Labour’s aspiring would-be leader David Cunliffe continues to head around the country pretending he knows what he’s talking about, disgracing himself in his first speech with his lack of learning and absence of economic nous, an experience he repeated in front of yesterday’s audience of receivership and liquidation lawyers—reciting history that wasn’t so and economics that never could be.
I still maintain his future lies in poetry.
Let’s see however if we can’t correct some of his latest error-ridden diatribe. He begins with cloth-cap boiler plate before settling into his main theme:
Anyone who seriously believes that the economy can somehow heal itself by being left alone, hasn’t read a newspaper for the last 12 months.
And anyone who thinks the economy has been left alone hasn’t read a newspaper—or a history book—for some time. But this is the level of his flawed analysis, in which virtually every sentence is either a lie, or spin, or just frankly mistaken. He either believes it, or he’s even stupider than the cat’s arse he looks like. [Cunliffe’s drivel appears below in italics, followed by my comments.]
No one these days [he says] seriously believes that a totally unregulated economy will work. Just as important, no one seriously believes that a totally regulated economy will work. It’s a question of getting the balance right.
This is three canards in one, isn’t it: Two straw-men coupling with an attempt to posture as a man of balance. (“Look at me, I’m a moderate!”) But the fact is, while there are any number of ridiculous regulations that helped cause the crash and that still burden the recovery,* despite his posturing Cunliffe doesn’t suggest removing any burden—but only adding more.
The Great Depression [he says], for those who haven’t studied history, was caused by a lack of government regulation.
Well, it’s clear Cunliffe has never studied history. The Great Depression—America’s Great Depression (which was where it began and where it took longest to recover) did not persist for lack of any regulation; it was spun out and spun out by an endless series of regulations pouring out of the White House—regulations to keep wages high, to keep prices high, to cartelise industries, to confiscate gold, to confiscate agricultural produce, to pick winners and subsidise losers, to create a business environment of such complete “regime uncertainty” that no-one (not even the President) knew from one day to the next what what would happen the day after tomorrow.
The 1929 stock market crash triggered an economic tsunami that all but flattened America. Just like now, it was the ordinary people that bore the brunt of the crash and the depression that followed it.
And, as if the crash itself wasn’t bad enough, the government still refused to intervene, so the situation got worse.
The 1929 crash was not the biggest economic crash in history. It was not even the biggest crash in that decade. In 192o the stock market fell further and faster than in 1929—and the collapse in the monetary base during 1920–1921 was the largest in U.S. history—yet within eighteen months recovery was complete.
Further, and for a variety of reasons (some of them involving a sick and lame-duck president and a Fed still reluctant to destroy their currency) in 1920-21 neither government nor Federal Reserve Bank “intervened”—in fact in every sense they did the very opposite of what Cunliffe now recommends: the government slashed its budget, the Fed hiked interest rates, and the Consumer Price Index dropped like a stone. And the situation rapidly got better, mostly because costs came down as prices came down and businesses had the certainty and lower costs within which to redirect production into new and more profitable ventures.
Things got better, and fast.
So that’s what happened when there was no “intervention.” And like a laboratory experiment we can contrast it with the prescription tried a decade later, because what was tried there was virtually the diametric opposite with results as grim as described by Cunliffe:
Bank after bank collapsed, along with the millions of families who had entrusted those bankers with their life savings.
By 1933, 11,000 of the United States’ 25,000 banks had failed. That’s nearly half.
People had no money…And so it went on, and on, and on, until, by 1933, nearly 13 million Americans were unemployed. That was a quarter of the total workforce.
And what was the government’s response: nothing.
Yes, bank after US bank collapsed. 9,646 in all (Cunliffe’s figure is just made up for effect.) They collapsed because the government was doing something: with regulations on branch banking and gold holding it was getting in the way. When nearly half of US banks were failing, how many banks do you think were failing over the border in Canada, where the same regulations weren’t imposed? Answer: not one. The government’s own banking regulations amplified the problem.
And do you know why 1933 was the nadir for banks? Because the incoming president, Franklin Roosevelt, had put it about for months since his election (it taking months for the new president to be inaugurated) that upon his inauguration he would devalue the dollar and confiscate gold, rumours he put about that caused the biggest run on the banks since the Civil War.
And what was the government’s response? Well, it was far from nothing. From 1929 to 1933 Hoover did the exact opposite of sitting on his hands. He was virtually Keynes-Lite, as he himself boasted in his 1932 presidential campaign:
We might have done nothing [said Hoover]. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.... For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered.... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.
Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for ... "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom.... We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.
Featured in Hoover's plan were increased taxes, lowered interest rates, huge deficits, public dams, public works, restrictions on immigration and trade, and government regulation of banking, finance, industry and labour markets—even his 1932 opponent Franklin Roosevelt accused him (accurately) of “reckless and extravagant” spending, of thinking “that
we ought to center control of everything in Washington as rapidly as possible,” and of
presiding over “the greatest spending administration in peacetime in all of history.” It was all of it—all the spending, all the alleged “stimulus”—all an attempt to keep up wages and prices and keep the engine ticking over in the manner to which Cunliffe suggests we do today.
It failed. It failed spectacularly.
By 1933, nearly 13 million Americans were unemployed. Yet when the Second World War began, after eight years of further intervention by Franklin Roosevelt (whose advisers conceded their New Deal was based on the “Hoover New Deal”) , nearly 12 million were still unemployed (unemployment had never dropped below 20% for the whole of the decade) and Roosevelt was to embrace a world war as a way to get the unemployed out of his hair.
Cunliffe '”quotes” Hoover’s Treasury Secretary Andrew Mellon (“by curious coincidence, one of the wealthiest men in America” sneers Cunliffe) who was supposed to have advised Hoover to “liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system.” Fact is, it would have. But the “quote” was actually Hoover’s, and it was him contrasting the “liquidationist” programme of the type followed in 1920 with the “interventionist programme” followed by Hoover and Roosevelt from 1929 to 1933, and 1933 to 1945 respectively.
Cunliffe neither knows nor cares about the truth. He says
the voters threw out Herbert Hoover and voted in Franklin D. Roosevelt. Roosevelt heavily intervened in the economy, regulated the banks and the stockbrokers, and set America on the path of its longest period of economic growth in history.
But as Roosevelt’s own Treasury Secretary Henry Morgenthau summarised for a 1939 Treasury meeting the results of this heavy intervention and regulation
“No, gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work. ...I say after eight years of this Administration we have just as much unemployment as when we started…Mr. Doughton: And an enormous debt to boot!
HMJr.: And an enormous debt to boot! We are just sitting here and fiddling and I am just wearing myself out and getting sick. Because why? I can’t see any daylight. I want it for my people, for my children, and your children. I want to see some daylight and I don’t see it…”
From Cunliffe neither do we see daylight, only dishonesty. For it is from shibboleths and myths like this he hopes to assemble around himself a braindead mob of zealots eager to accept him and his word as sufficient unto itself to lead him to Prime Ministerial glory—for make no mistake, that is his ambition.
There is more, much more in his speech that challenges both the historical record and the patience of his audience. But since he is going to continue going around the country stirring up ignorance, might I suggest just four questions you might ask from him if you have the misfortune to find yourself in a room with him and a microphone up front. Ask him,
- Why did the US economy recover so quickly in 1920-21 by following the opposite of his prescription?
- How was it that England. Australia, Canada and New Zealand followed more conventional, less interventionist policies than the US and were out of Depression by 1934/45?
- Why was it that no Canadian banks failed in 1929-33, while US banks were falling over like so many houses of cards?
- Why was it that when US government sending plummeted in 146 and deficit spending ended, and 10 million US servicemen came home from the war, why was it that instead of the economic disaster predicted by Keynesians at the time this was instead the beginning of real prosperity?
Because the answer to every single one of those simple questions undermines the whole premise on which Cunliffe’s Five Year Plan rests.
* * * * *
* Indeed, the three most regulated parts of the US economy were housing, mortgages and banking; no surprise then that the crash happened at the intersection of all three.
The question is not regulation or not. It’s about what governments can and must do to protect individual rights, property rights and contracts—to protect actions chosen voluntary and production about the separation of state and economics , and after a century of ever-increasing government regulations and spending, do Americans think the obvious solution is to increase government regulations and spending? Why, when companies in the least regulated industries prosper and those in the most heavily regulated industries struggle and fail, do people blame failures on capitalism and free markets?a large number of quite smart people understand it is not a matter of regulation per se
** The best, most concise debunking of what many people think they know about the Great Depression can be gleaned from Larry Reed’s short ‘Great Myths of the Great Depression,’ online in a 28-page PDF.