A Review of Robert Murphy's "The Politically Incorrect Guide to the Great Depression and the New Deal"

[DanielMuffinburg]

A 3-star review (not by me) posted on Amazon.com for Robert Murphy’s The Politically Incorrect Guide to the Great Depression and the New Deal .

By Crosslands (Maryland USA) - See all my reviews The three star rating is really an act of charity. Mr. Murphy’s work has its points. The book is very readable, generally quite interesting, and sometime makes valid arguments. Mr. Murphy is good in pointing out the errors of many of the policies of Presidents Hoover and Roosevelt in combatting the Great Depression, including the Hawley Smoot Tariff Act, The National Recovery Act, and the attempts to maintain or raise wage rates during depression conditions. Mr. Muirphy’s work also contains some very interesting material on the effect of World War II on the economy. He also provides interesting references and sources. However Mr. Murphy also tells some whoppers.

First, there is the gold standard, or really two gold standards. There is gold standard bliss, which supposedly existed before World War I. In it all nations played by the rules which meant that countries with trade surpluses would not merely store the excess gold but raise interest rates and increse their money supplies to lower the gold inflow and relieve trade deficit countries from experencing major recessions to wipe out their trade deficits. Prices and wages would be perfectly adjustable to signals from the market and allow for rapid adjustments to any major trends in the movement of gold reserves. There would be peace, harmony, love, ease in foreign travel (at least by the wealthy and the elite), and no bad breath.

Unfortunately gold standard bliss could not last. Humans are not angels. War appeared in the form of World War I. Belligerent countries had the choice of maintaining gold standard bliss or producing the necessary munitions to avert defeat. To produce these munitions, a belligerent nation would have to to production in export industries, increase some imports, reduce the labor force by sending much of the manpower into the military. The belligerents chose the later path. Thus the exit from eden.

Then there is gold standard deficient (or can I say gold standard piss) which prevailed in the 1920s and 1930s. In this fall from heaven gold surplus countries like the United States and France no longer played by the rules, the British pound was overvalued, and cooperation between countries was poisoned by reparations, war debts, the Versailles Treaty, and national hatred and jealousy. Often the financial authorities reflected popular opinion by putting their own national interest first and let the rest of the world be damned. Prices and particularly wages were no longer rapidly adjustable. The result was deflation, unemployment, and human misery. This was the gold standard deficient no longer administered by angels but by humans.

Mr. Murphy concedes that the countries in the 1930s that went off the gold standard sooner bagan their recovery from the Great Depression faster and slashed their unemployment rates much faster. This fact was explored and verified by Barry Eichengreen Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (NBER Series on Long-Term Factors in Economic Development); Charles Feinstein, Peter Temin, and Gianni Toniolo The World Economy between the Wars; Liaquat Ahamed Lords of Finance: The Bankers Who Broke the World; and Benjamen Bernanke Essays on the Great Depression. Yet Mr. Murphy accuses the 1930s politicians and economists who led their countries off the gold standard deficient of not seeing “the big picture”. In other worlds they should focus on the ethereal gold standard bliss rather tahn the real world gold standard deficient.

Actually the pre World War I gold standard was not completely gold standard bliss. Recessions occurred every five years in the United States with a major recesion every twenty years. The recession of 1895 was one very big recession. William Jennings Bryan and others described how this gold standard hurt farmers. It was not all peaches and cream.

Moreover the Pre World War I gold standard was a historically specific institution. The Central Banks of the United Kingdom, France, and Germany, the major powers of the time, consulted each other and acted together to intiate finacial policies to keep the gold standard working. In particular the Bank of England, the major industrial power, was the bank of last resort whose activities stabilized the gold standard. Labor unions were not powerful enough to keep any central bank from effectively lowering wages when the bank thought such action necessary to the stability of the system. See Barry Eichengreen Globalizing Capital Globalizing Capital: A History of the International Monetary System (Second Edition). I am araid the gold standard bliss when carefully examined becomes more and more of a mirage.

Then Mr. Murphy does not do justice to John Maynard Keynes and his economic theory. Mr. Murphy only refers to Keynesian economics as perpetual government spending advocates. Such a label applies to some vulgar Keynesians. But really Keynes was much more sophisticated. Keynes, like most economists, claimed that money supply generally strongly determines economic output and employment. Where Keynes differs is in the Investment function. Non Keynesian economists often believe the interest rate determines investment. Thus interest rate adjustment can equalize investment and savings. Keynes thought differently. He believed that investment is strongly influenced by the expectations of investors of future economic conditions and future rates of return. Thus sometimes the adjustment of the interest rate can be inadequate to equalize investment and savings and bring about full employment. This Keynesian theory is completely ignored by Mr. Murphy.

Then there are the actions of the Federal Reserve from 1929 to 1933. Supposedly the Federal Reserve was an expansionary force because it decreased interest rates. And Mr. Murphy seems to presume most economists believe these interest rate reduction should have stimulated the economy (p. 78). However Mr. Murphy ignores that Kenyesian and monetary economists focus on the money supply, not interest rates. Thus even though interest rates declined, money supply continued to fall. The other economists are right, the Federal Reserve was still deflationary. And it was the constraints of the gold standard deficient that kept the Federal Reserve from being more expansionary.

Then there is Mr. Murphy’s description of the recession of 1920 when interest rates rose and the economy still recovered from the recession fast. Mr. Murphy does not mention that the nations of the world had not tried to return to the gold standard yet, after leaving it during World War I. He also neglects to mention that prices and wages in this postwar period were quite flexible.

The book is interesting but often fallacious.

Anybody wanna take a stab at it?

[mookrit]

Guys,

Any responses to this should be posted on Amazon.com so that potential readers will notice it.

[yessir]

@Daniel

Thus even though interest rates declined, money supply continued to fall. The other economists are right, the Federal Reserve was still deflationary

Can someone explain how interest rates can go down together with money supply? thanks.

[Cork]

Let’s give the author some credit: it’s at least a calm, well-written, rational review by someone with more than two brain cells.

Most critics of Austro-libertarian stuff just go, “OMG PPL WILL STARV IN THA STREETS!!! ITS TEH RICH VERSES TEH POOR. GOLD IS TOTALLY WHACKY, NOT MAINSTREAM! I PARROT EVERYTHING I SAY BLAH BLAH BLAH [Insert gigantic string of ad hominems, straw man arguments, all caps-lock words, logical fallacies, spelling errors, etc.]”

Subsantive arguments have become increasingly rare. [:(]

[DanielMuffinburg]

@Cork

Let’s give the author some credit: it’s at least a calm, well-written, rational review by someone with more than two brain cells.

Most critics of Austro-libertarian stuff just go, “OMG PPL WILL STARV IN THA STREETS!!! ITS TEH RICH VERSES TEH POOR. GOLD IS TOTALLY WHACKY, NOT MAINSTREAM! I PARROT EVERYTHING I SAY BLAH BLAH BLAH [Insert gigantic string of ad hominems, straw man arguments, all caps-lock words, logical fallacies, spelling errors, etc.]”

Subsantive arguments have become increasingly rare.

Yet, he mischaraterizes the Austrian perspective of the gold standard.

[Jon_Irenicus]

Any responses to this should be posted on Amazon.com so that potential readers will notice it.

Post them here too though.

The three star rating is really an act of charity.

One could say the same about reading his review… [^o)]

[Dondoolee]

@Cork

Let’s give the author some credit: it’s at least a calm, well-written, rational review by someone with more than two brain cells.

Most critics of Austro-libertarian stuff just go, “OMG PPL WILL STARV IN THA STREETS!!! ITS TEH RICH VERSES TEH POOR. GOLD IS TOTALLY WHACKY, NOT MAINSTREAM! I PARROT EVERYTHING I SAY BLAH BLAH BLAH [Insert gigantic string of ad hominems, straw man arguments, all caps-lock words, logical fallacies, spelling errors, etc.]”

Subsantive arguments have become increasingly rare.

Agreed. Reading some of his other reviews, I think he my be somewhat of a moneterist who is a trained keynesian economist.

[wilderness]

“There would be peace, harmony, love, ease in foreign travel (at least by the wealthy and the elite), and no bad breath.”

On what page did Murphy cover “bad breath” so next time I debate a Keynesian minded person I have a good fresh breath counter argument? lol

[hayekianxyz]

A lender of last resort is needed to stabilize the gold standard?

[Catalan]

Crosslands suggests that the gold standard is not “bliss” because there were recessions even when the gold standard was in use. But, he fails to understand the true nature of the “gold standards” which were emplace at the time of these recessions (or the government’s policies, for examples such as Tulipmania). For example, let’s not forget that the United States went on a de facto fiat currency under the Lincoln administration, in order to pay for the costs of the Civil War and post-war reconstruction. Mises.org has an article on the panic of 1819, which happened under a “gold standard”, so perhaps this would be a better example. As the article states, the gold standard was not actually respected; an increase in the circulating bank notes did not correspond to a decrease in actual money (gold). But, Crosslands does suggest in his review that the gold standard prior to the First World War was not perfect, but I’m not sure where he wants go with that point. His own analysis only further serves Robert Murphy and the fact that recessions were not caused by the gold standard, but by breaks in the gold standard.

I haven’t read Mr. Murphy’s book (and, is not high on my list of priorities to spend, since I only have limited wealth and unlimited wants in regards to books!), but I doubt that he “ignores Keynes’ theories”. In fact, a refutation of Keynes is inherent in most arguments on the Austrian Business Cycle Theory—it’s an expansion of credit and a subsequent collective malinvestment, not underconsumption; in other words, depressions have little to do with a decrease in aggregate demand and more to do with a decrease in aggregate supply (due to higher order production goods being invested into, as opposed to responding to real consumer’s needs by allowing interest rates to fluctuate as a result of changes in real savings). In a sense, Crosslands is correct, I think, in pointing out that Keynes did say that investment has more to do with interest rates, including future expectations. This is not something denied by Austrian economists; for example, Robert Higgs suggests that it was only with the coming of President Truman and a relaxation of anti-business laws that promoted investment after the Second World War, which shows that investment does have a lot to do with future expectations. But, something that, I think, Keynes and Crosslands forget is that businesses also judge future expectations by means of interest rates. The interest rates symbolize the consumer’s time preference, and so that investment is really a choice between producing lower order goods or higher order goods. And so, the fact that interest rates play a large role in allowing businesses to gamble for the future is undeniable. Of course, there are other factors, but most of these have to do with government restrictions on business (and, these are not ignored by Austrian economists; they are, in fact, suggested—for example, it was Henry Hazlitt who said that corporate profit taxes hindered investment. If businesses are not making a large profit on each dollar, then there’s little incentive to expand production).

Furthermore, Crosslands commits a fallacy in suggesting that the contracting money supply had to do with the Federal Reserve having a contractionary fiscal policy. This has already been proved wrong by Murray N. Rothbard in America’s Great Depression. For example, in the 1930s the Federal Reserve started an easy-money policy, reducing rediscount rates to 2%, from 4.5%. He shows that in 1930 the total reserves held by banks increased, although Rothbard does say that there was a contraction in the credit supply due to the existance of the depression—but, the Federal Reserve’s manipulation of discount rates and its use of open market security purchases are undeniable. Rothbard describes deflation:

The American monetary picture remained about the same until the latter half of 1931. At the end of 1930, currency and bank deposits had been $53.6 billion; on June 30, 1931, they were slightly lower, at $52.9 billion. By the end of the year, they had fallen sharply to $48.3 billion. Over the entire year, the aggregate money supply fell from $73.2 billion to $68.2 billion (Rothbard, p. 231).

But, the contracting money supply had little correlation with the Federal Reserve’s policies:

The Federal Government had tried hard to inflate, raising controlled reserves by $195 million—largely in bills bought and bills discounted, but uncontrolled reserves declined by $302 million, largely due to a huge $356 million increase of money in circulation (Rothbard, p. 231).

By “money in circulation”, Rothbard is referring to money depositors withdraw from banks in the face of the banking failures and general distrust in the financial institutions. But, the point remains that while the Federal Reserve attempted to inflate the money supply by expanding credit, money controlled by banks actually decreased due to the increasing amount of withdrawals. And so, Crosslands ignores empirical evidence which proves him wrong.

Finally, I’m not sure what he is trying to get across in his comment on the recession of 1921, “when interest rates rose and the economy still recovered from the recession fast”. He then ignores Robert Murphy’s probable arguments and changes the topic to the fact that countries that left the gold standard did not try to return to it (although, Great Britain tried to return the gold standard in 1925). In fact, most European nations abandoned the gold standard in the early 1930s and this is, to a minor extent, chronicled by Garet Garret in The Bubble That Broke The World. But, this is largely irrelevant to Robert Murhphy’s point (a point he probably based upon Murray Rothbard’s analysis); the key is to look at the fact that the government did not attempt to intervene (at least, to a large scale), allowing for a quick recovery. The lack of a gold standard is not what causes recessions to permeate, and no Austrian economists has ever claimed that this is true—just like we could recover from our current recession without getting rid of the Federal Reserve; it’s just that the lack of central banking, or in this case the imposition of a true gold standard, would most likely benefit in limiting the damage in future creditory booms.

And so, Crossland’s thesis that “the book is interesting but often fallacious” is based on fallacious examples and evidence.

[Catalan]

There are several different types of interest rates. The Federal Reserve mainly decreased the rediscount rate, which is the interest banks pay when they borrow from the Federal Reserve. As Murray N. Rothbard shows, this controlled expansion of the money supply could not outpace the uncontrolled contraction of the money supply held by banks.