The Politically Incorrect Guide to the Great Depression and the New Deal

The three star rating is really an act of charity. Mr. Murphy’s work has its points. The book is very readable, generally quite interesting, and sometime makes valid arguments. Mr. Murphy is good in pointing out the errors of many of the policies of Presidents Hoover and Roosevelt in combating the Great Depression, including the Hawley Smoot Tariff Act, The National Recovery Act, and the attempts to maintain or raise wage rates during depression conditions. Mr. Murphy’s work also contains some very interesting material on the effect of World War II on the economy. He also provides interesting references and sources. However Mr. Murphy also tells some whoppers.

First, there is the gold standard, or really two gold standards. There is gold standard bliss, which supposedly existed before World War I. In it all nations played by the rules which meant that countries with trade surpluses would not merely store the excess gold but raise interest rates and increase their money supplies to lower the gold inflow and relieve trade deficit countries from experiencing major recessions to wipe out their trade deficits. Prices and wages would be perfectly adjustable to signals from the market and allow for rapid adjustments to any major trends in the movement of gold reserves. There would be peace, harmony, love, ease in foreign travel (at least by the wealthy and the elite), and no bad breath.

Unfortunately gold standard bliss could not last. Humans are not angels. War appeared in the form of World War I. Belligerent countries had the choice of maintaining gold standard bliss or producing the necessary munitions to avert defeat. To produce these munitions, a belligerent nation would have to reduce production in export industries, increase some imports, reduce the labor force by sending much of the manpower into the military. The belligerents chose the later path. Thus the exit from Eden.

Then there is gold standard deficient (or can I say gold standard piss) which prevailed in the 1920s and 1930s. In this fall from heaven gold surplus countries like the United States and France no longer played by the rules, the British pound was overvalued, and cooperation between countries was poisoned by reparations, war debts, the Versailles Treaty, and national hatred and jealousy. Often the financial authorities reflected popular opinion by putting their own national interest first and let the rest of the world be damned. Prices and particularly wages were no longer rapidly adjustable. The result was deflation, unemployment, and human misery. This was the gold standard deficient no longer administered by angels but by humans.

Mr. Murphy concedes that the countries in the 1930s that went off the gold standard sooner began their recovery from the Great Depression faster and slashed their unemployment rates much faster. This fact was explored and verified by Barry Eichengreen Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (NBER Series on Long-Term Factors in Economic Development); Charles Feinstein, Peter Temin, and Gianni Toniolo The World Economy between the Wars; Liaquat Ahamed Lords of Finance: The Bankers Who Broke the World; and Benjamin Bernanke Essays on the Great Depression. Yet Mr. Murphy accuses the 1930s politicians and economists who led their countries off the gold standard deficient of not seeing “the big picture”. In other worlds they should focus on the ethereal gold standard bliss rather than the real world gold standard deficient.

Actually the Pre World War I gold standard was not completely gold standard bliss. Recessions occurred every five years in the United States with a major recession every twenty years. The recession of 1895 was one very big recession. William Jennings Bryan and others described how this gold standard hurt farmers. It was not all peaches and cream.

Moreover the Pre World War I gold standard was a historically specific institution. The Central Banks of the United Kingdom, France, and Germany, the major powers of the time, consulted each other and acted together to initiate financial policies to keep the gold standard working. In particular the Bank of England, the major industrial power, was the bank of last resort whose activities stabilized the gold standard. Labor unions were not powerful enough to keep any central bank from effectively lowering wages when the bank thought such action necessary to the stability of the system. See Barry Eichengreen Globalizing Capital Globalizing Capital: A History of the International Monetary System (Second Edition). I am afraid the gold standard bliss when carefully examined becomes more and more of a mirage.

Then Mr. Murphy does not do justice to John Maynard Keynes and his economic theory. Mr. Murphy only refers to Keynesian economics as perpetual government spending advocates. Such a label applies to some vulgar Keynesians. But really Keynes was much more sophisticated. Keynes, like most economists, claimed that money supply generally strongly determines economic output and employment. Where Keynes differs is in the Investment function. Non Keynesian economists often believe the interest rate determines investment. Thus interest rate adjustment can equalize investment and savings. Keynes thought differently. He believed that investment is strongly influenced by the expectations of investors of future economic conditions and future rates of return. Thus sometimes the adjustment of the interest rate can be inadequate to equalize investment and savings and bring about full employment. This Keynesian theory is completely ignored by Mr. Murphy.

Then there are the actions of the Federal Reserve from 1929 to 1933. Supposedly the Federal Reserve was an expansionary force because it decreased interest rates. And Mr. Murphy seems to presume most economists believe these interest rate reductions should have stimulated the economy (p. 78). However Mr. Murphy ignores that Keynesian and monetary economists focus on the money supply, not interest rates. Thus even though interest rates declined, money supply continued to fall. The other economists are right, the Federal Reserve was still deflationary. And it was the constraints of the gold standard deficient that kept the Federal Reserve from being more expansionary.

Then there is Mr. Murphy’s description of the recession of 1920 when interest rates rose and the economy still recovered from the recession fast. Mr. Murphy does not mention that the nations of the world had not tried to return to the gold standard yet, after leaving it during World War I. He also neglects to mention that prices and wages in this postwar period were quite flexible.

The book is interesting but often fallacious.

Rating: 3 / 5

This a great read! If you want to know what our history books never told us about the Roaring Twenties and the Great Depression, this is the book to buy. All the data that show the Bush/Obama presidencies to be re-runs of Hoover/Roosevelt. Easy to read, but well researched.
Rating: 5 / 5

This book is nothing short of absolutely fantastic. Having actually heard Robert Murphy speak at a luncheon recently, I am all that much more impressed. Dr. Murphy lays out the facts and the fallacies piece by piece and clearly outlines why. His points are so incredibly clear and concise that it really makes this book a page turner (which I thought could never be said about economics). I STRONGLY recommend this book for anyone. Especially those that may not buy whole-heartedly into New Deal policies but still grasp onto the other untruths such as WWII getting us out of the depression. If you have a college degree in economics you need to read this more than anyone else! Truly a must read if you want to know all there is to know about the New Deal and the Great Depression.
Rating: 5 / 5