Will It Happen Again? | Facts Ep. 16
09:54 Share

It's the roaring 20s in America. An age of miracles. An age of art. An age of excess. But no more. Now the 30s have begun.

And there is a new word, depression. What caused the Great Depression? And could it happen again? It's one of the great puzzles of economics and one of the most important questions in history. It's important because depending on what you think caused the Great Depression, you might structure an entire economic policy around avoiding such a situation again.

And indeed, that's precisely what has happened over the course of American history. In a desire to prevent another Great Depression, our government has grown in unprecedented ways, ironically setting the stage for a great stagnation still to come. There are essentially three main theories as to what caused the Great Depression. The Keynesian Theory, the Monetarist Theory, and the Austrian Theory.

John Maynard Keynes, born in 1883, is perhaps the most influential economist in modern history. His book, The General Theory of Employment, Interest, and Money, is a nearly unreadable tome with a seductive central thesis that a free market economy, left to its own devices, does not create full employment, but that by increasing demand in the marketplace via government pumping, full employment can indeed be achieved.

According to Keynes, the problem of the Great Depression was secular stagnation. People apparently stopped wanting to buy things. Normally, the idea is that if consumption falls, savings rise. When savings rise, interest rates go down as banks need to pay people less for storing their money. When interest rates go down, borrowing increases. Investment and innovation are thus renewed. This theory, supply-side economics, was rejected by Keynes. Keynes argued that if businesses expected demand to level off for the long term, they wouldn't invest at all.

Thus, to restart the economy, massive government interventionism would be necessary. FDR took the Keynesian theory to heart. It failed utterly. In fact, in an early iteration of Keynesian theory, Herbert Hoover actually radically increased government spending. Here's Hoover on his own agenda in 1932. We might have done nothing. That would have been utter ruin. Instead...

We met the situation with proposals to private business and to the Congress of the most gigantic program of economic defense and counterattack ever involved, ever evolved in the history of the republic. In 1929, the federal budget was $3.1 billion. By 1932, it increased it to $4.6 billion, a nearly 50% increase. Hoover also participated in subsidies to agriculture on a massive scale, tried to pressure firms not to cut workers and wages,

FDR doubled down on Hoover's policies.

The result was, according to professors Harold Cole and Lee Ohanian of UCLA's Department of Economics, an economic depression prolonged by at least seven years.

According to Cole and Ohanian, quote,

The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies. By artificially inflating both prices and wages, the New Deal policies short-circuited the market's self-correcting forces. Then there's the second theory of the Great Depression, the monetarist theory. In their classic 1963 book, A Monetary History of the United States, Milton Friedman and Anna Schwartz suggested the Great Depression was caused by a drop in the stock of money. Banks began calling in loans in order to pay off their depositors, thus sucking liquidity out of the economy.

This lack of monetary supply, they argued, led to a massive contraction as people hoarded the money they had. In the aftermath of the collapse of Keynesian theory of economics, thanks to stagflation in the 70s, in which money was injected into the system only to lead to high levels of inflation and economic stagnation, the monetarist theory became the way of the world. It remains the basis for Federal Reserve policy today, which seeks monetary stability. The final theory of the Great Depression is the Austrian theory.

These economists believe that easy money policies essentially created a bubble prior to the Great Depression. That bursting bubble was then exacerbated by terrible economic policy. There's a debate among Austrian economists as to whether Milton Friedman's theory of monetary contraction was correct, or whether, as Murray Rothbard argued, the real problem was a lack of faith in the system from the population at large that the Federal Reserve could not have stemmed by simply injecting more cash into the system.

We'll get to more on this in a second. First, anybody with a basic understanding of economics can see the economy is not in amazing shape right now. I'm not saying that the plane is falling out of the sky, but just in case it were, you would want a parachute. Well, here is your economic parachute warning. I've been telling you for years, you need to diversify your portfolio with precious metals. If you'd listened to me years ago, you'd have been better off. Birch Gold makes it easy to convert your IRA or 401k into a precious metals IRA. It's a smart way to protect your hard-earned savings from impending economic disaster. But hey,

If protecting your financial future isn't motivation enough, how about this? Backed by popular demand, now through the end of the month, you can get your very own 24-karat gold-plated truth bomb on qualifying purchases. It's a little reminder of those truth bombs we here at Daily Wire deliver every day and the smart decision you made to invest in gold. Here's what you need to do.

Text BEN to 989898. You'll get a free info kit. Learn how you can own gold in a tax-sheltered IRA account. That's all. Put our financial parachutes on before the economy takes a nosedive. Do not wait for the crash to hit. That's too late. Text BEN to 989898 right now. Claim your eligibility. Qualifying purchases made before August 31st can get a gold and truth bomb to serve as a reminder of the great decision you made to protect your savings with gold. That's BEN to 989898 today. What are you selling your house? Lost a job and relocation.

The arguments about the Great Depression were projected forward into arguments about the causes of the Great Recession in 2007-2008.

The left essentially argued that greedy banking industry titans took advantage of predatory loans on those who couldn't afford them, sliced and diced those loans and mixed them with higher-rated assets, creating an entire industry of poison credit instruments, which were then insured in credit default swaps. When subprime loans went bust, the entire system took it on the chin. The solution was more government regulation and, for some reason, more subsidization of demand for things like subprime mortgages.

The right argues that all of this was incentivized by governmental action via Fannie Mae and Freddie Mac. But the Clinton era revision of the Community Investment Act led to bank regulators pressuring banks to make those subprime loans with the quiet guarantee that if things went south, the government would bail them out. By the year 2000, Fannie and Freddie had been ordered by the Department of Housing and Urban Development to make half of their mortgage purchases affordable housing loans. Total CRA lending spiked from $8 billion in 1991 to $4.5 trillion in 2007.

By 1999, only 45% of residential mortgage loans acquired by Fannie and Freddie were solid prime loans. As Senator Phil Graham, former Republican chairman of the Senate Banking Committee, and Mike Solon, former economic policy advisor to Mitch McConnell, wrote, quote,

But a review of banking laws adopted since 1980 reveals that not one single safety and soundness measure was repealed. We've risen from recession. We have the capacity to write our own future. We're better positioned than any other nation on Earth. All these theories were tried out in the aftermath of the crash of 2008. The economic crash became a great recession thanks to the intervention of Barack Obama, who spiked spending, taxation, and regulation. He followed FDR's playbook. The result was the slowest economic recovery in modern American history.

In 1994, the federal government spent about $1.5 trillion. In 2007, the federal government spent about $2.7 trillion. In 2009, that number jumped to $3.5 trillion and stayed around or above that number for the entirety of Barack Obama's presidency. To understand what bad depression policy looks like, it's also worth looking at two depressions that didn't happen

In 1907, the stock market cratered after a failed attempt to take over of United Copper. A consortium of major bankers led by J.P. Morgan came in and bought up all the troubled assets. John Rockefeller inserted an enormous amount of his own money into a troubled bank. The panic lasted precisely one month. In 1920, the markets entered a depression as the United States and the rest of the world exited the war economy of World War I. Inflation and wartime expenditures had put governments behind the eight ball.

Their solution, a massive slashing of the federal budget from $18.5 billion in 1919 to $6.4 billion in 1920, and then all the way down to $3.3 billion in 1922. The New York Fed, meanwhile, raised its discount rate despite a collapse in the monetary base. The unemployment rate spiked to 11.7% in 1921. It was down to 2.4% by 1923.

As Robert P. Murphy of the Independent Energy Institute writes, "The conclusion seems obvious to anyone whose mind is not firmly locked into the Keynesian or monetarist framework: the free market works. Economic theory has practical consequences. A free market remains the single best answer to the possibility of a Great Depression. Not regulation, not priming the pump. The free market."