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The Politically Incorrect Guide to the Great Depression and the New Deal (The Politically Incorrect Guides)

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One of the problems with economic history is that it is difficult to "test" it properly. With regard to the Great Depression and the New Deal, there is still a very loud contingent of Keynesian economists who insist that had Hoover and Roosevelt just spent even more money than they did, we would not have experienced a prolonged depression. Other economists, notably the Monetarist school founded by Milton Friedman and Anna Schwartz, insist that responsibility must lie with the Federal Reserve for not acting quickly enough to stem deflationary pressures, while still other economists, especially the Austrian school, claim the problem was caused by government intervention into the market place. All these writers can point to some evidence in support their position, though in the case of the Keynesians, that evidence is very narrow and often somewhat contrived, especially when it appears from the pen of popular columnist Paul Krugman. But the problem is that we cannot simply directly test what would have happened had their been no New Deal, or an even greater amount of spending on the New Deal. Similarly, we cannot directly test the effects of monetary policy. What we can do is carefully examine what actually happened before, during, and after the Great Depression using these three models and see which interpretation best accords with the known facts. Such a project requires a great deal more familiarity with economics than most historians possess. Not surprisingly, studies which have done this sort of analysis in the past, most notably Murray N. Rothbard's America's Great Depression have not been very accessible to the public at large. This new book by economist Robert Murphy is at once immanently readable and a good synopsis of present day scholarship.

After briefly discussing the three main schools of thought about this crisis in American history, Murphy is quick to dismiss with the Keynesians. The argument that government spending was what saved us from the Great Depression, and that a lack of spending by Hoover caused the problem is fairly easy to disprove. Historians have long known that Hoover was a staunch interventionist in the economy and he rejected the advice of his own Secretary of the Treasury to simply let the bad investments liquidate themselves, a policy that had worked wonders in the earlier contraction of 1921. (Indeed, some historians of a left wing bent have chosen to praise Hoover for his intervention, most notably Joan Hoff Wilson in her classic study Herbert Hoover: Forgotten Progressive.) Of course, we cannot know if the economy absolutely would have recovered in the absence of Hoover's many interventions into the market. All we can say for certain is that he was not a laissez-faire president who did nothing while the economy contracted around him. Those who make this claim, most notably Paul Krugman, are either astoundingly ignorant or fundamentally dishonest. I tend to lean (charitably) towards the former position. As an ironic aside, Hoover was anti-interventionist only in foreign policy. Yet the institute that still bears his name is now a hot bed of neo conservatives who favor intervention everywhere in the world. But as a politican he did remarkable work at trying to set a floor for wages and prices, created the Reconstruction Finance Corporation and ran budget deficits that make those of today under Bush and Obama seem modest by comparison. Hoover rightly claimed he was the first President to not let the economy go its own way and four years later we were in the midst of the worst economic downturn in the nation's history.

Of course, there was some initial recovery during the early Roosevelt administration, but nowhere near to the extent seen in any previous downturn, even on a percentage basis. Indeed, one of the strong points of this book is that, unlike most economic histories of the period, Murphy examines several of America's large downturns, including the dramatic economic collapse of the 1870s in order to give some sense of comparison. Eventually of course, the early gains of the New Deal collapsed in 1937 and the economy right back to where it was under Hoover. Indeed, Treasury Secretary Henry Morgenthau rightly recognized that all the New Deal policies had failed, though they had left the US with an enormous debt. He was far more honest than many of today's leftists who share similar political positions.

So on the whole, the thesis that government spending mitigated against the Great Depression, and ultimately helped end it is simply not supported by the evidence. We cannot say for certain that even more government spending would not have solved the problem, and that is precisely what many today are advocating. But we can say that this was the first time the government responded to a downturn using these policies and not coincidentally, this was the first time (and hopefully the last) that instead of quickly realigning resources, the market fell into a quagmire. But easy as it is to dismiss with the Keynesians, one of the strengths of this book is that it also takes to task the Monetarists who many naively believe are the opposite of the Keynesians.

Monetarists tend to be somewhat more sympathetic to a free market, though not as much as many people suspect. Friedman, for example, was not opposed to a welfare state as such. He rightly argued that a negative income tax was a more "efficient" way to obtain the goal of an income floor for people than our current hodgepodge of programs, but his argument was pragmatic, not principled. Similarly, he supported government funding of schools and his still controversial voucher system would have made this program even more universal than it is today. He did not consider the fact that with government funding comes government regulations governing the use of that funding, a policy that would have effectively killed the innovations found in many private schools. But it is only when one looks at Friedman's big claim to fame, his monetarist theory of the Great Depression, that one realizes just how similar his perspective is to the Keynesian one. Friedman argued the Fed sat and did nothing (similar to the Keynesian claim about Hoover) while the economy contracted. Had they been more actively interventionist, he argues, we could have avoided the depression altogether. But, like the Keynesian argument, Friedman's claim simply does not stand up to historical scrutiny. The Fed dramatically lowered interest rates immediately following Black Monday, and they continued to do so throughout Hoover's reign. By contrast, in the 1920-21 contraction, the Fed had actually increased rates! And in the final analysis, both the Keynesian and monetarist claims essentially state the same proposition: government inaction caused the depression. And the historical evidence suggest both are wrong: government inaction simply did not happen during the Great Depression.

On the other hand, the Austrian claim that government intervention in the market caused the depression, is far more substantiated. Beginning in 1927, the Fed decided to inflate US currency in order, of all things, to assist the bank of England in preventing devaluation of the pound sterling. But this inflation, which went through the banks, had the effect of making many investments that were not profitable appear so, and a stock market boom followed. When the bust inevitably came, rather than allowing these bad investments to liquidate, as had happened in all previous busts, the government boldly tried to keep inflating the currency, with disastrous results. And, as Murphy points out in the close of his book, the same could easily happen today. Many are calling upon President Obama to become the new FDR and based on the early days of his reign, he seems quite happy in this role. Already, bailouts of businesses (a bad policy that began under the Bush administration) is proceeding apace, and the administration has even made tenative steps towards nationalizing the largest banks. Promises of tax cuts for the middle class and pay as you go spending, so widely trumpeted during the campaign, now appear to be temporary, in terms of the former, or completely forgotten in terms of the latter.

There are, however, some signs of (real) hope. Several Senate Democrats have refused to sign on to the proposed cap and trade carbon tax, a boondoggle for the economy if there ever was one, and it seems unlikely a tax hike will occur until the 2010 Bush tax cuts expire. And more citizens are becoming increasingly skeptical of the whole bailout agenda. That is a good sign, and books like these are a good place to start if you want to understand why a new "New Deal" is the last thing this country needs.

Robert P. Murphy's new book makes the reader question one's own education about the U.S. Surely Social Security, abandoning the gold standard, the FDIC, are all good things! And didn't the New Deal get us out of our worst economic mess in history? Weren't we all taught that in school, indeed, perhaps by our own parents? Much like his previous work (PIG - Capitalism), Murphy's new book takes dead aim at many of the myths and outright falsehoods of that time. And he instructs us in an easy, straight-forward style. He reminds us (perhaps we never knew) of the outrages of the New Deal: the thug-like tactics of the National Recovery Administration, bank "holidays", government destruction of food, and so on. And Murphy's likening of Hoover/Roosevelt to Bush/Obama is superb.
But alas, nothing is perfect. Murphy's book is troubling in two respects: 1. the reader wants/needs more - I literally could not put the book down... I wanted to keep going - his style makes for such easy and interesting reading! 2. his analysis of the current US state of affairs vis a vis 70-80 years ago is downright scary! He certainly does not exude confidence in our current "leaders."

Economic history is a difficult subject to enjoy. Rarely is an entry easily readable to a lay audience and even rarer does it show its applicability to current events. This book succeeds at both.
Released in an exceptionally timely manner and well styled, the reader will have trouble telling the book from a newspaper. Similar to his earlier The Politically Incorrect Guide(tm) to Capitalism (Politically Incorrect Guides) (Paperback), the author covers a large amount of history and theory together, never losing the reader's attention or confusing us with tedious theoretical minutia. Instead you'll find the simplest of graphs that make the most profound of conclusions by themselves. Quick reviews of familiar topics are followed by shocking details few have heard before. Always radical, but never dry or confusing, the subjects fall into each other smoothly. The history itself is right-on, with some of the latest research seamless with the more conventional subject matters.
The book starts with the Hoover administration, covers the crash, Hoover's response, and then details the whole Roosevelt administration, providing important points on earlier and later history throughout. Coverage is quick but exhaustive--every major political and economic development is mentioned.
Some of the PIG series tend to be trite with their arguments, but not this entry. Discussion of the classical gold metal standards' value and the working mechanisms of floating currency exchange under it were new, even to a well-read history hobbyist. The analysis of the sudden end of the New Deal is fresh and leads one to want to look further into this profound yet neglected development of our history.
Any short work has its drawbacks, however. Major discussion points are left open and wanting for more detail. The author's redundant quoting of Coolidge reminds the reader of a kitten discovering a new toy. Worse, the critically needed demonstration of how this history may be repeating itself today--the cause célèbre of the work--is given only short attention.
Anyone familiar with the contemporary research on the Great Depression knows that the history we were all taught in middle-school is almost complete myth. Anyone also familiar with the news today knows that few understand this. Educated laymen would do well to dispel these myths and grant themselves a chance to look at contemporary events without a false view of the past blurring their vision. As Einstein wrote, "No problem can be solved from the same consciousness that created it. We must learn to see the world anew." For anyone interested, this book would be an excellent opportunity to do so.

This book answers one question that I always wanted to know. Why did the Depression last so long and why was unemployment 20%+ so high. Hoover along with large industrialists agreed to keep wages high because high wages (under the consumption theory) would allow workers to consume more and thus support the economy.

Sure high tariffs and high taxes were devastating to the economy of the 1930s or any time thereafter, but the faulty theory of consumption exposed in this book is beyond common sense.

As wages were held high (by unions or "cooperation" with Hoover and Roosevelt) while prices of goods and production inputs fell, then profits collapsed and investment declined. Based on supply and demand unemployment rose. If the price of something (real wages of labor) rises then people will demand less of it. If you had a job during the depression, you were in good straits since your wages stayed high while what you bought dropped in price. The cost was borne by the millions of unemployed. Why does a politician support minimum wage laws? Why not advocate wages at $million dollars a day? We will all be rich!

Think of it: consumption doesn't drive the economy; production does. One only produces something to ultimately consume it or trade it for something else to consume. To increase production then you need to increase capital investment and to do that you need people to postpone consumption enough to save.

Hoover, Roosevelt, Bush and Obama AND Bernake have it ass backwards. At least after reading this book, you will know better.

God Help us.

Great book. Perfectly summarizes the reasons for the Great Depression. Debunks the idea that recessions or depressions are inherent in free market economic systems, instead laying the blame squarely on Central Banking. Shows why the Great Depression started as a bad recession and how it became Great, thanks to the interventionist policies of Hoover and Roosevelt.

Robert Murphy makes use of sound economic analysis from an Austrian perspective (meaning the Austrian School of economics) to show and demonstrate how the depression was not caused by laissez faire policies but by the money supply manipulations of the Federal reserve, which was legislated into existence to purportedly reduce the number of recessions or runs of the banks that created the previous recessions. In fact the Federal Reserve merely helped to hasten the big recession that started in 1929.

What happened in 1929 is not that different to what happened in 1919-1921 (when the US suffered the OTHER Great Depression nobody hears about today). But instead of having the government reduce spending and lower taxes, to help people recover faster, the Hoover administration tried to bail out farmers, laborers and manufacturers by propping up food prices, wages and imposing a tariff that started a trade war between the US and everybody else.

Dr. Murphy debunks many other myths highly touted by historians, leftists and even many so-called conservatives:

+ That Herbert Hoover let the problem grow by a "do-nothing" approach, regardless of the clamors made by many. In fact, Hoover was a Progressive that believed it was the role of the government to command and control the economy, and like many today, did not let a good crisis go to waste, to impose many of the plans that later became part of the New Deal.

+ That Roosevelt's New Deal programs were created to kick start the economy after the failed policies of Hoover. In fact the New Deal had its origin in programs already implemented by the Hoover administration. The only difference was in their name and scope.

+ That the spending of WWII got us out of the Depression (a myth that contradicts the much touted effectiveness of the New Deal.)

+ That the depression became great because of a tightwad Federal Reserve (Milton Friedman's contention). In fact, the Fed increased the money supply right after the stock market crash to keep credit flowing.

Dr Murphy shows how the New Deal was more about protecting special interest groups than about helping every day Americans; how FDR created a quasi-Fascist state, by getting Big Businesses and labor unions into bed with the Government; how the World War did NOT pull the US out of the Great Depression, making the privations for many much WORSE than during the previous years before the war; how the economy recovered astoundingly fast after the war, when the US Government stopped or reduced many of its expenditures, canceled many of its New Deal programs and cut some taxes - something the Keynesian economists said could not happen: A recovery after a reduction in government spending.

Apart from debunking many myths regarding that era and the origins of the crisis, it also gives a good education in sound economics, making the book not only a good reference to debate New Deal advocates, but also to expand one's knowledge of economics. As a companion to this book, I also recommend you seek Thomas Wood's "Meltdown."

I heard about this book on "Free Markets With Dr. Mike Beitler," a libertarian internet-radio show. I'm looking forward to Dr. Murphy and Dr. Beitler's show on May 21.

This book as well as Murphy's "PIG to Capitalism" The Politically Incorrect Guide(tm) to Capitalism (Politically Incorrect Guides)are easy and fun to read, and very informative. Murphy is obviously very knowledgeable, but writes in an easy-to-understand style.

I would recommend both of Murphy's PIG books as well as Beitler's Rational Individualism Rational Individualism: A Moral Argument for Limited Government & Capitalism.

The Politically Incorrect Guide to the Great Depression and the New Deal is the most accessible book I have read on the Great Depression to date. Having read The Forgotten Man by Amity Shales (which I believe to be the definitive history of the Depression) and New Deal or Raw Deal by Burt Folsom, I think I can safely say that this book is the easiest to read and the easiest to digest.

He begins by stating, "Everything You Learned about the Great Depression and New Deal is Wrong," then proceeds to debunk myth after myth. As to the actual cause of the Great Depression, he offers this: The Federal Reserve fueled the stock market boom of the 1920s with its easy-money policies. After the crash, the Fed did the wrong thing by cutting rates and propping up unsound institutions. Hoover and FDR's interventions in the economy only made things worse.

The biggest myth surrounding the Great Depression is that FDR and the New Deal pulled us out of it. However, by any measure, the New Deal failed in its most basic mission - to improve the economy. Unemployment was 8.9% in 1930, and it didn't hit single digits again until the war "employed" millions as soldiers. Compared to Canada, which experienced its own "Great Depression" yet did not implement a "New Deal," the U.S. unemployment rate consistently remained 5 - 7 points above theirs. A very destructive policy of the New Deal was the National Industrial Recovery Act. This led to the artificial propping up of wages and prices. This worked if you had a job, but overpriced labor led to fewer jobs. Overpriced goods led to real poverty. Americans literally starved to death as crops were destroyed to maintain the higher prices. The "Codes of Fair Competition" likewise benefited specific jobs and industries, but imposed huge harms through severe economic inefficiencies on those not in favored classes. Finally, Roosevelt was no businessman and barely understood what he believed he could manage as a benevolent ruler. His policies led to a "capital strike" as those with money basically sat out the economy during the 30s. In an era that produced Stalin, Mussolini, and Hitler, businessmen were understandably afraid that FDR was on a path to a similarly socialist economy. In fact, FDR intentionally introduced uncertainty into the market so the common man would look to him as a savior. His political ambitions and lust for power led 93% of business executives polled by Fortune magazine in 1941 to conclude that after the war, FDR would socialize much if not all of the economy. The fact that he had sought and won a third term did nothing to alleviate their fears of a budding dictatorship.

Murphy ends the book with lessons for today. Yes, we are doing it again. Yes, with Obama, we are heading in the same direction.

Well here is the deal. I learned several new things in this book and highly recommend it. I believe the author gives references for most of the facts he presented. How is it that 79% of the readers gave it a good to excellent rating and a measly 10% gave it a bad or really bad rating? Hmmmm, maybe they've been drinking the Kool-Aid too long, OR they don't buy it because they too busy watching the evening adult cartoons instead.
The fun part is reading what he has to say about Obama in the last chapter, which was published BEFORE Obama took office. (Don't cheat and go to the back). Read the whole book in chapter order. What I always find ironic is even when he criticized Bush on some issues or policies, there are those who in TRUE Liberal, Progressive fashion, ALWAYS agree, but NEVER acknowledge when the facts are there proving a point that they don't agree with. All they do is put the spin on it to detract from the point. That is the way they work and they will never change.
I did as Glenn Beck strongly urges his listeners to do on his points. Don't trust his word, go look it up for yourself, and I did look up many of the references, (not all however), and found corresponding validity. It is of my opinion that the best way to decide if the peoples points of view are correct, take a cross-section of the liberal American public and ask them a few questions. That will show how illiterate they are on this subject, as well as the simplest facts. It is our wonderful educational system run by a bunch of academic brain farts. Don't believe it? Ask any of them what the Articles of Confederation are. Or ask them if they know what the first three words in the Constitution are. You will get a deer in the headlights look on both of them. Don't bother asking them what the Federalist papers are. Want more proof, go to YouTube and search for Jay Leno's Jay-Walking segment, filmed in beautiful Hollywood California, home for the liberals and take a look at the voting public's intelligence level. Search for the episode called Jaywalk: Let's Party. That will explain it. This the reason the Democrats focus on the young people today. They are gullible, easily fooled and haven't got a clue. The problem today is most of the kids are a bunch of spoiled brats who don't want to work. They just want to sit on their butts and mooch off of those have spent 30 or 40 years of working their ass off. Remember, many politicians, right and left are corrupt, and it is up to the educated, knowledgeable conservatives to take our country back, and kick the lazy liberals in the you know what. Don't like it? Leave and go to Greece or France or Spain, where you will feel right at home.

Clocking in at a quick 175 pages, this book gives a basic overview of the actions taken by Presidents Hoover and FDR to stem the tide of the Depression that lasted longer than any recession previous or since. The author covered subjects such as abolishing the myth that Hoover was a free-market man that left the economy alone during his term; the unwise policies of the Federal Reserve which had wrong headed policies that created false prosperity during the late 1920s; FDR's expansive programs and Keynesianism that hurt more than helped the common man and gives a lesson to the current adminstration not to follow in Hoover's and FDR's footsteps.

This volume was light in content and was not meant to be comprehensive. He relied on some source materials too much such as Burton Folsom's book New Deal or Raw Deal?. As with all PIG guides, it gives the reader books to study the topic in depth which is always a plus. There are adequate endnotes and a short index. A good book to start the novice on the road to mythbusting.

This is one of a series published by Regnery whose theme seems to be an exposition of the anti-establishment view of various public issues. A reader could easily be forgiven for discounting the entire series on the basis of the Amazon reviews of the two issues on "Science" and "Darwinism", but that would be a mistake in the case of Murphy's book.

While Murphy vigorously argues against the popular interpretation of the causes and cures of the Depression of the 1930's, he does so with sound facts and a consistent economic theory.

The popular story has Presidents Coolidge(1923-1929) and Hoover (1929-1933) allowing an unnatural boom to occur in the early "Roaring" twenties by following conservative laissez-faire economic policies, then when the Depression hit unexpectedly in 1929, making it worse by even more conservative federal stinginess. The story continues with the country saved only by President Roosevelt's (1933-1945) massive intervention and creation of numerous new federal programs and by the huge stimulus of the Second World War from 1941 to 1945.

One of Murphy's main points is that the popular story fails to look back far enough to see the real cause of the boom in the twenties. The First World War (1914-1918) had left England with a severe shortage of Gold to back up its currency. Without explaining exactly how this was supposed to work, he reports the evidently well-established fact that the recently created Federal Reserve Bank attempted to aid the United Kingdom by sharply increasing our own money supply during the twenties, especially 1927. This, along with what might have been a natural economic expansion following a war, led to a boom that had some real components; namely that the US standard of living actually increased, but also a significant amount of purely inflationary bubble. When the Federal Reserve recognized the problem, they pulled back sharply on their expansionary intervention; with the result that the stock market, which had been based largely on credit, collapsed in 1929.

So, yes, a monetary contraction was the proximate cause of the Depression, but the contraction itself was necessitated by an earlier expansion not adequately supported by real growth. Further supporting this argument, the wild expansion in the stock market was plausibly caused by the failure of interest rates, held down by the Fed, to reflect the true cost of money.

One of the popular myths about the period is that President Hoover was unable to respond successfully to the challenge of the depression because he was a hide-bound conservative who did not believe in government intervention in the free market. This could not be further from the truth. In the face of rising unemployment he successfully persuaded businesses to keep wages at the high "boom" level in order to maintain "purchasing power", in what would become a classical Keynesian prescription. This intervention led to what amounted to cartels that protected existing large businesses and a strengthening of labor unions. Furthermore, for the first few years of the depression, he caused the federal government to run what for the time were huge deficits, another Keynesian tactic. Both of these approaches failed to improve the economy because they impeded the reallocation of labor and other resources that was needed to correct the excesses of the boom. Finally, of course, in an attempt to keep prices at their boom level, he signed the infamous Smoot-Hawley tariff act, which simply decreased our export trade. When, toward the end of his term, Hoover tried to balance the budget, he did it mostly by raising taxes, hardly a "hands-off" approach.

Why is Hoover so mischaracterized? It is probably a residue of the Presidential campaign of 1932. Interestingly, while Roosevelt criticized Hoover for his extravagant spending, the real difference was that Roosevelt was willing to ignore the Constitution in his efforts to centrally plan the economy even more than Hoover had done. He also represented "Change", so Hoover had to be bad.

The final myth Murphy attacks is that the Second World War boosted aggregate demand, employment and productivity, thereby lifting us out of the depression. The attack is based both on fundamentals and a review of economic statistics. First, the fundamental fact is that war, while it may be a worthwhile expense to save something of greater value, must be an economic loss because all an army does is kill people and break things. All of that impressive wartime production ends up either exploding or otherwise destroyed. Large numbers of potentially productive workers are killed.

The statistical review consists of noting that the apparent low unemployment rate during a war is largely a result of the removal of potential workers into the army. Furthermore, the apparent increase in GDP is largely government purchases, not private consumption.

Throughout the book Murphy attempts to state the conventional economic and historical views that he then refutes. I can't judge how well these views are presented, but I suspect that a real debate might not end up quite so clearly. That being said, Murphy's assessment certainly seems worth considering.

It is impossible to avoid a comparative look at our government's response to the collapse of the real estate boom of 2008. Easy money and other government policies led to frenzied speculation in residential housing, which eventually came to a bad end. We are now trying to prop up those false prices with massive creation of credit by the Federal Reserve. So, Murphy is not only valuable as a fresh view of history, but as a cautionary tale relevant to our current situation.