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« Some Updates in the World of Austrian Economics | Main | Who are the Dogmatists and Ideologues Now? »


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Hoover was an interventionist, and so too was FDR. Under Hoover the economy crashed, yet under FDR it improved, albeit not by much. If market interventions are a bad thing, why didn't the economy plumb lower depths under FDR than Hoover?

This is so obvious that even Roosevelt’s running mate, John Nance Garner, charged that Hoover was “leading the country down the path of socialism.”

Now, certainly FDR out did him but Hoover was New Deal Lite--he paved the way. I really hope she accepts your generous offer.

WT, If it may take first crack at your question, you need to get Estey's 1950 book "Business Cycles." In has a great chart of business cycles from 1790 to 1949. There were 47 of them.

How was it possible for the economy to recover each time without state intervention?

Great article! Thanks!

Reading Shlaes' "Forgotten Man" I learned that Coolidge called Hoover's efforts to rescue the economy socialist. I had to put down the book and laugh out loud. Coolidge could see it when few today can.

Those who write history win the ideological and policy debates.

(1) after a crash the economy will tend to recover and find growth again if allowed to at all (in 1920-1921 a very deep crash recovered in just over a year when the state kept out of the economy); 1929 was a deep crash and there was much room for recovery; arguably it was due to Hoover and Roosevelt that it took so long to recover; also, arguably real recovery did not come until 1946-8 when labor market and trade controls were almost entirely lifted. Before that GDP was artificially boosted but living standards barely improved.
(2) FDR did not do everything wrong; for one thing he lifted many protectionist policies..
(3) There are a whole lot of monetary questions and a problem of accurately determining growth and inflation.

Dave B,

I believe that John Nance Garner also accused Roosevelt of leading the country to socialism after he was no longer FDR's VP. It might be interesting to find out more about Garner.

Herbert Hoover's acceptance speech at the 1932 GOP convention is an excellent summary statement of all of his interventionist policies.

This is an excellent post by Steve.

It's helpful to remember that markets naturally recover. Economic growth is the norm. So economies that do not grow (or decline) are being repeatedly shocked by bad policies (or natural disasters). That was true in the 1930s and is true today.

Thanks for the tip Mario.


I post here a graph showing in both nominal and real terms federal expenditures and revenue from 1925 to 1935. Call it the "tongs" graph.

Hayek: “The absence of a sound monetary system was another factor that was responsible for the length of the depression. One of the single most important mistakes that unnecessarily prolonged the depression was Roosevelt’s decision to go off the gold standard.

“There was an international monetary conference in progress in London at the time that was on the whole working on a proposal along the right lines. The conference just blew up as a result of the American action. Roosevelt completely upset the whole international monetary system by that decision at just a time when there were some signs of a recovery.”

Hayek interview from Gold and Silver Newsletter 1975 available at

Marginal Revolution linked favorably to a piece on this topic just yesterday.

Of course with a horrendous deflation, the flat nominal spending yields a real increase.

@McKinney : but international comparisons have identified a different result. Countries quickest to leave the gold standard suffered less lengthy depressed activity. Ben Bernanke summarizes the research at the link below:

Jonathan, that could be a post hoc fallacy. The US went back on the gold standard in 1935. If gold was the problem, whey didn't the economy immediately tank?

And the US didn't need to leave the gold standard in '33 to increase the money supply. Gold was flowing into the US but the Fed was sterilizing it.

Thanks Mark.

Would you rather have surgery performed upon you by a Kaynsian surgeon who believed that bleeding wasn't a problem because the body produces an endless amount of blood all the time, or a Hayekian surgeon who believes that blood circulates in a close loop, hence large losses of blood could be dangerous if not deadly?

I'm with the latter.

McKinney:I agree that that is possible but I think Bernanke makes a reasonable case for causality. I wouldn't say "gold was the problem" but defending the standard by raising interest rate certainly had negative consequences in the real economy.

Austrians should explicitly address the principal flaw in their theoretical system: the assumption that increases in savings lead inexorably to increases in investment. Any investor familiar with financial markets can point out to you that the stocks-flow analysis undermines completely the ISLM model and, by extension, the Austrian Business Cycle Theory. Professor Horwitz knows all about this, or at least he should, since he debated this very topic with Greg Hill in the pages of Critical Review. Unfortunately, the debate seems to have been lost on Professor Horwitz since Mr. Hill wrote, and I quote, "Horwitz does not come to grips with this problem (he does not even mention it), but as long as the interest rate remains tethered to the expectations of those who hold the pre-existing stock of financial assets, it cannot effectively carry out the task assigned to it by the neoclassical and Austrian schools."

"The rate of interest is what it is because it is expected to become other than what it is. If it is not expected to become other than what it is, there is no reason for it to be what it is. The organ that secrets has been amputed. Yet it survives, like a grin without a cat."

DH Robertson, "Mr. Keynes on the Rate of Interest." (Review of The General Theory)

Going back a little further into the past than the "useful data, well presented" that Tyler Cowen took note of (upthread), I found this same representative of "the left" discussing this same issue. Is he repeating a canard or presenting a balanced view of Hoover's record?

I would certainly rather rely on this evaluation than the statements of an incumbent on the campaign trail about his own record.

Robertson had a way with words.

If this ever happens, remember that it won't be a scientific discussion. Pick three statements - any three - and one insult, and keep repeating them. That's the Chicago way- er, the cable TV way.

"stocks-flow analysis undermines completely the ISLM model and, by extension, the Austrian Business Cycle Theory."

OK, I'll byte, what does the above mean?

"Austrians should explicitly address the principal flaw in their theoretical system: the assumption that increases in savings lead inexorably to increases in investment."

What flaw? Are you serious?

'Austrians should explicitly address the principal flaw in their theoretical system: the assumption that increases in savings lead inexorably to increases in investment.'

"What flaw? Are you serious?"

I'm in the process of writing something about this problem. I'm curious to see how this debate turns out :)

"austrian away" what precisely do you mean by savings not leading to investment? I've been looking into this and I think that Keynesians mean something quite different to what we do.

I'd be interested to hear what Niko thinks it means too.


I am glad to see the interest in my post. I brought this up because the argument against active government involvement by the Austrians is the idea that it is both harmful and unnecessary. It is is unnecessary because the failure to spend does not mean that the private economy is not handling it in productive ways (i.e. by investing it). This is the principal flaw I referred to above. Here are some links that will explain the problem in a bit more detail:

How are austrian-away's assertions different from changes in monetary demand?

It would be good if someone could recommend a piece on the flaws of IS-LM analysis, since that seems to be a typical feature of mainstream analysis.


Jonathan: "defending the standard by raising interest rate certainly had negative consequences..."

Yes it did, but don't think that raising interest rates was defending the gold standard. It was defeating the gold standard.

Gold was flowing into the US. That would have reduced interest rates and expanded the money supply. But the Fed did not want that.

Yes, Bernanke makes a reasonable argument, but he filters his history through Keynesian/monetarist lenses and only reports those elements that support his economics.

Read Rothbard's history of the Great D, or Amity Shlaes' "The Forgotten Man" and you'll learn a lot of history that Bernanke ignores and will give you a different interpretation of events.

yuehan, Dr. George Reisman does an excellent job on IS/LM in his book "Capitalism" which is available online.

"Austrian Away" & Niko,

I don't have much time to talk about this now.

Let's say we have a city with lots of houses in it. There is a "house market", but the houses aren't identical and their surroundings aren't identical. Some houses are in worse areas, or areas that may be at risk of becoming worse. Some may be more appropriate for some people than others. All this means that there is market in houses even if there is no change in the supply or demand. It also means that when new houses are built (or old houses destroyed) that doesn't have a clear and simple effect on the stock of houses. We can't estimate the price of all houses by the price of new ones.

As I understand it "Austrian Away" is saying that the same sort of inhomogeneity applies to savings products (including direct investment and holding fiduciary media). I agree with him there. But, I doubt that Horwitz really disagrees.

I'll say more later.

Bravo! I would be surprised if Ms Maddow does not rise to the challenge.

Jonathan, I think some of Bernanke's confusion about the gold standard comes from his belief that the central bank should control money and interest rates.

But the whole point of the gold standard was that no one would control money and interest except the choices of people in the marketplace.

Central bankers have always seen their role as "protecting" the economy from the gold standard, no supporting it.

I read Greg Hill’s “An Ultra-Keynesian Strikes Back: Rejoinder To Horwitz”. He either doesn’t understand Horwitz or is creating a straw man.

Either way, I think the discussion could be helped with Hayek’s Ricardo Effect. The Ricardo Effect communicates to capital goods producers the message from savers that Keynes/Hill can’t hear.

I thought this was going to be a pistols at dawn kind of deal ... how disappointing.

I thought 'austrian away' was just repeating the Keynesian doctrine that the interest rate(s) cannot be relied on to equate investment with the level of savings. That is, investment is interest-inelastic and is more a function of autonomous feelings of pessimism and optimism than anything else. Nothing new.


It seems obvious to me. Why would people invest -- regardless of how much savings is taking place -- if capitalists are not confident in the prospective yield of their completed, final goods? Ludwig Lachmann was onto something when he said that Keynes was more of a subjectivist than Hayek. The subjective expectations of investors is exactly what he was getting at.

"I thought this was going to be a pistols at dawn kind of deal ... how disappointing."

It would be a historic achievement if we had the first polite discussion about interest rate theory.

A lot of straw men make an appearance here.

I don't know any Austrian that would say increased saving leads "inexorably" to increased investment. Nor do they ignore or overlook expectational theories of interest. They reject such theories. "Interest" is a complex of relative prices determined in goods' markets, and not soley in markets for financial assets.

Steve Horwitz just wrote a paper for the recent APEE meetings. What separated Hayek and Keynes was their respective theories of capital. Tell me a person's capital theory, and I'll tell you his theory of interest.

At ThinkMarkets, I have posted on the related issue of the Keynesian policy response to downturns. I link to a Kevin Hasseett piece on the issue. Hassett is no Austrian, but offers what I call the classical critique of discretionary fiscal policy.

Re, following Jonathan, "Countries quickest to leave the gold standard suffered less lengthy depressed activity. Ben Bernanke summarizes the research...":

The actual facts show differently and contrarily, as can be seen historically from the Gold Block countries relatively breezing through their downturns during the 1930s.* And furthermore, it was the U.S. that went *off* the Gold Standard in 1933, only to face a worsening depression! (The Gold Block countries held-on to gold until 1936, when they finally were forced off by the rest of the world.)

During the Great Depression, the Gold Block countries (Italy, Belgium, Netherlands, Switzerland, France) experienced the worldwide-linked downturns all right, but theirs were mild and relatively innocuous. Why? Because during the 1920s, they didn't engage in the profligate monetary inflating as that of the rest of the world, who suffered subsequent massive & protracted contractions.

* Observed in passing and data for which presented in the monograph, "Monetary Policy Under the International Gold Standard: 1880-1914," Federal Reserve Bank of New York, 1959, Arthur I. Bloomfield, Professor of Economics and Finance at the University of Pennsylvania

cf. Bloomfield, A. I. (1959), Monetary Policy Under the International Gold Standard, Reprinted Arno Press, NY, 1978

It seems that we're all agreed that we can't use a very simple model for the interest rate. What we're concerned with here though isn't any specific rate of interest and how it behaves, but the transformation of savings into investment.

In one of the posts that "Austrian Away" links to he quotes a passage by Fiona Maclachlan, a Post Keynesian I hadn't heard of. I agree with him that it's quite good, I might use it in my article.

She wrote: "On any given trading day, a certain number of bonds are sold to raise money to purchase investment goods and a certain number are bought to serve as a vehicle for new saving. But then there are trades that are unrelated to the current flows of investment and saving. Existing bonds are bought and sold by wealth-holders who are only rearranging their existing portfolios. It is customary to think of the latter type of trading as speculation. The primary motivation behind much of the trading is the expectation of securing a profit from future price changes. ... In an economy in where there are a large number of speculative trades between cash and bonds, there arises the possibility that, in any period, the non-speculative trades arising from saving and investment are overwhelmed to such an extent that they exert little effect. Such a situation could arise when speculators are highly responsive to small changes in the interest rate. Suppose, for instance, that there is a sharp increase in corporate investment causing an influx of new bonds into the loanable funds market. Traditional theory would predict a rise in the interest rate. But if speculators are active, they may see a small change in the interest rate arising from the new bond issues and immediately respond by selling or buying bonds: those who think that the small rise is an indication that bond prices have peaked will sell and those who think that it is an indication that they are on an upward trend will buy. No-one can say a priori whether the bulls or the bears will dominate but what one can say is that the resulting level of the interest rate will probably be different from what it would be if the speculators were not involved."

Above I gave an analogy to the market for housing in a city. That analogy was meant to say pretty much the same thing that Maclachlan says here. There are only two parts I would really disagree with Maclachlan about. Firstly, her characterisation of "traditional theory" which relies on Keynesian stereotypes. Secondly, she talks about an "interest rate", but the world she describes is one where there are many different returns on different assets. She must pick a market to be "the" interest rate such as the interbank market, or alternatively make it into a sort of platonic form (which is what Mises does).

Those of us who are steeped in the "ceteris paribus" way of thinking wouldn't look at it in the same way Machlachlan does. What Maclachlan is talking about here is really a change in demand for loans and a change in expectations that occur closely spaced in time. Though if you look at it that way you don't think you reach very different conclusions, it's just more normal.

I think the problem that Post Keynesians fear is that investors don't want new assets. Instead they want existing assets, perhaps because they're seen as less risky. I think that Post Keynesians then worry that increases in savings will lead to a rise in the price of existing assets rather than an increase in investment spending. This seems to be what Greg Hill is worried about in the first quote "Austrian Away" gives on his blog post on stocks and flows. (I'm not sure what to make of Greg's second quote though).

As an extension of that idea perhaps normal savers want balances in banks. Those are fractional-reserve banks, but the bank managers don't believe that they can trust new bonds to act as capital, so they buy existing bonds. To me this is a sensible thing to worry about.

In my opinion there is a part of this worry that's correct and a part that's incorrect.

The incorrect part concerns money. Suppose I hold a bond, and I decide that it's too risky so I sell it. That means I then hold money instead of a bond. If I keep that money then that means my demand for money has increased, in that case we have a monetary equilibrium type problem. In that case my bank may increase it's lending due to my increased lending to it. If I spend the money on investment goods then I have invested and there is no problem. If I spend the money on consumption good then I've dissaved and consumed, and there is no problem. If I spend the money on a different sort of existing investment then the person who recieves my money is in exactly the same position I was in the start of this paragraph. We can't really get to the problem by starting here.

The correct part concerns a shift in the relative demand between existing assets and constituents of GDP output. Instead of selling a bond suppose that I earn £1000 and I save it in a bank account. The loan officers in my bank are too cautious to chase new business, so they invest in existing bonds bidding up their price. This is what Keynesians call "leakage from the output flow". This could also happen directly if I were to invest it in existing assets myself. That is, there may be a shift in demand between outputs and existing assets in favour of existing assets. To the extent that some of those existing assets are not reproducible quickly that may produce a decrease in investment and therefore in GDP.

I'm not particularly worried about this though. What's happening here is that the appetite of investors for risk is not great enough to sustain as much new investment as before. This is not necessarily a bad thing.

McKinney: Thanks for your replies. I would have been more correct to say "defending the dollar" with the hike in rates, however, my understanding is that this defense was an attempt to preserve the system of the gold standard which as Bernanke points out had just crumbled in Great Britain. Note that Bernanke is referring to a very specific time period (Sept. Oct. 1931) when "...central banks as well as private investors converted a substantial quantity of dollar assets to gold." So I think your more general statement that "gold was flowing into the US", while true over a longer period, obscures Bernanke's point. I do have Rothbard's book and will find the time to give it another look. Thanks for the suggestion.

George Machen: I do not see data supporting the idea that the Gold Block countries "relatively breezed" through their downturns. Figure 1 p936 of Eichengreen and Sachs (1985 Journal of Economic History) presents findings in dramatic contrast to that assertion.

Reading from the chart (values are eyeball estimates but rankings are exact) the index of industrial production in 1935 (1929=100) is 1. Finland (126) 2. Denmark (125) 3. Sweden (123) 4. UK (112) 5. Norway (108) 6. Germany (101) 7. Italy (97) 8. Netherlands (92) 9. Belgium (72) 10. France (71)

The analysis in the paper relates these numbers to exchange rate flexibility.

Note that countries ranked 7, 8, 9, 10 were in the Gold Block and had indices below 100. Great Britain and Scandinavia the 5 best performing economies left the gold standard in 1931.

Eichengreen and Sachs do not incorporate US data but looking at US industrial production data in the 1930's (
one can observe a rapid and dramatic increase in starting in 1933. This undermines the contention that US faced a "worsening recession" at this time.

Quoting Bernanke on the US experience: "With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly."

What did he mean by "the economy"?

FC: if "he" is Bernanke then I think the answer is real GDP.

Bernanke: "During the major contraction phase of the Depression, between 1929 and 1933, real output in the United States fell nearly 30 percent."

Steven you don't want to Bleep with Rachel she will tear you a new one consider this a warning she is goos at what she does

Bill King,

"[G]oos [sic] at what she does?" Oh, you mean falling for Internet hoaxes?

Keep dreaming, mate. If Steve Horwitz goes mano a mano with Rachel Maddow, my money says Horwitz will have Maddow in a verbal headlock within three minutes.

My father always regretted voting for FDR in 1932. However Roosevelt ran to the right of Hoover in that election.

Mark J: As long as Steve has a credible answer for this question he has a chance, "If Congress in 1931 passes a large benefit program for war veterans, and if Hoover vetoes it, and if Congress overrides the veto, and if the money is spent, does Hoover increase spending?"

I am not saying he doesn't. I just haven't seen it addressed here. Links are upthread.

"If market interventions are a bad thing, why didn't the economy plumb lower depths under FDR than Hoover?"

FDR did a lot of things that hindered recovery, but he did one thing right that Hoover never dared to do--FDR neutered the Federal Reserve, which, influenced by the real bills doctrine, thought that money should decline with output. He did that by taking the U.S. off gold, and then revaluing it so that gold flowed into the U.S. The whole story of Fed incompetence is told by Friedman and Schwartz in their classic Monetary History; Alan Meltzer fills in some gaps but supports their conclusion in this History of the Federal Reserve.

They know this. I believe they absolutely know that the truth. And as soon as someone presses back against it, they change the subject or they mumble something about 'Hoovervilles' and move on.

Check out when Chris Matthews realizes that he used that claim on the wrong person and how he quickly jumps to another President when Ron starts to explain the Hoover fallacy.

Ryan: I still have not heard anyone give a reasonable response to the issue raised by this question:

"If Congress in 1931 passes a large benefit program for war veterans, and if Hoover vetoes it, and if Congress overrides the veto, and if the money is spent, does Hoover increase spending?"

see link upthread: (search "Marginal Revolution")

If the Hoover Administration was using counter cylical spending as early as 1929, does this mitigate the historical importance the publication of Keynes’ General Theory (1936) for the economy?

When Franklin Roosevelt first ran for president he still echoed (Adam) Smith. “Let us have the courage to stop borrowing to meet continuing deficits,” he said in a radio address in July 1932. “Revenues must cover expenditures by one means or another. Any government, like any family, can, for a year, spend a little more than it earns. But you know and I know that a continuation of that habit means the poorhouse.”


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