocy. Same applies to the other side, by the way. You sound exactly like people saying Trump = Hitler
FDR was a Marxist socialist and he embraced the American communist party. Is that what makes me a “kook”?
I do indeed think that FDR intended to use the economic collapse (or great depression) as a opportunity to take power. In fact he did assume a lot of power that historians have said never belonged to a president. Of this there is no doubt. My point is that the Great Depression or any economic depression/recession can be “allowed” to correct itself IF the government gets out of the way. This is no secret. FDR knew this as does every economist alive today. Get out of the way means reduce taxes, reduce regulations, reduce all barriers to business and commerce and the natural desire of the people will take advantage of the opportunity to build businesses and they will produce goods and hire workers. FDR choose the opposite tack while at the same time seizing power. Why would he do that?? Makes no sense IF his goal was to bring the country out of the great depression why would he do the things that would result in the opposite of what is good for the country??? Does recognizing that he did this intentionally (Intentionally meaning he was not stupid and no one forced his actions they were his own) make me a “kook”??.
FDR was power hungry and he seized power where he could and he dragged out the Great Depression so that he would have an excuse to do it. This is also EXACTLY what Obama did for the last 8 years.
LOL no
I’m no economist, but . . . Here’s my but comment to the Great Depression. I always hated those compare and contrast questions on standardized tests. Figuring out what’s the same and what’s different is hard. And that applies especially in economics since no two times or events are exactly the same. Consider 1928-29 and 2007-08. They are the same in some ways. For example, inequality was roughly the same, and investors were on runs of wild speculation, pushing up asset prices to unsustainable levels. But they are also different, primarily in the responses to the financial crisis that occurred and the results of those responses. In the first instance the Fed did little or nothing to support asset prices as they plummeted, whereas in the second instance the Fed used extraordinary measures to stop the collapse of asset prices and to inflate asset prices. As for results, in the first instance, the economy plunged into the Great Depression taking inequality down to levels that hadn’t been seen in decades; indeed, inequality remained low for many decades (up until about 1980 when it began its rise). In the second instance, the economy averted both another depression (sure, the Great Recession but no depression) and a precipitous drop in both asset prices and inequality; asset prices and inequality fell briefly but soon (some say not soon enough) recovered to the pre-crisis levels. Today, most people look back on the Great Depression and ask “what were those people thinking?” Today, most people look back on the Great Recession and breathe a sigh of relief and thank their lucky stars for the good works of the Fed. Are “most people” good at figuring out what’s the same and what’s different about the Great Depression and the Great Recession? Or are “most people” too obtuse to tell what’s the same and what’s different?
The best educational series on the Great Depression mentions the three dominant narratives: Keynesian, ABC, and monetism. It presents the pros and cons of each and then lets the audience decide, as there is no concensus within the academic community.
The economy began to recover quite rapidly in the Spring of 1933 when the Roosevelt Administration managed to devalue the currency and quell the wave of bank failures. Output was growing at rates exceeding 9% during the period running from 1933 to 1941 (the 1937-38 recession excepted). Not sure how academic Austrians assess that. Vulgar Austrians contend that production statistics are nonsense.
Their argument is that the depression was prolonged by Hoover and Roosevelt meddling in the economy and that it would have been short like the depression from 21-22. Not that I am convinced by this argument. I think sumner showed that the fed deliberately induced both crashes in the 20s
The problem with the restated argument is, again, that Hoover’s actions were largely hortatory prior to the spring of 1932 (bar Smoot-Hawley and some unimportant fiddling with commodity prices). In 1932, Congress incorporated the Reconstruction Finance Corporation and the Fed began attempting open market operations. Production levels roughly stabilized in the summer of 1932 after careering downhill for two years. Then another wave of bank failures erupted and ran unabated for four months (November 1932 to March 1933), stopped by the bank holiday. The ‘delayed recovery by 8 years’ is a meme passed around by partisan Republicans (who evidently think the economy would have recovered instantaneously if not for Roosevelt, or, alternatively, that the improvements in production levels during the period running from 1933 to 1941 were some sort of mirage).
Future videos will do just that!
Why bother? There was already a great podcast (audio only) that spent an hour on this subject. I think it was from Stanford.
The section on the tariff beautifully illustrates the argument that trade is like a technology that allows us to almost-magically transform one good into another. A
About 5% of American output was exported in 1929. You had a 30% fall in output between the summer of 1929 and the spring of 1933. Would wager that deadweight losses from Smoot-Hawley account for only a small fraction of that.
I did my MSc thesis on the political economy of Smoot Hawley. I remember my impression from reading all the lit was that most arguments claimed that Smoot-Hawley really wasn’t big enough to justify the Great Depression, and probably at worst made it marginally worse. Basically what you wrote.
It’s hard obviously to come to any full proof conclusion on historical counterfactuals, but smoot hawley as a smoking gun isn’t well supported.
I wrote that paper a few years ago and can’t even remember a single author to cite though lol…
The best description I read was that it wasn’t the tariffs or even the responses from other countries, but the bank failures. The banking system was fragile, and many pushed over the edge by the changes in the export situation in specific markets that depended on exports. That added to the cascading banking crisis.
The Statistical Abstract for 1930 indicates that gross income in the farm sector in 1927/28 was about $11.8 bn of which about 14% was exported and that production of foodstuffs was about $11 bn of which 6.8% was exported. About 8.6% of industrial output aside from foodstuffs was exported (in which sectors gross output was $51 bn) Agricutlure and agro-processing were more export-dependent sectors than other goods-producing industries. I’m skeptical that the difference is so great as to account for the horrendous experience of banks in the Great Plains – Rocky Mountain region.
The NRA gets two mentions by Tabarrok in his post. What were those people thinking? We know (don’t we?) that wages should be allowed to fall during a downturn. Asset prices, on the other hand, should be supported, right? When down is up and up is down, it’s all very confusing. Like I said in my first comment, compare and contrast is hard. Or is it? It depends on what one is looking for.
No one was supporting asset prices in 1934 or in 2009, so your complaint is silly.
>No one was supporting asset prices in 1934 or in 2009, so your complaint is silly.
What do you call TARP?
Bridge loans for banks which were paid back with interest. There were no price floors for securities or for real estate, which plunged by 30%.
Cool video overall but Alex says:
“Let’s start in the 1920s – the Roaring 20s. The economy was growing by almost 3% per year in per capita terms and inflation was 0%.”
This surprised me since I was almost positive that real GDP per capita has never grown near 3% in the U.S. for a decade. It turns out the above is incorrect and that per capita real growth was only 2.1% from 1920 to 1929.
1920 | 5552 | -2.25%
1921 | 5323 | -4.12%
1922 | 5540 | 4.07%
1923 | 6164 | 11.26%
1924 | 6233 | 1.11%
1925 | 6282 | 0.78%
1926 | 6602 | 5.09%
1927 | 6576 | -0.39%
1928 | 6569 | -0.10%
1929 | 6899 | 5.02%
(data from Angus Maddison) http://socialdemocracy21stcentury.blogspot.com/2012/09/us-real-per-capita-gdp-from-18702001.html
Prices were completely stable from 1922 to 1929. Not before or after.
I didn’t say anything about the inflation rate but just pointed out growth wasn’t unusually high during the Roaring 20s but a common 2% per capita real growth.
I wonder why we don’t call it “The Roaring 70s” since growth per capita was also at 2.2%. The Booming 90s? 1.7% GDP/capita.
Good catch and I also agree with Art about the timeline including the volatile lesser depression of 21. If you include only the roaring part of the 20s – 23 to 29 – then you get mild inflation.
It should be called “The Roaring Five Years of the 20s” but that sounds a little stilted and harder to fit on a book cover.
You can get slightly different numbers with different sources but fast growth in the 1920s is the standard view. e.g. Here is Gene Smiley’s encyclopedia entry on The U.S. Economy in the 1920s for the Economic History Association which aims to be the authoritative, consensus view of economic historians.
https://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/
“Real GNP growth during the 1920s was relatively rapid, 4.2 percent a year from 1920 to 1929 according to the most widely used estimates. (Historical Statistics of the United States, or HSUS, 1976) Real GNP per capita grew 2.7 percent per year between 1920 and 1929. By both nineteenth and twentieth century standards these were relatively rapid rates of real economic growth and they would be considered rapid even today.”
Right, but the Gene Smiley’s citation is from 1976 where the source I used was from later. Note the “New Evidence” part:
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.
Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.
At any rate, if the later revised 2.1% is correct, it doesn’t take away from the video. Strong A.I. should sort this out in 2029…
The Gene Smiley piece I linked to is from 2004!’
Citation: Smiley, Gene. “US Economy in the 1920s”. EH.Net Encyclopedia, edited by Robert Whaples. June 29, 2004. URL http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/
I saw 1976 was the year of the inflation data. Also, the first graph by Romer that shows real GNP per capita is from 1982. (Almost all graphs in the article are from 1976 with Romer’s from 1982 and a couple others from 1983.)
Gordon is from 1989 and Maddison, the Economic Historian King*, is from 2003.
* How’s that for an appeal to authority?
Tabulating growth in the 1920s is analogous to tabulating productivity in the financial sector and the so-called tech sector today. What is growth and productivity if not arithmetic. When the arithmetic proves fleeting, does that mean the arithmetic is wrong or the standard for measuring growth and productivity is wrong. 1 plus 1 equals 2. True enough. But 1 plus 1 minus 1 equals 1. There’s nothing wrong with the arithmetic, but there’s something wrong with the standard of measuring. I’m reminded of Rosa, whose classmates referred to as Tabula Rasa, who asked the professor if the numbers would always add up.
Cite all the statistics you want Art Deco. But, at the end of the day, FDR was the father of big government…and that’s all he was. As one historian said (perhaps W. Manchester) Washington was a sleepy southern town when Roosevelt got there.
Even the people who liked him acknowledged that he wasn’t very bright.
Neither was your boy Ronald Reagan. FDR was the father of government when needed, which it was.
The ratio of federal expenditure to domestic product during the period running from 1933 to 1940 averaged about 0.065. That’s higher than it was earlier, but nowhere near where it reached later. The first leg of the increase was general mobilization during the war. At the conclusion of the war and demobilization, the military claimed about 6.5% of domestic product rather than the 1.5% which had prevailed during the Depression. You then had a generation long increase in the significance of the public sector (1945-74) where the ratio of public expenditure to domestic product reached a set point of about 0.31 which it maintained for the next 35 years. The bulk of this post-dated Roosevelt.
I don’t know why people feel the need to disparage people in the past who were struggling with tough ideas and decisions. Many of the ideas that were tried in 1933-1935 were paradoxical or not obvious at that time. For example, Reflation was one of the ideas that worked. That means higher prices. Many ordinary people thought higher prices would only benefit business owners. When people advocated a minimum wage, etc., it made a political point that workers would get some of the benefits from higher prices, as opposed to just getting higher prices, which didn’t sound that great. Some people believed Reflation would help workers, and so went along with the minimum wage figuring it wouldn’t matter much one way or the other, while it would help the political climate of the country, which was pretty down at that point.
As for FDR, he always opposed deposit insurance and advocated a balanced budget. That makes him pretty traditional from my point of view, and clearly wrong. To understand what was tried and why is a very complicated question. Two of my personal heroes, Hayek and Schumpeter, made a serious error concerning deflation, and concerning which they changed their minds. The real question is why so many people got it wrong this time.
The nation of Japan generally sidestepped the Great Depression by printing money. That would make a great video too, one that I doubt we’ll ever be produced.
If people wish to re-litigate the New Deal, they should have a firm foundation in the evolution of production, incomes, prices, public spending – in short, the schematic contours of the era. They need to get the timeline right. There’s a great deal of fake history in this discussion.