Friday, September 21, 2018

Academic Agent versus Reality on the US Industrial Recession of 1873–1878

In this recent stream on economics, Academic Agent attempts to defend Rothbard’s views on the American economy in the 1870s.



In my Twitter debates on this issue with Academic Agent – who is an unusually ignorant libertarian – I directed him to my post here.

I said explicitly in that post that, while Rothbard was correct that there was no depression in the sense of a fall of GDP/GNP of 10% or more, Rothbard was nevertheless wrong to claim that the 1873–1878 period saw “extraordinarily large expansion of industry.”

Here is what Rothbard said:
“Orthodox economic historians have long complained about the ‘great depression’ that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged ‘monetary contraction’ never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.

It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.” (Rothbard 2002: 154–155).
The central claims of Rothbard about the 1870s are therefore as follows:
(1) there was no “depression” in GDP/GNP between 1873–1879.

(2) in the period between the panic of 1873 and 1879, there was an “extraordinarily large expansion of industry”.
While assertion (1) is true on the basis of the most recent GNP/GDP estimates, assertion 2 is false.

To see this we need only look at the best indices of industrial/manufacturing output in these years.

First, a graph of Frickey’s manufacturing index (Frickey 1947; for a high quality version of the graph, click on it or open it in a new window):



The data from Frickey shows an industrial recession from 1873–1876 in which there was a 9.67% fall in manufacturing output (almost a depression in the manufacturing sector).

Next, a graph of the data from Davis’s US industrial index (Davis 2004: 1189), which uses 43 annual components of the manufacturing and mining industries in the US, which represented about 90% of manufacturing output in the 1800s (Davis 2006: 105; for a high quality version of the graph, click on it or open it in a new window):



We can see the data here in table form from Davis’s US industrial index:
US Industrial Index, 1870–1880
Index base is 1849–1850 = 100
Year | Index

1870 | 242.97
1871 | 255.29
1872 | 275.74
1873 | 302.17
1874 | 300.7
1875 | 284.2

1876 | 294.0
1877 | 297.8
1878 | 314.0
1879 | 356.4
1880 | 400.9
(Davis 2004: 1189).
So the data is clear: there was a real industrial recession and stagnation until 1877. Both industrial indices, whether the older data of Frickey (1947) or newer, better index of Davis, show serious problems in the manufacturing sector.

By contrast, it is true that the real GNP estimates of Balke and Gordon (1989: 84) on the annual growth rates in the US in this period only show a recession in 1874, and low growth in 1876:
Year | GNP* | Growth Rate
1869 | 78.2 |
1870 | 84.2 | 7.67%
1871 | 88.1 | 4.63%
1872 | 91.7 | 4.08%
1873 | 96.3 | 5.01%
1874 | 95.7 | -0.62%
1875 | 100.7 | 5.22%
1876 | 101.9 | 1.19%
1877 | 105.2 | 3.23%
1878 | 109.6 | 4.18%
1879 | 123.1 | 12.31%
* Billions of 1982 dollars
Average real GNP growth rate, 1870–1879: 4.69%.
(Balke and Gordon 1989: 84).
But given our data from Frickey and Davis that shows a manufacturing recession, the data of Balke and Gordon – if accurate – can only mean that it was agriculture and services that continued to grow in order to provide positive real GNP in 1873 and in 1875–1877.

But this is the precise opposite of what Rothbard said: Rothbard wanted us to believe that there was an “extraordinarily large expansion of industry” from 1873 to 1877. That is clearly false.

There is also considerable contemporary evidence from the 1870s of serious unemployment in the manufacturing sector as catalogued by Bernstein (1956).

A report of the Bureau of Statistics in Pennsylvania in 1875 reported the following:
“… in October, 1873, occurred the revulsion in trade (known as the panic) which immediately checked industrial operations, and which, although it was generally supposed its effects would be temporary, has continued to grow in force and intensity ever since.

This has materially obstructed the operations of the Bureau in its attempts to procure returns that could be used for tabular statements, in fact making it impossible. Those who have not given particular attention to this phase of the subject, would be astonished in making anything like an extended inquiry among our industrial establishments this year, to find in how large a proportion of them, there was so little being done that detailed reports would be impracticable.

Very many are entirely closed, having given up the attempt to keep their machinery moving at all. Many more just doing sufficient to have the appearance of running, while those doing what could be called sufficient business to cover expenses, were so very small a proportion of the whole as to constitute them exceedingly rare exceptions to the general rule. Probably never in the history of the country has there been a time, when so many of the working classes skilled and unskilled, have been moving from place to place seeking employment that was not to be had—never, certainly for so long a time.” (Commonwealth of Pennsylvania 1875: 433).
The unemployment data in Vernon (1994) shows rising unemployment from 1873 to 1878 (for a high quality version of the graph, click on it or open it in a new window):



This would strongly confirm problems in the US economy in these years. Another point is that, on the basis of analysis of the 1890s and the likelihood that 19th century labour force participation rates were countercyclical in the sense of rising during recessions, there is at least a reasonable case that Vernon’s data seriously underestimates US unemployment in the 19th century, so that the real unemployment rate for the 1870s may have been considerably higher.

Finally, we can look at immigration into the US in the 1870s (data from Historical Statistics of the United States: Colonial Times to 1970. Part 1, 1975, pp. 105–106, Series C 89–119; for a high quality version of the graph, click on it or open it in a new window):



As we can see, immigration fell in every year from 1873 to 1878, which suggests a bad economy which discouraged immigration. The falling periods of US immigration in the late 19th century generally line up with recessions.

So, all in all, our data shows that the United States from 1873 to 1877 had a recession within the manufacturing sector, even if GDP (with the exception of 1874) continued to grow owing to agriculture and services.

Unemployment seems to have risen in every year down to 1878 (consistent with contemporary evidence reporting bad industrial unemployment), and there cannot have been a healthy economy in these years if manufacturing – the most important sector – was internally in recession. Rothbard was wrong to think there was an “extraordinarily large expansion of industry” between 1873 and 1879, and that there was some economy-wide boom in these years.

BIBLIOGRAPHY
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.

Bernstein, Samuel. 1956. “American Labor in the Long Depression, 1873–1878,” Science & Society 20.1: 59–83.

Commonwealth of Pennsylvania. 1875. Second Annual Report of the Bureau of Statistics of Pennsylvania, for the Years 1873–1874. B. F. Meyers, Harrisburg.

Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790–1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Frickey, Edwin. 1947. Production in the United States, 1860–1914. Harvard University Press, Cambridge, Mass.

Rothbard, Murray N. 2002. A History of Money and Banking in the United States. Ludwig von Mises Institute, Auburn, Ala.

U.S. Department of Commerce. 1975. Historical Statistics of the United States: Colonial Times to 1970. Part 1. US Government Printing Office, Washington, DC.

Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

Wednesday, September 12, 2018

Academic Agent on Herbert Hoover: A Critique

Academic Agent’s video on Herbert Hoover is below:



First of all, it is true that Hoover was not a strict liquidationist. He supported limited interventionism, and was – for his time – a type of corporatist Republican. But was Hoover an “interventionist” relative to the interventions that became commonplace in Western mixed economies after 1933 and certainly after 1945? The answer is: no, Hoover was relatively non-interventionist in relation to the mixed economies of the post-1945 period. Hoover himself rejected effective Keynesian economics, which was the key to escaping the Great Depression.

What is wrong in this video?

Let us break it down as follows:

1. Hoover’s “high wage” policy
Hoover’s “high wage” policy was largely limited to certain industrial markets, and was not generally forced on industrialists, contrary to libertarian myths. Academic Agent (citing Rothbard) is wrong. Most of the industrialists of Hoover’s day agreed with his high wage policy.

The proof can be seen below.

On November 21 1929, Hoover met with business leaders and labor representatives in the White House. The press release makes interesting reading:
“The conference this morning of 22 industrial and business leaders warmly endorsed the President’s statement of last Saturday as to steps to be taken in the progress of business and the maintenance of employment. The general situation was thoroughly canvassed, and it was the unanimous opinion of the conference that there was no reason why business should not be carried on as usual; that construction work should be expanded in every prudent direction both public and private so as to cover any slack of unemployment. It was found that a preliminary examination of a number of industries indicated that construction activities can in 1930 be expanded even over 1929. ….

It was considered that the absorption of capital in loans on the stock market had postponed much construction and that the flow of this capital back to industry and commerce would now assist renewed construction.

It was the opinion that an indirect but very substantial contribution could be made to the extension of credit for local building purposes and for conduct of smaller business if the banks would freely avail themselves of the rediscount privilege offered by the Federal Reserve Banks.

The meeting considered it was desirable that some definite organization should be established under a committee representing the different industries and sections of the business community, which would undertake to follow up the President’s program in the different industries.

It was considered that the development of cooperative spirit and responsibility in the American business world was such that the business of the country itself could and should assume the responsibility for the mobilization of the industrial and commercial agencies to those ends and to cooperate with the governmental agencies. ….

The President was authorized by the employers who were present at this morning’s conference to state on their individual behalf that they will not initiate any movement for wage reduction, and it was their strong recommendation that this attitude should be pursued by the country as a whole. They considered that aside from the human considerations involved, the consuming power of the country will thereby be maintained.

The President was also authorized by the representatives of labor to state that in their individual views and as their strong recommendation to the country as a whole, that no movement beyond those already in negotiation should be initiated for increase of wages, and that every cooperation should be given by labor to industry in the handling of its problems.”

http://www.presidency.ucsb.edu/ws/?pid=22009
So the “high wage” policy was not some alien, evil government intervention imposed on unwilling and hostile business people and industrialists: it was a policy they largely agreed with.

Vedder and Galloway (1997: 92) – who themselves think that the high wages were the major cause of the unemployment during the depression – nevertheless point out that Hoover received “wholehearted support” from businessmen at his White House meeting on November 21, 1929. Even Henry Ford agreed with it (Vedder and Galloway 1997: 92).

Furthermore, even though there was some degree of “jawboning” of certain business people who wished to cut wages,
“In a survey of business leaders in mid-1930 by Printer’s Ink magazine, corporate executives were near-unanimous in their support of the high-wage policy coming out of the November 1929 conference at the White House. Howard Heinz, the ketchup maker, said: ‘In this enlightened age, large manufacturers . . . will maintain wages ... as being the far-sighted and . . . the constructive thing to do.’ Carleton Palmer, president of E. R. Squibb & Son, advocated increasing hourly wages by reducing the workweek and maintaining weekly wages constant. William Wrigley, the gum magnate, said he would not reduce wages, while Charles C. Small, president of the American Ice Co., said he believed in ‘good wages to aid purchasing power.’ George F. Johnson, president of Endicott Johnson Corp., echoed that sentiment, declaring that ‘reducing income of labor is not a remedy for business depression; it is a direct and contributing cause.’

Big business felt it had a duty to carry through the high-wage-policy.” (Vedder and Galloway 1997: 94)
Now let us assume for the sake of argument that the “high wage” policy really was the single worst policy endorsed by Hoover. But why aren’t Austrians blaming the private industrialists and business people who supported and endorsed this “high wage” policy, since it was clearly their fault as much as Hoover’s? It is doubtful that the “high wage” policy could have been carried out without so much support from the private sector: in fact, very many corporate leaders already held the same opinion as Hoover.

Secondly, Gardiner Means, in his own contemporary work on prices in the 1920s and 1930s, noted how it was in fact industrial prices that had already become relatively less flexible than other prices in the US economy during the early years of the Great Depression (Lee 1998: 28).

So, given that relative inflexibility in industrial prices, to what extent did the high wages per se with (less severe) price cuts in those industries really exacerbate the depression? Although it stands to reason that, when industrial prices did start to fall significantly, this would have squeezed profits in the relevant industries, the fact is that output and employment was already directly reduced in many firms anyway as a response to the demand shocks, which were the primary cause of the increased unemployment.

Most important of all, far from being the solution to the depression, severe wage cuts even in 1929 would have severely worsened the debt deflationary spiral and increased the real burden of debt for debtors, putting pressure on them and eventually driving many into bankruptcy, and in turn driving creditors into bankruptcy. Of course, that is exactly would did happen in the depression as nominal wages fell after 1931 and continued to fall in 1932 and 1933.

Moreover, as is now well known, the extent of nominal wage flexibility in the West before 1929 is grossly exaggerated. In reality, wages had already started to become relatively inflexible downwards in recessions after the late 1880s, as can be seen here. It is a complete myth that US recessions were cured by flexible wages, because there were numerous recessions after the 1880s where this was not the case.

2. Comparing the Recession of 1920–1921 with the Great Depression
Academic Agent compares the money wage falls in the recession of 1920–1921 with the less flexible money wage data in the early years of the Great Depression (whose contractionary phase ran from 1929 to 1933).

Unfortunately, the recession of 1920–1921 was highly anomalous, coming as it did after the First World War and the extensive wartime inflation which eroded the value of private debt, and cannot be usefully compared with the situation in 1929–1933, as I have shown here. In short, in 1929–1933 wage and price deflation caused a severe debt deflationary spiral, which was avoided in 1920–1921, because of the different conditions then.

And, of course, libertarians like Academic Agent cannot explain why severe wage and price deflation in Weimar Germany or in Austria in the 1930s did not lead to a rapid recovery there.

3. The Smoot Hawley Tariff
Academic Agent makes much of the Smoot Hawley Tariff and argues that it was a “massive” cause of the depression, and even that it was the major cause. This is a blatant falsehood, contrary to the data we have.

The Tariff Act of 1930 (or Smoot–Hawley Tariff) became law on June 17, 1930. While Smoot Hawley undoubtedly hurt foreign export-led growth nations dependent on the US market, it was not a major factor in the US contraction from 1929–1933.

Peter Temin explains:
A tariff, like a devaluation, is an expansionary policy. It diverts demand from foreign to home producers. It may thereby create inefficiencies, but this is a second-order effect. The Smoot-Hawley tariff also may have hurt countries that exported to the United States. The popular argument, however, is that the tariff caused the American Depression. The argument has to be that the tariff reduced the demand for American exports by inducing retaliatory foreign tariffs … Exports were 7 percent of GNP in 1929. They fell by 1.5 percent of 1929 GNP in the next two years. Given the fall in world demand in these years from the causes described here, not all of this fall can be ascribed to retaliation from the Smoot-Hawley tariff. Even if it is, real GNP fell over 15 percent in these same years. With any reasonable multiplier, the fall in export demand can only be a small part of the story. And it needs to be offset by the rise in domestic demand from the tariff. Any net contractionary effect of the tariff was small (Temin 1989: 46).
America was not an export-led economy in the 1920s and 1930s, and export growth was not the primary engine of American growth at all. As noted by Temin, exports were just 7% of US GNP in 1929.

Contrary to Academic Agent, it is a complete myth that the United States suddenly faced economic collapse because foreign companies suddenly left and closed factories in America after Smoot Hawley.

Worse still for Academic Agent, the Smoot Hawley Tariff was not some exception in American history. The United States had a long history of high tariffs, as can be seen here. In fact, the average level of duties on manufactured goods in 1875 in the United States was about 40–50%, and the Republicans in September 1922 had returned to a high tariff policy with the Fordney–McCumber Tariff, which raised the ad valorem tariff rate to an average of about 38.5% for dutiable imports, which was years before the Great Depression even happened (Bairoch 1993: 38).

Why, then, didn’t the Fordney–McCumber Tariff of 1922 crash the US economy if high tariffs had such a bad effect?

Nor, contrary to Academic Agent, was the Smoot Hawley tariff or the collapse in agricultural production the primary cause of the banking failures in the US Great Depression. Those were caused largely by rapid insolvency of banks and then the large-scale bank runs triggered by panic.

The severe worsening of the depression in America was caused to a great extent by the banking panic of 1930 from November 1930 to August 1931, which could have been easily halted by Federal Reserve actions to protect depositors while liquidating bad debts.

4. Hoover’s Spending
Hoover did not in fact massively increase government spending. Total US federal government spending in 1929 was about 2.5% of GDP (Stein 1966), and the rise in US federal government spending as a percentage of GDP from 1929 to 1933 was partly the result of the collapse in GDP, and not huge increases in government spending relative to GDP.

Given that US GDP collapsed by 28.52% between 1929 to 1933, the rise in US spending under Hoover was feeble and far short of what was need to stabilise GDP and end the depression.

We can see in this graph the absurdity of saying that Hoover massively increased government spending (with the circle showing the size of government spending in the 1920s to about 1933):


If huge government spending was a serious cause of depression, then why didn’t the US collapse after 1945 given the huge levels of spending that now occurred relative to the pre-1929 period?
.
Finally, let consider Hoover’s fiscal policy. Hoover’s fiscal policy in fiscal years 1930 and fiscal year 1933 was actually contractionary:
(1) In fiscal year 1930 (July 1, 1929–June 30, 1930), Hoover actually ran a federal budget surplus, not a deficit. Federal policy was contractionary in this fiscal year.

(2) In fiscal years 1931 and 1932, fiscal policy was mildly expansionary, but feeble compared to what was needed.

(3) The Federal Reserve raised the discount rate in 1931.

(4) In fiscal year 1933 (July 1, 1932–June 30, 1933), total federal spending was cut in relation to fiscal year 1932. Hoover introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years.
These were contractionary measures, and these policies are the very antithesis of Keynesianism stimulus.

5. Other Interventions
Most of the other interventions Academic Agent lists were taken in 1932 and cannot possibly explain the severity of the depression from 1929–1931, with one exception: the Revenue Act of 1932 (June 6) which increased taxes.

However, Academic Agent is blissfully unaware that blaming this measure for exacerbating the depression (which is no doubt did do) is nothing but a vindication of Keynesian theory, which does not advocate raising taxes in recessions or depressions.

Finally, let us consider here the Reconstruction Finance Corporation (RFC). Blaming the RFC as some evil government intervention that made the depression worse is absurd. Why? Because the RFC was only established in January 1932, and it did not even exist in 1929, 1930 and 1931 when the US economy was collapsing badly. In 1932, the RFC spent about $1.5 billion in loans to states and businesses, and there are very good reasons for thinking that this policy per se would have aided the economy, not exacerbated the depression. But of course whatever good the RFC did was destroyed by Hoover’s contractionary fiscal policy in fiscal year 1933 – the exact opposite of a Keynesian policy response.

6. Counterexamples where Keynesian interventions worked
I have yet to see any libertarian explain why government interventions and Keynesian stimulus rapidly ended the Great Depression in a number of nations in the 1930s.

For we must ask the question: what nations emerged quickly from the Great Depression to have a strong recovery where unemployment fell to low levels?

Those nations that recovered rapidly and successfully from the Great Depression were New Zealand, Germany and Japan. They did so by large-scale fiscal stimulus and numerous other intervention far more extreme than what Hoover did.

More on the Keynesian policies in New Zealand, Germany and Japan is given in these posts:
“Keynesian Stimulus in New Zealand: 1936–1938,” September 23, 2011.

“Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s,” August 27, 2011.

“Fiscal Stimulus in Germany 1933–1936,” September 3, 2011.
It is also notable that some Scandinavian nations also left the gold standard quickly, devalued their currencies, stabilised their banking systems, implemented loose monetary policy, and perhaps some degree of fiscal stimulus to escape the worst ravages of the depression (although the question whether the Scandinavian countries pursued fiscal expansion and how strongly is disputed by some economists).


BIBLIOGRAPHY
Bairoch, P. 1993. Economics and World History: Myths and Paradoxes. University of Chicago Press, Chicago.

Bernanke, Ben S. 2000. Essays on the Great Depression. Princeton University Press, Princeton, N.J.

Keynes, J. M. 1939. “Relative Movements of Real Wages and Output,” Economic Journal 49: 34–51.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Stein, H. 1966. “Pre-Revolutionary Fiscal Policy: The Regime of Herbert Hoover,” Journal of Law and Economics 9: 189–223.

Temin, P. 1989. Lessons from the Great Depression. MIT Press, Cambridge, Mass.

Vedder, Richard K. and Lowell E. Galloway. 1997. Out of Work: Unemployment and Government in Twentieth-Century America. New York University Press, New York.