London Calling: The Dollar is Falling!

Mr. Livingston teaches history at Rutgers. He's finishing a book called The World Turned Inside Out: American Thought and Culture at the End of the 20th Century. He blogs at

Being in London for a week is instructive, especially during a financial crisis that keeps creeping from its Anglo-American roots to the wider world.  No matter what paper I bought, headlines and front-page stories were full of exotic references to hedge funds, SIVs, CDOs, and the like.  Meanwhile, there was little coverage of the Obama speech except notice of declining support for his candidacy in the wake of the Reverend Wright’s YouTube performances.  (Two Financial Times columnists, Gideon Rachman and Clive Crook, did catch up quickly—but then their different beats converge on the USA.)  As you know, this decline has now been arrested if not reversed.

I went to visit my daughter, who is a student at University College of London for the semester.  It’s an amazing city, full of energy, music, theater, immigrants—and tourists.  Just like Manhattan, except that there are a lot more young people in the central city, real residents, than you’ll find hanging around Midtown or Tribeca.  That difference could be a function of the many universities that congregate in London. 

In any event, the place reminds me of Chicago and Brooklyn rather than Manhattan because it’s so accessible, because its bearing and scale are more horizontal than vertical.  I know, the birthplace of the skyscraper was Chicago, but it’s still a city where three or four stories is the norm—it looks like Brooklyn.  So does London, regardless of the laughable “gherkin” and the other misshapen high-rises downtown, in or near the City. 

For the enormity of the place is latitudinal, a social and architectural urge captured perfectly in the incoherent spread of tombs and chapels in Westminster Abbey, and reiterated in the sprawl of “cities” north and west of the Thames.  London doesn’t go up, it goes out.  And that’s OK, because it got started a thousand years before the elevator was invented, and because the Tube stitches this crazy quilt together—if you’re underground, you can go anywhere.      

It was a bizarre experience because the dollar is such a wreck these days.  Lunch for three cost about 80 bucks, and we’re talking appetizers and a pizza, not high tea at a fancy restaurant.  A tour of Oxford, including transportation to and from the town but not admission to the Bodleian Library, was 700 bucks.  Still, this trip was worth more than all the lunches, because, late in the day, I noticed a lovely memorial to Christopher Hill, the great Marxist historian of the English Revolution, high up on the wall of the chapel at Balliol College, where he was a fellow and later master.  My daughter took a picture of it for me.     

Speaking of Marx, England was a bizarre experience at another remove because the language of class resentment and struggle is so ubiquitous.  Every guide I heard—whether on a tour bus or a river boat or a pub walk, from London to Edinburgh to Oxford—had the same smirking contempt for the toffs who live in the fancy condos and had the same quiet respect for the members of the royal family.  The columnist for the Times of London who called himself a Marxist (!) as his preface to a hilarious critique of Richard Dawkins and Christopher Hitchens couldn’t have been any more class conscious than the working stiffs who identified all those buildings and streets and statues and monuments and bars.  The caste system cuts both ways in the UK—everybody remembers where they come from.  But no, I never made it to Marx’s tomb in Highgate Cemetery.      

This introduction to troubled thoughts on the current financial crisis no doubt seems both perverse and desultory—as if Joseph Pulitzer had asked Henry James, Jr., to comment on the economic crisis of the 1890s from his apartment in London.  After all, the impending meltdown surely originated here, in the good old USA, with the subprime mortgage mess that erupted last August.  But there is method in my madness, gentle reader, yea, perhaps even dividend in my digression.

For the crisis got rolling over there, and its immediate result—the British government now owns Northern Rock—could be read as the future of banking over here.  JP Morgan, not the Bush administration, is buying Bear Stearns, to be sure, but the buyer is still in the market for its rival because the Fed has given it a credit line, effectively assuming the bad debts that Jimmy Cayne’s empire acquired over the last decade (about $30 billion in subprime packages owned by two Bear-related hedge funds). 

Indeed it seems that Ben Bernanke and Henry Paulson called the shots—the original $2 per share offer was designed to avoid the charge of “moral hazard” by demonstrating that the government was not bailing out Bear shareholders.  The new offer of $10 per share was made with the approval of the Fed and the Treasury Department.  JP Morgan is on the hook for the first $1 billion of losses, according to this revised arrangement, but we, the people, are still liable for the remainder.

The “discount window” opened by the Fed for use by Lehman Brothers and Goldman Sachs, two other firms with problematic stakes in the subprime market, again via hedge funds, is also a radical new departure.  In effect the central bank is promising to cover all the losses that derive from the collapse of the housing bubble.  In doing so, it is making itself at least a de facto regulator of, and at most a stakeholder in, the largest investment banking firms—those that will queue up at the window, hoping to avoid the fate of Bear Stearns.

So, long before Barney Frank’s pending legislation is in place (he and Christopher Dodd are pressing for regulation of the “shadow banking system” composed of SIVs and hedge funds), the socialization of an ostensibly private financial sector will be more or less complete.  Wall Street and Main Street will finally merge because the identical source of their revenues—consumer spending—has been revealed by this unfolding crisis (of which more anon).      

But the regulation of banks, whether commercial or investment banks, is not the real issue.  It’s a lullaby sung by and for the best and the brightest.  I know, I know, the Left, from Barney Frank to Paulie (“The Hitman”) Krugman, wants to believe that Alan Greenspan was asleep at the wheel—that he is somehow to blame for the mess we’re in—and to believe as well that closer regulation of the rogues on Wall Street will prevent a reprise of this crisis.  The Left is wrong, or only half-right. 

For the problem we face is structural, and its solution requires that we address the issue of class as well as race.  We need, then, to borrow the language of class resentment and struggle so easily spoken in England, minus the cynicism and the naïve monarchism that accompanies it over there.  We need to be more Marxist, but less dogmatic.  We need to follow the example of Christopher Hill.

Greenspan is not the free market, supply-side zealot who appears in Krugman’s hit list.  Like everyone else except the lunatics at the Club for Growth—oh, and Phil Gramm, McCain’s economic advisor—he treats markets as unnatural devices through which we express and enact our intentions, our social purposes.  As he put it in his remarkable memoir, The Age of Turbulence (2007): “Remember, markets are not ends in themselves.  They are constructs to assist populations in achieving the optimum allocation of resources” (p. 461).

Moreover, he hasn’t endorsed Milton Friedman’s daffy interpretation of the Great Depression—the Fed’s new chief, Ben Bernanke, who is also Krugman’s friend and former colleague at Princeton, has, in fact, done so.  Greenspan did endorse Bush’s tax cuts, on the assumption that, together with lower interest rates, they would reflate an economy staggered by the debacle.  He hoped that increased investment would flow from the resulting redistribution of income; he was disappointed, of course, as every post-Keynesian, from David Stockman to Peter G. Peterson, has been when confronted with the pathetic results of tax cuts for the rich.  Greenspan put it this way: “intended investment in the United States has been lagging in recent years, judging from the large share of internal corporate cash flow that has been returned to shareholders, presumably for lack of new investment opportunities” (p. 387).

But Greenspan was not asleep at the wheel.  He was trying to avoid the deflationary spiral that plagued Japan throughout the 1990s by promoting greater consumer expenditures rather than increased saving—expenditures that would offset the measurable lag in investment.  He succeeded: lower interest rates let American consumers borrow freely, which in turn fueled an already overheated housing market.  Their increasing debts fed growth worldwide, as it absorbed the savings glut accumulated in developing countries and financed the current account deficit of the USA.

Now Bernanke is trying to avoid the same deflationary spiral by flooding the financial sector with an apparently unlimited volume of liquidity.  He has announced that he stands ready to discount any asset, any collateral—that is, to buy it at a wholesale price, thus providing the client with cash—if that will prevent the collapse of the banking system and restore the confidence of lenders and borrowers alike.  Moral hazard and renewed inflation are clearly unimportant parts of his calculations; indeed the fall of the dollar actually abets the Fed’s reflationary agenda.  And, to repeat, these calculations sketch the lineaments of a new regulatory regime.

But again, new regulations will not solve the problem.  Consider the worst case scenario, the origins and outcomes of the Great Depression—you can be sure that Mr. Bernanke is, for he is the academic who calls a comprehensive explanation of this event the “Holy Grail” of economic theory (he should read chapters 1-4 of my Pragmatism and the Political Economy of Cultural Revolution [1994], where I have not only found this elusive document, I have measured it).
The Great Depression was caused by the intersection of three trends.  First, the new industrial blocs that formed the cutting edge of growth in the 1920s all congregated in consumer durables like automobiles.  Second, at the very moment that increasing consumer incomes thus became the key to growth, a substantial shift away from wages and toward profits occurred.  Third, this shift to profits fed the speculative boom in the real estate and stock markets, especially after 1926, largely because there was no place else to put the money—new investment opportunities were lacking, then as now, because economic growth was proceeding as a function of declining net investment.  Output and productivity were increasing throughout the 1920s even though inputs of both capital and labor were declining.  You can look it up.

Recovery from the Great Depression was almost complete by 1937 because the federal government had financed consumer spending out of deficits (there was no capital formation from 1929 to 1939; in fact capital endowment per worker was lower in 1955 than in 1929).  You can look this up, too, preferably in my book, but if that’s too much trouble, take a look at H. W. Arndt’s pathbreaking analysis in Economic Lessons of the 1930s (1944).
The fundamental lesson to be learned in this school of hard knocks was that only a reversal of the 1920s shift to profits would permit recovery—that is, only a shift of income shares toward wages, and thus consumption, would allow for growth in an economy that no longer required increasing net investment in productive capacity.  It is the same lesson now being taught in our current straitened circumstances.

Of course we should figure out how to regulate the “shadow banking system” that has grown up in the last 15 to 20 years, under the rubrics of hedge funds, “securitized investment vehicles” (SIVs), “collateralized debt obligations” (CDOs), and so forth, especially since it looks like two-thirds—yes, two-thirds—of existing hedge funds will fail by 2010, leaving their sponsors among the large investment banks holding a very heavy bag of bad debt. 

But we shouldn’t fool ourselves.  The only long-term solution to this so-called credit crisis is the one enacted, willy-nilly, in the 1930s.  That means we need to change the distribution of income in favor of wages and mass consumption, at the expense of profits and high-end profligacy.  No need to close the theaters, mind you—unlike “Waiting for Lefty,” the Puritan Revolution can’t be revived.  But we do need, just for starters, to repeal the Bush tax cuts.

Beyond that baby step, we need to encourage unionization of the service work force, by legislation like the Wagner Act if necessary; we need to subsidize higher education on a much larger scale, making it accessible to ever more teenagers, but also to workers displaced by the rising tides of free trade; we need to refinance Medicare and Social Security, so that the transfer payments it provides will grow; and we need to map a moral universe in which the relation between work and income, effort and reward, becomes more complicated, maybe even mysterious.

We need a dose of class struggle.  London’s calling.  Let’s get all lost in the supermarket, try to see what us consumers can do about the future of capitalism, socialism, and democracy. 

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William J. Stepp - 4/13/2008

Another misguided set of government diktats were the bank holidays that began in Michigan in February 1933.
They weakened the banks by increasing the public's desired currency/demand deposit ratio. When a bank holiday was declared in a state, bank customers in neighboring states would take money out of banks thinking their banks would be next, which they often were.

Pete Murphy - 4/12/2008

Mr. Livingston, it's soooo refreshing to hear someone describe the roots of the Great Depression without any reference to the Smoot-Hawley Tariff Act. Unfortunately for America, free trade advocates successfully made that case and turned our nation away from its history of affording domestic industry the protection it needed to grow the U.S. into the wealthiest nation in the world - its preeminent industrial power - the envy of every other nation on earth.

Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China's. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It's also available at

Please forgive me for the somewhat "spammish" nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, Five Short Blasts

James Livingston - 4/11/2008

Ah, gee, here are two other titles, which cut athwart you, Gene White, and Uncle Milty--now that we're doing bibliographic performance:

James Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (Ithaca: Cornell University Press, 1986), and

James Livingston, Pragmatism and the Political Economy of Cultural Revolution, 1850-1940 (Chapel Hill; University of North Carolina Press, 1994).

If you can't recover from the monetarist explanation of the Great Depression, we'll never get anywhere. But go ahead, try, see what happenas when uncle Milty is no longer the end, the thing you must justify as if he is the godhead--see what happens when he's just another means to explanatory adequacy.

Marxists perform the same psycho-intellectual operation all the time. Why won't you?

Jim M Powell - 4/10/2008

Although Milton Friedman developed a monumental empirical case -- several thousand pages of data -- showing how the Fed played a key role triggering the Great Depression, critiques of depression era policies go far beyond this. Such critiques cover New Deal tax hikes that dramatically increased the cost of government; the reliance on excise taxes paid disproportionately by the middle class and the poor for programs that supposedlyi were going to get the middle class and the poor out of the depression; the skewing of federal spending away from the poorest people who lived in the South; the failure of the TVA to energize the Tennessee Valley economy; the anti-consumer New Deal policies -- establishing some 700 New Deal cartels, destroying food in an effort to force up food prices, and laws that prohibited discounting when the American people needed bargains; New Deal policies that broke up the strongest banks; New Deal policies that made it harder for employers to raise capital; New Deal policies that made it more expensive for employers to hire people; relentless New Deal attacks on employers when there was a critical need for job creation; overall, the failure to end double digit unemployment rates (until the federal govermnent began conscripting 13 million men and women for World War II).

I'm offering here a list of some of the books and articles that I found particularly helpful when I wrote my survey FDR'S FOLLY, HOW ROOSEVELT AND HIS NEW DEAL PROLONGED THE GREAT DEPRESSION. I skipped studies that seemed too specialized for our purposes here. I included a few older studies that anticipated later empirical investigations.


Gary M. Anderson and Robert D. Tollison, “Congressional Influence and Patterns of New Deal Spending, 1933-1939,” Journal of Law and Economics, April 1991, pp. 161-175

Leonard J. Arrington, “The New Deal in the West: A Preliminary Statistical Inquiry,” Pacific Historical Review, August 1969, pp. 311-316.

Leonard J. Arrington, “Western Agriculture and the New Deal,” Agricultural History, October 1970, pp. 337-353.

Charles W. Calomiris, “Financial Factors in the Great Depression,” Journal of Economic Perspectives, Spring 1993, pp. 61-85.

Charles W. Calomiris and G. Gorton, “The Origin of Banking Panics: Models, Facts, and Bank Regulations,” Financial Markets and Financial Crises, edited by R. Glenn Hubbard (Chicago: University of Chicago Press, 1991), pp. 109-173.

Charles W. Calomiris and Joseph R. Mason, “Causes of U.S. Bank Distress During the Great Depression,” National Bureau of Economic Research Working Paper W7919, September 2000.

Charles W. Calomiris and Joseph R. Mason, “Contagion and Bank Failures During the Great Depression: the June 1932 Chicago Banking Panic,” National Bureau of Economic Research Working Paper W4934, November 1994.

Harold L. Cole and Lee E. Ohanian, “The Great Depression in the United States From A Neoclassical Perspective,” Federal Reserve Bank of Minneapolis Quarterly Review, Winter 1999, pp. 2-24.

Timothy Curry and Lynn Shibut, “The Cost of the Savings and Loan Crisis: Truth and Consequences,” FDIC Banking Review, Fall 2000, pp. 26-35.

Richard A. Epstein, “The Mistakes of 1937,” George Mason University Law Review, 1988.

Richard A. Epstein, “The Proper Scope of the Commerce Power,” Virginia Law Review, 1987.

Mark D. Flood, “The Great Deposit Insurance Debate,” Federal Reserve Bank of St. Louis Review, July/August 1992, pp. 51-77.

Milton Friedman and Anna Jacobson Schwartz, “The Failure of the Bank of the United States: A Reappraisal: A Reply,” Explorations in Economic History, April 1986, pp. 199-204.

Robert Higgs, “Regime Uncertainty, Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,” Independent Review, Spring 1997, pp. 561-591.

Stanley High, “The WPA: Politicians’ playground,” Current History, May 1939, pp. 23-25.

Jith Jayaratne and Philip E. Strahan, “The Benefits of Branching Deregulation,” Regulation, vol. 22, no. 1.

Gregg A. Jarrell, “Change at the Exchange: the Causes and Effects of Deregulation,” Journal of Law and Economics, October 1984, pp. 273-312.

Gregg A. Jarrell, “The Economic Effects of Federal Regulation of the Market for New Security Issues,” Journal of Law and Economics, December 1981, pp. 613-675.

George G. Kaufman, “Bank Runs: Causes, Benefits, and Costs,” Cato Journal, Winter 1988, pp. 559-587.

George G. Kaufman, “Bank Failures, Systemic Risk, and Bank Regulation,” Cato Journal, Spring/Summer 1996.

Randall S. Kroszner, “The Political Economy of the Reconstruction Finance Corporation’s Bail-Out of the U.S. Banking System During the Great Depression.” Unpublished draft.

Allan H. Meltzer, “Monetary and other explanations of the start of the Great Depression,” Journal of Monetary Economics, 1976, 2, pp. 455-472.

Douglass North, “Berle and Means,” Journal of Law and Economics, June 1983, pp. 269-271.

Gene Smiley, “Some Austrian Perspectives on Keynesian Fiscal Policy and the Recovery in the Thirties,” The Review of Austrian Economics.

George J. Stigler, “Public Regulation of the Securities Market,” in The Citizen and the State: Essays on Regulation (Chicago: University of Chicago Press, 1975).

John Joseph Wallis, “The Birth of the Old Federalism: Financing the New Deal, Journal of Economic History, March 1984, pp. 139-159.

John Joseph Wallis, “Employment in the Great Depression: New Data and Hypothesis,” Explorations in Economic History, January 1989, pp. 45-72.

John Joseph Wallis, “Employment, Politics, and Economic Recovery During the Great Depression,” Review of Economics and Statistics, August 1987, p. 516-520.

John Joseph Wallis, “The Great Depression: Have We Learned Our Lessons?” in Donald N. McCloskey ed., Second Thoughts: the Uses of American Economic History (New York: Oxford University Press, 1991).

John Joseph Wallis, “Why 1933? The Origins and Timing of National Government Growth, 1933-1940,” in Robert Higgs ed., The Emerging Modern Political Economy (New York: JAI Press, 1986).

David Wheelock, “Member Bank Borrowing and the Fed’s Contractionary Monetary Policy During the Great Depression,” Journal of Money, Credit and Banking, November 1990, pp. 409-26.

David Wheelock, “Monetary Policy in the Great Depression,” Federal Reserve Bank of St. Louis Review, March/April 1992, pp. 3-28.

David Wheelock, “Regulation, Market Structure, and the Bank Failures of the Great Depression,” Federal Reserve Bank of St. Louis Review, March 1995, pp. 27-38.

Eugene N. White, “Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks,” Explorations in Economic History, vol. 23, 1986, pp. 33-35.

Eugene N. White, “The Legacy of Deposit Insurance: the Growth, Spread, and Cost of Insuring Financial Intermediaries,” National Bureau of Economic Research, Working Paper 6063 (June 1997).

Eugene N. White, “The Stock Market Boom and the Crash of 1929,” Journal of Economic Perspectives, Spring 1990.

Elmus Wicker, “Federal Reserve Monetary Policy, 1922-22,” A Reinterpretation,” Journal of Political Economy, August 1965, pp. 325-343.

Gavin Wright, “The Political Economy of New Deal Spending: An Econometric Analysis,” Review of Economics and Statistics, February 1974, pp. 30-38.


Dominick T. Armentano, Antitrust and Monopoly: the Anatomy of a Policy Failure (New York: John Wiley, 1982).

Jeremy Atack and Peter Passell, A New Economic View of American History from Colonial Times to 1940 (New York: Norton, 1994).

George J. Benston, The Separation of Commercial and Investment Banking, The Glass-Steagall Act Revisited and Reconsidered (New York: Oxford University Press, 1990).

George J. Benston, Robert A. Eisenbeis, Paul M. Horvitz, Edward J. Kane and George G. Kaufman, Perspectives on Safe & Sound Banking: Past, Present, and Future (Cambridge: MIT Press, 1986).

George J. Benston and George G. Kaufman, Risk and Solvency Regulation of Depository Institutions: Past Policies and Current Options (New York: Salomon Brothers Center for the Study of Financial Institutions, 1988).

Gary Dean Best, Pride, Prejudice and Politics, Roosevelt Versus Recovery, 1933-1938 (Westport, CT: Praeger, 1991).

Michael D. Bordo, Claudia Goldin and Eugene N. White ed., The Defining Moment: the Great Depression and the American Economy in the Twentieth Century (Chicago: University of Chicago Press, 1998).

Douglass V. Brown, Edward Chamberlin, Seymour E. Harris, Wassily W. Leontief, Edward S. Mason, Joseph A. Schumpeter and Overton H. Taylor, The Economics of the Recovery Program (New York: McGraw-Hill, 1934).

W. Elliott Brownlee, Federal Taxation in America, A Short History (Cambridge: Cambridge University Press, 1996).

Karl Bruner ed., The Great Depression Revisited (Boston: Martinus Nijhoff, 1981).

Lester V. Chandler, American Monetary Policy, 1928-1941 (New York: Harper & Row, 1971).

Lester V. Chandler, America’s Greatest Depression, 1929-1941 (New York: Harper & Row, 1970).

William U. Chandler, The Myth of TVA, Conservation and Development in the Tennessee Valley, 1922-1983 (Cambridge: Ballinger, 1984).

Jim F. Couch and William F. Shughart, The Political Economy of the New Deal (Northampton, MA: Edward Elgar, 1998).

Howard Dickman, Industrial Democracy in America, Ideological Origins of National Labor Relations Policy (LaSalle, IL: Open Court, 1987).

Milton Friedman AND Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (Princeton: Princeton University Press, 1963).

Thomas Hall and J. David Ferguson, The Great Depression, an International Disaster of Perverse Economic Policies (Ann Arbor: University of Michigan, 1998).

Ellis W. Hawley, The New Deal and the Problem of Monopoly (Princeton: Princeton University Press, 1966).

David M. Kennedy, Freedom from Fear, the American People in Depression and War, 1929-1945 (New York: Oxford University Press, 1999).

Mark H. Leff, The Limits of Symbolic Reform, the New Deal and Taxation, 1933-1939 (Cambridge: Cambridge University Press, 1984).

Walter Lippmann, Interpretations, 1931-1932 (New York: Macmillan, 1933). Edited by Allan Nevins.

Walter Lippmann, Interpretations, 1933-1935 (New York: Macmillan, 1936). Edited by Allen Nevins.

Michael J. McDonald and John Muldowny, TVA and the Dispossessed: Resettlement of Population in the Norris Dam Area (Knoxville: University of Tennessee Press, 1982).

G. Warren Nutter, Enterprise Monopoly in the United States (New York: Columbia University Press, 1969).

James T. Patterson, The New Deal and the States (Princeton: Princeton University Press, 1969).

Morgan O. Reynolds, Power and Privilege, Labor Unions in America (New York: Universe Books, 1984).

Gene Smiley, The American Economy in the Twentieth Century (Cincinnati: South-Western Publishing, 1994).

George J. Stigler, Lectures on Five Economic Problems (London: Longmans, Green, 1949).

George J. Stigler ed., Business Concentration and Price Policy, A Conference of the Universities-National Bureau Committee for Economic Research (Princeton: Princeton University Press, 1955)

Armand J. Thieblot, Jr. and Thomas R. Haggard, Union Violence: the Record and the Response by Courts, Legislatures and the NLRB (Philadelphia: University of Pennsylvania, Wharton School, Industrial Research Unit, 1983).

Richard Timberlake, Monetary Policy in the United States (Chicago: University of Chicago Press, 1993).

Carolyn Weaver, The Crisis in Social Security: Economic and Political Origins (Durham, North Carolina: Duke University Press Policy Studies, 1982).

Elmus Wicker, The banking panics of the Great Depression (New York: Cambridge University Press, 1996).

Elmus Wicker, Federal Reserve Monetary Policy, 1917-1933 (New York: Random House, 1966).

James Livingston - 4/10/2008

I tried to respond once already, and the thing went up in smoke. All I'll try to say here is thanks for the thoughtful commentaries, will get back to you soon. Also, you all gotta look at my 1994 book, people. Mr. Powell, if you looked there, you couldn't have written your 2003 book, or this entertaining comment, because you would have realized that my key sources on the depression are KAren Olney, Michael Bernstein, and H.W. Arndt. It's true that Arndt's book was published in 1944, but the other two are from 1988 and 1990--and they're economists! AAck!

Jim M Powell - 4/10/2008

While I appreciate Mr. Livingston’s lively commentary from London about current affairs, I’m surprised at his summary of the Great Depression, because he disregards a half-century of empirical research on the subject. Possibly, he’s not aware of it, because political historians have steadfastly ignored evidence from outside their profession, in particular evidence developed by economists about the effects of New Deal policies. The most comprehensive report on this evidence seems to be my book FDR’s Folly, How Roosevelt And His New Deal Prolonged The Great Depression (2003).

Mr. Livingston seems to defend the conventional wisdom before 1960: namely, during the roaring ‘20s, greedy stock speculators and others in the business world became so wild that they brought on the 1929 stock crash and the Great Depression, but public-spirited government men figured out how to make everything better. In other words, the view that the depression was caused entirely by the private sector, and they were fixed by politicians and regulators.

Mr. Livingston doesn’t say anything about Federal Reserve officials who – concerned in 1928 that the stock market boom was getting out of hand – began the contraction that triggered the stock market crash. Fed officials certainly didn’t intend to trigger the stock market crash, any more than their predecessors at the Fed intended to intensify the severe 1920 contraction following World War I.

The Fed shares some of the critical weaknesses of discredited socialist central planning: a small number of people have power to make decisions that affect an entire economy. When Fed officials make mistakes, they adversely affect not just a city, a state or a region, but the entire United States. Because the U.S. economy was (is) so big, what happened to it affected people around the world to one degree or another. The vast power of the Fed magnifies the harm done by human error.
Since Fed officials are human beings, mistakes are inevitable. It’s easy to make mistakes, because at any particular time, these officials are looking at incomplete information. Much of it consists of samples, surveys or estimates subject to revision as more data comes in. In addition, some information conflicts with other information: some sectors of the economy aren’t doing well, while others are fine; the dollar is doing this, gold is doing that, and oil prices are doing something else; and so on. It takes time for a Fed policy to play out through the economy, and officials don’t know whether they’ve done too much or too little for more than a year.

That the selection of a new Fed chairman is always critical betrays the inherent weakness of the Federal Reserve: any system that depends on finding a superman (or superwoman) is asking for trouble, because super-human individuals are scarce. Moreover, there’s no reliable way to keep bad or incompetent people out of power – the Fed, the Presidency, Congress or any other position in government.

Of course, Federal Reserve policies weren’t the only causes of the Great Depression. An often-overlooked cause of depression era bank failures were unit banking laws that prohibited banks from having more than one office. Unit banking laws reflected the political clout of small town bankers who didn’t want big city banks to compete with them by opening local branches. But the unit banking laws turned out to be a disaster for those small town banks. In the farm belt, for instance, bank depositors and borrowers were farmers. As the depression deepened, increasing numbers of farmers withdrew their deposits and defaulted on their loans, and one-office banks in the farm belt failed by the thousands. By contrast, Canada – which didn’t have branch banking restrictions – got through the Great Depression without a bank failure. Banks there were free to diversify their sources of funds and their loan portfolios by opening branches in different markets.

Bottom line: one cannot understand the Great Depression without understanding the role of misguided government policies.

It’s ironic that so many people still believe that government – notably, the New Deal – got America out of the Great Depression. In fact, unemployment averaged 17 percent during the New Deal period (1933-1940). Unemployment didn’t fall significantly until the federal government removed some 13 million young men and women from the civilian labor force to fight in World War II.

For those who believe that the New Deal got America out of the Great Depression, I’d suggest the following questions about New Deal policies:

1. Why did FDR triple federal taxes during the Great Depression? Federal tax revenues more than tripled, from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, holding company taxes and "excess profits" taxes all went up. FDR introduced an undistributed profits tax. Consumers had less money to spend, and employers had less money for growth and jobs.

2. Why did FDR discourage investors from taking the risks of funding growth and jobs? Frequent tax hikes (1933, 1934, 1935, 1936) created uncertainty that discouraged investment, and FDR further discouraged investors by denouncing them as "economic royalists," "economic dictators" and "privileged princes," among other epithets. No surprise that private investment was at historically low levels during the New Deal era.

3. Why did FDR channel government spending away from the poorest people? Comparatively little New Deal spending went to the South, the poorest region. Most New Deal spending went to political "swing" states in the West and East, where previous presidential election returns had been closer – and, as it happened, average incomes were more than 60% higher. The South was already overwhelmingly Democratic, on FDR's side, so from a political standpoint it didn’t make sense to spend much money there.

4. Why were New Deal spending programs financed mainly by the middle class and poor people? According to HISTORICAL STATISTICS OF THE UNITED STATES, through 1936, federal excise taxes on beer, wine, cigarettes, soft drinks, chewing gum, radios and other things, purchased by millions of ordinary people, GENERATED MORE REVENUE THAN THE FEDERAL PERSONAL INCOME TAX AND THE FEDERAL CORPORATE INCOME TAX COMBINED. In 1936, the federal government reported $674.4 million from the personal income tax, $753 million from the corporate income tax and $1.5 billion from excise taxes. Despite big income tax hikes, the federal excise tax continued to be the single largest source of federal revenue until World War II. To hear one of FDR’s “Fireside Chats,” Americans had to pay a federal excise tax on a radio and a federal excise tax on the electricity needed to run it.

5. Why did FDR make it more expensive for employers to hire people? By enforcing above-market wages, introducing excise taxes on payrolls and promoting compulsory unionism, the New Deal increased the costs of employing people about 25% from 1933 to 1940 -- a major reason why double-digit private sector unemployment persisted throughout the New Deal era.

6.. Why did FDR destroy all that food when millions were hungry? FDR promoted higher food prices by paying farmers to plow under some 10 million acres of crops and slaughter and discard some 6 million farm animals. The food destruction program mainly benefited big farmers, since they had more food to destroy than small farmers. This policy and subsequent programs to pay farmers for not producing victimized the 100 million Americans who were consumers.

7. Why did FDR make everything more expensive during the Depression? Americans needed bargains, but FDR signed the National Industrial Recovery Act to establish some 700 industrial cartel codes that forced consumers to pay above-market prices for goods and services. Moreover, he banned discounting by signing the Anti-Chain Store Act (1936) and the Retail Price Maintenance Act (1937).

8. Why did FDR break up the strongest banks? FDR broke up the strongest banks, which diversified with both commercial banking and investment banking. FDR's federal deposit insurance didn't stop bank failures, but it transferred the cost to taxpayers. About 90% of bank failures occurred because of unit banking laws that prevented small banks from diversifying through branches. Canada, free from branching restrictions, didn't have a single bank failure during the Depression.

9. What was the point of New Deal securities laws that made it harder for employers to raise capital and didn't help investors to do better? Employers desperately needed to raise capital, but FDR made this harder. New Deal securities laws led to costly regulations for issuing stocks. These laws impeded the raising of capital. The rate of return from new stock issues failed to improve after the SEC was established.

10. How did the Tennessee Valley Authority become a drag on the economy? FDR taxed 98% of the American people who didn't live in the Tennessee Valley, then used this revenue for the TVA power-generating monopoly, exempt from federal and state taxes and regulations. But non-TVA Southern states such as North Carolina and Georgia grew faster than TVA states, because there was a faster exodus out of farming and into manufacturing and services, which offered higher incomes.

11. Why did FDR disrupt companies employing millions? In 1938, FDR authorized an unprecedented barrage of antitrust lawsuits against about 150 employers and industries. FDR had big employers tied up in court, discouraging investment for growth and jobs.

Mr. Livingston’s imagined cure for the problems of the world appears to be more compulsion of one sort or another. Apparently denying the right to work, he wants to force more people into compulsory unionism. He wants to force more people to pay for other people’s schooling. He suggests that he might suppress the freedom of Americans to get bargains wherever they can find them, including suppliers based overseas.

In promoting more compulsion, Mr. Livingston seems to assume that government officials are smarter, wiser and more idealistic than the dummies paying taxes. Yet chronic corruption at all levels of government shows that politicians pursue their self-interest like everybody else. They develop a lust for power. When possible, as in the U.S. Congress, they retain their power for decades. Incumbent politicians manipulate the drawing of election districts in an effort to minimize the impact of their opponents. Some politicians, like John F. Kennedy, Bill Clinton, Jim McGreevey and Eliot Spitzer, have exploited their power for risky sex. Other politicians simply grub for money, like Illinois Secretary of State Paul Powell who died leaving some $900,000 cash from his bribes, or Connecticut governor John Rowland who was imprisoned for his bribes. Congressmen were long able to exempt themselves from the inconvenience of complying with many laws they imposed on other branches of government, on businesses or ordinary folks. Politicians bungle all sorts of things including construction jobs, flood relief and wars. If history teaches anything, it’s that there’s no reliable way to keep bad or incompetent people out of power, and therefore power must be limited to protect us from politicians.

James Livingston - 4/10/2008

Steele is probably wrong--unemployment was about 14% according to my estimates, based on Historical Statistics and older works on the Great Depression.

But your point is correctamudo to the max. Output, national income, etc. were back to 1929 levels in 1937 (and in view of price levels, had exceeded 1929 levels), but employment was still stagnant.

Doesn't that make my point? Unless you insist that a recovery in terms of employment would have required increased net investment and its antecedent, higher profits--but then there are those pesky figures on capital endowment per worker, ca. 1929-1960.

My fundamental point is that profits and investment are irrelevant to growth unless they feed somehow into increased mass consumption; in the 20th century, and in our own time, they have fed into increased consumption in only one way, and that is through speculation in bubbly markets.

The other path is redistribution of income under government auspices--as happened in the 1930s. But here "government auspices" doesn't have to mean statist command of markets. It must mean sponsorship via policy and law of mass consumption, but, in view of the central (and very liberal) principle of American politics--the supremacy of society ovwer the state, the sovereignty of the people--it can't mean the obliteration of the line between state and society in the name of equality.

You should go back to my original postings on this topic, starting in late August of 2007.

William J. Stepp - 4/10/2008

Recovery from the Great Depression was almost complete by 1937 [...]

According to John Gordon Steele's article on the Erie Canal in this week's issue of Barron's, unemployment in 1939 was over 17%. Doesn't sound like much of a recovery.

James Livingston - 4/9/2008

Well, shoot, another admirer of Murray Rothbard is at large! I love his critique of Hoover.

Mises and Hayek, both of those vons, are important countries on the map of 20th-century economic theory, but my man Irving Kristol--the founding father of so-called neo-conservatism--redrew their boundaries in his amazing book of 1978, Two Cheers for Capitalism, which you, you Austroid, must know.

Therein, as you recall, he sketches a post-Friedman/post-Hayek conservatism by showing that their adherence to liberty via markets foreclosed a devotion to justice via politics--and that it was a self-conscious foreclosure. It was also a huge irony because market societies are always political societies, as every observer from Aristotle to Lindblom to Kristol has understood.

It was a huge irony as well because the USA is animated by the weird idea that liberty is impossible in the absence of equality. Kristol, an American patriot through and through, opted for justice--a modulation of market forces in the name of equality--and in doing so got us beyond the indecently innocent conservatism of Friedman (and his Hayekian sources).

Thus was born a neo-conservatism that was, and is, neither Left nor Right.

William J. Stepp - 4/9/2008

Well, actually, as an Austrian (or Austroid, the flipside of a Marxoid)
my High Churchman is my main man Ludwig Mises (by way of Hayek).
I bypassed the Church of Monetarism when I got mugged by reality--or Comrade Rothbard's rendition of it.

I will check out your book even if I do disagree with the factoid/theory dichotomy, for reasons set forth by Comrade Mises in his book Theory and History, a book 'oids of all persuasions should peruse.

James Livingston - 4/8/2008

God, I love it when the monetarists come out of closet. Bernanke has, as I said in the piece, endorsed Friedman's daffy interpretation of the Great Depression. Greenspan has not, to my knowledge.

The big problem with MF's interpretation--or should I say Anna Jacobson Schwartz's interpretation--is that he treats the G.D., as you so nicely abbreviate it, as just another business cycle, when in fact it was the watershed event in a radical redefinition of economic growth.

I can't convince you here, mainly because you still believe that profits translate into investments into jobs into incomes into spending into demand. You're wrong, but you'll never know that because in theory you're correct, whereas in history you're out to lunch.

Please do check out--and I mean this as a library loan--my book, featured here, which explains the G.D. in chapter 4 better than I've ever seen elsewhere.

But if your theory can't accommodate "the facts on the ground," as we now say too often, what then? Should we just ignore the world as it actually exists in the name of ideological or theoretical purity?

Once upon a time, a church did that. You want to stand with it, or with Galileo?

William J. Stepp - 4/8/2008

You refer to Milton Friedman's monetarist explanation of the Great Depression as "daffy," but if I understand Bernanke, he too accepts it. Do you seriously think that the decline in the money supply by a third, engineered by the Fed, had no causal role in causing it?
And the only cogent explanation I've seen for the unprecedented collapse of the U.S. banking system during that time was the existence of state anti-branch banking laws, which limited the growth of banks (and their ability to innovate btw), and denied them access to the capital that would have helped them stem bank runs.
(As a friend of mine put it in the early 1990s, there was nothing wrong with the U.S. banking system that about 4000 mergers wouldn't have solved. He was referring to the 1990s, not the 1930s!)
From 1931 to 1935, 22 states repealed these laws, which strengthened the banks considerably, and made the possibility of a repeat nil, even in the Age of Easy Al.
Canada had no such laws and suffered no bank failures duing this time; it had only one bank failure in the previous decade and that was caused by fraud. Canada didn't saddle itself with a central bank until 1935.
The Keynesian balon, er triloney is wholly unconvincing as an explanation of either the cause or the duration of the G.D.

James Livingston - 4/8/2008

I think I did this already. But, what the hell. Paul Krugman is a great intellect and a fine columnist, and he's also wrong most of the time. My criticisms of him derive and proceed from his left.

William J. Stepp - 4/7/2008

Krugman blames lack of regulation far more than he blames Greenspan. Just read his NY Times columns.
Oh, and since he was hired by Bernanke in his present job, he will never, ever criticize the Fed Chairman, at least as long as he stays at Princeton. If he had any integrity, he'd never write a word on the Fed while Bernanke is in his current job.
Letting Bush's tax cuts expire won't solve whatever economic problems there are.
Btw, just for the record, in 2005 the lowest 40% of income recipients in the U.S. had a negative tax rate.
See Geoff Colvin's column "The Tax Debate We Should Be Having" in the April 14 issue of Fortune, p. 34.
Under Bush's tax cuts, the poor had their taxes cut by more than the rich did.
Naturally Krugman will never report this fact.

James Livingston - 4/7/2008

Yeah, sorry, it was a last-minute indulgence, and it was my idea. Does it matter to you that we did the Edinbergh trip in one tidy, cheap day, including nine hours on the train to and from?

But speaking of how to finance social mobility, are you sure you have nothing to say about the larger issues of banking, credit, and the future of capitalism?

Again, I plead guilty as charged--Tourism R Us. Oh, and did I mention the National Portrait Gallery near Leicester Square, where American actors and artists are on expensive display courtesy of Vanity Fair? The Tudors, one floor up, look a lot better, unless you get to stand in front of Louis Armstrong and marvel at how omni-American he looks.

Caroline Hill - 4/7/2008

Good grief! yes, the UK is expensive today, but you could have taken a day return ticket on the train from Paddington after 9 AM (return any time after 5) and signed up for a tour in Oxford itself for far less!

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