Tag: economics

Did Smoot-Hawley Cause The Great Depression?

Americans are taught in school that the Smoot-Hawley tariff legislation of 1930 greatly exacerbated the Great Depression and sent the world spinning off into a decade of debt deflation and economic contraction.

This seems to make sense until we remember that the history of the United States over the past century was written largely by progressives. In fact, the Great Depression began in 1920 with a decade of falling prices for farm products, a deflationary wave that eventually engulfed the real estate sector and the entire US economy.

What is missed by many discussions of Smoot-Hawley during and after that period, is the fact that the economic collapse of the 1930s was already a given with or without the new tariff law. The impetus behind the political decision to raise tariffs was a misguided reaction to the collapse of agricultural prices, but the force behind this deflationary wave was primarily “positive” factors such as new technology and innovation. The deflation that began after WWI decimated farm communities and eventually led to the collapse of real estate prices, particularly Florida real estate.

Support for protectionism was the consistent refrain from the corporate and farm lobbies in Washington in the nineteenth and early twentieth centuries and was supported by members of both political parties. But the real underlying cause of the powerful political push to raise the existing tariffs even higher at the end of 1929 may be found in the substantial changes that were occurring in the American economy.

Many historians and economists blame the level of tariffs after World War I and particularly during the Great Depression for making more severe the economic contraction and unemployment following the 1929 market crash. The passage of the Fordney-McCumber Tarif Act in 1922 symbolized the unique Republican penchant for trade protectionism — and currency inflation — that stretched decades back in time to the party’s inception in the 1850s.

In his 2005 book, “Making Sense of Smoot Hawley,” Bernard Beaudreau argues that the imposition of tariff protection for U.S. industry in 1930 was simply a continuation of the policies implemented by the Republican Party after they returned to power in 1920. Beaudreau cites the rising productivity of U.S. factories, the spread of electrification throughout America, and the continued influx of cheap foreign-produced food and manufactured goods as the chief cause of the deflation during this period. Bread production, for example, became automated in the 1920s, contributing to a decline in bread prices.

Imports were still perceived to be a threat by the American manufacturers of that day, despite already high tariff levels. Underemployment was the result of the lack of demand and thus falling product prices that resulted in the 1930s. American industry became too efficient too quickly, resulting in a global surplus of goods and an equally dangerous lack of demand. Air-conditioning and improved transport helped to leverage the future value of Florida swamp land into a towering speculative bubble that collapsed two years before the Great Crash of 1929.

A century before the invention of such things as “artificial intelligence” or AI, American workers worried about technology taking their livelihoods. Senator Reed Smoot (1862-1941), Republican of Utah, said of Smoot-Hawley: “To hold the American tariff policy, or any other policy of our government, responsible for this gigantic deflationary move is only to display one’s ignorance of its universal character. The world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war.”

The onset of the Great Depression from the summer of 1929 on brought the unemployment rate from 4.6 percent in 1929 to 8.9 percent in 1930. Congress sought to correct this imbalance by limiting imports via the Smoot-Hawley tariff. While there is little doubt that higher tariffs made the Great Depression worse, higher levies on imports may not have been the primary factor. Indeed, the introduction of electricity and other innovations drove strong growth in many sectors of the economy, but not on the farm.

This alternative view of the role of Smoot-Hawley in turning the market crash of 1929 into the Great Depression of the 1930s is important to understanding the narrative of the 1920s. Following the Great Depression and World War II, the U.S. position regarding tariffs changed dramatically, in part because much of the industrial capacity of Europe and Asia was destroyed by the conflict.

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Osama bin Laden’s Secret Weapon: Economic Literacy

While acknowledging his great evils, future strategists and historians will one day likely recognize Osama bin Laden’s strategic acumen. With minimal resources or technology, Osama bin Laden managed to create immense socioeconomic damage and nearly destroy both of his main enemies—the “godless” Communist Soviet Union and the Zionism-supporting United States. Bin Laden achieved this using only one simple weapon, a basic understanding of economics, and thus, the immense harm that military spending does.

A simple economic concept is all we need to understand why most military spending is so detrimental. Every living order—whether it’d be a single cell, or a collection of them like a human being, or a collection of humans like a community or a company—is in a constant cycle of the production and consumption of wealth. A surgeon produces wealth in terms of surgeries, which he exchanges for money, which he then exchanges for the wealth he consumes in terms of housing, energy, food, and so on.

Production increases the world’s economic pie of wealth and order, while consumption reduces it. If the government taxes people and uses the money to hire 100 laborers to work on digging holes, only to then refill them, the laborers have not produced or increased the economic pie in terms of useful wealth, yet they trade their wages for—and then consume—goods and services (civilian goods that lead to life, enjoyment, etc.). This leads to an overall net shrinking of the economic pie to the detriment of the taxpayers who were deprived of the wealth which they sacrificed a part of their lives to create. In order to realize overall economic growth, action and social cooperation must be coordinated to facilitate more production than consumption.

With the above in mind, let us now look at military spending. Every year, about $1.5 trillion—an amount similar to the entire yearly productive output of Spain, which has the world’s 15th-largest economy at $1.58 trillion GDP—is consumed by the millions of people employed by the national defense bureaucracy and its associated contractors as they produce push-ups, military drills, jets, nukes, and other weapons. There is a massive consumption of real wealth taxpayers were deprived of and production of goods which do not improve the lives of Americans. Should the US be invaded, the production of the aforementioned would have been well worth the $1.5 trillion dollars of wealth consumed. But, since there is no chance of anyone attempting this, and they themselves—not being completely bankrupted by the attempt—the materials created would all be virtually worthless.

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Opposing The Keynesian Illusion: Spending Does Not Drive The Economy

Keynes held that the economy can suffer extended periods of high unemployment because of deficient aggregate spending. A contraction in spending results in businesses having excess inventories and reduced revenues. Businesses respond by cutting back and decreasing their demand for labor. Due to “sticky wages,” this results in a large decrease in employment and incomes for workers. The problem comes full circle and self-aggravating because workers as a whole must restrict their spending due to their reduced incomes.

For Keynes, the solution is found in the government, which can increase the money supply and engage in deficit spending. Monetary and fiscal policies are aimed at stimulating (indirectly) and replacing (directly) aggregate spending, respectively. Instead of focusing on these destructive prescriptions, I want to take a closer look at the central placement of aggregate spending in his analysis.

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Inflation Bites: The $38 Million Man

It’s easy to think of “inflation” as an abstract economic principle and forget that it has real impacts on real people.

Federal Reserve Chairman Jerome Powell acknowledged the pain of price inflation during his press conference at the close of the December FOMC meeting.

“We understand very well that prices went up by a great deal, and people really feel that, and it’s prices of food and transportation and heating your home and things like that. So there’s tremendous pain in that burst of inflation that was very global.”

Powell did not admit that he and his fellow central bankers were largely responsible for that pain, although he took credit for bringing inflation down, saying, “Now we have inflation itself is way down — but people are still feeling high prices — and that is really what people are feeling.”

Yes, Jay. We are feeling those high prices — because they haven’t come down! In fact, they continue to rise, just not as quickly as they were last year.

I might note here that inflation is on purpose. Making prices rise and go up is a stated policy. They just don’t want prices to rise so fast that you notice.

Unfortunately for the powers that be, you’ve noticed.

Just how much have prices gone up?

According to the most recent Consumer Price Index (CPI) data, prices are up 2.7 percent in the last year. But those of us living in the real world know prices have gone up much more than that.

Joaquin Henault and Laura Williams recently highlighted the dollar’s loss of purchasing power using the “Big Mac” index.

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The Economy Has Failed the American People, But It’s Taboo To Say Why

The economy has failed the American people, but it’s taboo to say why because that would undermine the entire power structure that so richly benefits the few at the expense of the many. The few have an extremely compelling motivation to obscure the “why” and to enforce the taboo on saying it aloud.

The economy has failed the American people because it’s a two-tiered power structure that’s essentially neofeudal, meaning it’s an updated version of traditional feudal social orders. To understand this, we must start by understanding traditional feudalism.

In feudal societies, life is pretty good for the nobility in the castle on the hill. For the powerless peasants working the fields below to fund the nobility, life is less good, and so the peasantry is open to changing this asymmetric power structure to a fairer balance.

To maintain its grip on power, the nobility must promote a social zeitgeist in which the peasantry’s powerlessness is the natural order of things and therefore resisting this structure is not only a sin, it’s futile.

One key feature of feudal social orders is the impermeability of the line between nobility and peasantry, what we call social mobility. Nobility and serfdom were established at birth, never to change. Serfs were bound to the land of their birth and could not leave; their servitude was for life.

This was a regression from the Roman Empire, which allowed ownership of land by free citizens, and relatively free movement of citizens throughout the vast empire.

Wedged between these hereditary classes were the merchants and craft workers whose services were essential to the nobility’s maintenance of power. As Fernand Braudel documented in his massive three-volume series Civilization and Capitalism, 15th-18th Century (Vol. 1: The Structure of Everyday Life, Vol. 2: The Wheels of Commerce, Vol. 3: The Perspective of the World), the story of capitalism is the steady expansion of commerce and production eventually generated a class with sufficient power to unseat the feudal power structure and replace it with various flavors of capitalism.

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Malice Aforethought

Professors of finance are a dime a dozen. Their theories are generally shallow and wrong… or kooky and silly. We weren’t sure which category Professor Richard J. Murphy of Sheffield, England, belonged in. We doubt that his core thesis on the coming crash is correct… but it is provocative.

At first glance, Murphy appears to be even more of a cynicalist than we are. He believes Donald Trump is offering dumb economic policies intentionally… trying to sink the US economy.

Everybody knows restricting trade is bad policy. It prevents people from getting the best product at the best price… and it allows uncompetitive, but politically well-connected, domestic companies to stay in business long after they should have been liquidated.

Threatening foreign nations with sanctions if they use currencies other than the dollar is another bad idea. It’s like when you’re losing a Little League baseball game… and threatening to take the bat home. Eventually the foreigners will find their own bat.

And there’s the threat of deporting millions of workers. Add those deported workers to the $2 trillion Musk and Ramaswamy say they will cut from the Federal deficits… and the higher prices caused by tariffs…

All of them coming on stream just as the stock market reaches bubble highs…

… and you have set the stage for a catastrophic meltdown.

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Is the Reign of the Dollar Coming to an End?

In early June, a rumour began to circulate – which was widely reported in the Indian press as true – that the government of Saudi Arabia had allowed its petrodollar agreement with the United States to lapse. This agreement, made in 1974, is quite straight-forward and fulfils various needs of the US government: the US purchases oil from Saudi Arabia, and Saudi Arabia uses that money to buy military equipment from US arms manufacturers while holding the income from the oil sales in US Treasury Bills and in the Western financial system. This arrangement to recycle oil profits into the US economy and the Western banking world is known as the petrodollar system.

This non-exclusive arrangement between the two countries never required the Saudis to limit their oil sales to dollars or to recycle their oil profits exclusively in US Treasury Bills (of which it holds a considerable $135.9 billion) and Western banks. Indeed, the Saudis are free to sell oil in multiple currencies, such as the Euro, and participate in digital currency platforms such as mBridge, a trial initiative of the Bank of International Settlements and the central banks of China, Thailand, and the United Arab Emirates (UAE).

Nonetheless, the rumour that this decades-long petrodollar agreement had come to an end reflects the widespread expectation that a seismic shift in the financial system will overturn the rule of the Dollar-Wall Street regime. It was a false rumour, but it carried within it a truth about the possibilities of a post-dollar or de-dollarised world.

The invitation extended to six countries to join the BRICS bloc last August was a further indication that such a shift is underway. Among these countries are Iran, Saudi Arabia, and the UAE, although Saudi Arabia has yet to finalise its membership. With its expanded membership, BRICS would include the two countries with the largest and second largest gas reserves in the world (Russia and Iran, respectively) and the two countries that accounted for nearly a quarter of global oil production (Russia and Saudi Arabia, all figures as of 2022). The political opening between Iran and Saudi Arabia, brokered by Beijing in March 2023, as well as the signs that the US allies UAE and Saudi Arabia seek to diversify their political linkages, demonstrate the possible end of the petrodollar system. That was at the heart of the rumour in early June.

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Civilization Depends Upon Economic Freedom

The BBC recently slapped a “trigger warning” on its popular 1969 series Civilisation, warning that viewers may deem the series objectionable as it presents Eurocentric perspectives. The series is now deemed to be “problematic” because it tells a “European story,” focusing on the Renaissance and the Enlightenment. This is criticized by academics—for example, the classicist Mary Beard—for excluding other cultures and also for excluding women while showcasing the achievements of men in Greece, Rome, France, Italy, Germany, and Britain.

This rejection of Eurocentricity by modern academics pervades the “decolonize” movement that has swept through all scholarly disciplines across the humanities and natural sciences. The science of economics has not been spared. Economic theories that have long been associated with economic progress and civilization are also rejected. The concept of “civilization” itself is rejected on the grounds that all cultures are equal; therefore, all cultures are a form of civilization, and no civilization is superior to any other. In this worldview, there is no particular reason why economic freedom should be prioritized above any other social goal.Jeffries, DonaldBest Price: $15.55Buy New $14.00(as of 11:47 UTC – Details)

Economic freedom concerns the human liberty to engage in the activities necessary to sustain prosperity and civilization, as well as the institutional conditions necessary for human beings to thrive. Economic liberty is therefore subsumed within civilization itself. The two concepts are linked, and the idea that we can choose to reject economic principles while maintaining the level of economic progress to which we have become accustomed is simply wrong. Ludwig von Mises explains this in Human Action:

What is wrong with our age is precisely the widespread ignorance of the role which these policies of economic freedom played in the technical evolution of the last two hundred years. People fell prey to the fallacy that the improvement of the methods of production was contemporaneous with the policy of laissez faire only by accident.

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TGIF: The Economic Is Personal

Contrary to accepted doctrine, we have no grounds for regarding so-called economic liberties as less important or less worthy of protection than so-called personal, or civil, liberties. That’s because we have no essential grounds for distinguishing so-called economic ends from so-called personal ends. (Let’s dispense with the “so-called” qualifier for the sake of fluency.)

Each of us pursues ends, full stop. Our ends vary widely in content and time required for accomplishment. Some are achieved quickly; others require prolonged effort and can be called projects. Some directly involve money-making; others don’t. What could be more personal than deciding how to earn a living? Why should the sort of end sought matter to the discussion of liberty?

Ends imply action, purposeful behavior. The laws and logic of human action — praxeology, Ludwig von Mises called it — thus apply to all action (the word purposeful is redundant) no matter what is sought and by whom, whether it’s Jeff Bezos or whoever succeeded Mother Teresa. The involvement of money is irrelevant. Ends, means, costs (opportunities forgone), profit, loss, and time (explicit or implicit interest) are all relevant concepts regardless of the ends we seek. As the British economist Philip Wicksteed put it, “The general principles which regulate our conduct in business are identical with those which regulate our deliberations, our selections between alternatives, and our decisions, in all other branches of life.”

Economics as an important discipline, Thomas Sowell emphasizes, is a way to analyze action, no matter its objective. It is how we understand the unplanned social consequences and institutions — property, markets, money, prices, and so on — that unfold when diverse people with divergent personal preferences aim at objectives using scarce resources that could be used in multiple ways. It’s the study of the social cooperation that emerges among widely dispersed strangers as an unintended byproduct of individuals’ pursuit of happiness. It’s not the particular objective that makes an activity “economic.” It’s an aspect of human action in itself.

Nevertheless, it is common in government offices and many people’s minds to rank economic liberty below personal liberty. Samuel Johnson said, “There are few ways in which a man can be more innocently employed than in getting money,” but many disagree.

An infamous footnote in a New Deal-era Supreme Court decision, which upheld a federal ban on interstate trade in filled milk, formalized and reinforced the ominous distinction between economic and personal liberty, which had replaced an earlier more fully pro-liberty view. The footnote seemed to say that while the government probably can’t interfere with, for example, the exercise of religion or expression, it probably can interfere with the exercise of commerce and manufacturing. In the latter activities only, the government should be allowed great leeway to interfere.

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Why Mankind Remains So Lost In Economic-Ignorance & Tribalistic-Warmongering

Carl Menger is widely recognized as one of the economists leading the so-called marginalist revolution along with William Stanley Jevons and Léon Walras. There are two other contributions by Menger that are relatively underappreciated and are vital for making sense of the socioeconomic order, including why mankind remains so lost in economic ignorance and tribalistic warmongering.

They are, first, his insights into the proper method or way to study the economy or social order and its emergence-evolution, and second, his application of such wisdom to explain the evolution of money and the entire socioeconomic order that further emerges thanks to money. Let’s further expand on these two.

Menger wrote an entire book devoted to discussing the proper method with which to study the social sciences, aptly titled Investigations into the Methods of the Social Sciences. So how should we study the social sciences according to Menger? He writes,

Natural organisms almost without exception exhibit, when closely observed, a really admirable functionality of all parts with respect to the whole, a functionality which is not, however, the result of human calculation, but of a natural process. Similarly we can observe in numerous social institutions a strikingly apparent functionality with respect to the whole. But with closer consideration they still do not prove to be the result of an intention aimed at this purpose, Le., the result of an agreement of members of society or of positive legislation. They, too, present themselves to us rather as “natural” products (in a certain sense), as unintended results of historical development. One needs, e.g., only to think of the phenomenon of money, an institution which to so great a measure serves the welfare of society, and yet in most nations, by far, is by no means the result of an agreement directed at its establishment as a social institution, or of positive legislation, but is the unintended product of historical development. One needs only to think of law, of language, of the origin of markets, the origin of communities and of states, etc. Now if social phenomena and natural organisms exhibit analogies with respect to their nature, their origin, and their function, it is at once clear that this fact cannot remain without influence on the method of research in the field of the social sciences in general and economics in particular. . . . Now if state, society, economy, etc., are conceived of as organisms, or as structures analogous to them, the notion of following directions of research in the realm of social phenomena similar to those followed in the realm of organic nature readily suggests itself. The above analogy leads to the idea of theoretical social sciences analogous to those which are the result of theoretical research in the realm of the physico-organic world, to the conception of an anatomy and physiology of “social organisms” of state, society, economy, etc.

Like Herbert Spencer, his contemporary and arguably the most famous and influential intellectual of the late 1800s, Menger too felt like the social order was akin to a “social organism” and should be studied using an organic or evolutionary approach similar to how we study the biological order. Menger thus felt like the methods of the physical sciences, like their use of mathematics, was as inappropriate for understanding the monumental complexity and evolution of the social order as it was for the biological one.

He writes, “I do not belong to the believers in the mathematical method as a way to deal with our science. . . . Mathematics is not a method for . . . economic research.”

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