Did World War II Help End the Great Depression?

Much as I admire Robert Higgs’s work, I suggest clarifying two points he makes in the October 2008 Freeman. Higgs says that World War II did not end the Great Depression; genuine prosperity did not return until after the war. But the Depression did give way to wartime full employment. Saying so does not deny that war is hell, as General Sherman said, and a hell of a way to end a depression.

Higgs downplays how money and other liquid assets created during the war contributed to postwar prosperity. He notes that holdings of them “did not decline at all after the war.” But they did not need to decline to have their effect. Their continuing in circulation, lubricating transactions in goods and services, helped restore production and employment.

Higgs’s understanding of why the “Great Duration” dragged on through the 1930s, while not the whole story, deserves to be widely shared.

-LELAND B.YEAGER Auburn University (Emeritus)

Robert Higgs replies:

I do not dispute Professor Yeager’s point that “full employment” returned during the war. I insist, however, that this employment be kept in proper perspective. The government’s withdrawal, mainly by conscription, of almost 20 percent of the labor force into the military and its acquisition of war-related goods and services, which occupied another 20 percent of the labor force, had everything to do with the disappearance of unemployment. This employment situation was extraordinary in many ways and could not have been sustained for long without wrecking the economy.

My point about the liquid assets that “did not decline at all after the war” was intended only to explode the simplistic, but oft-embraced, myth that postwar prosperity reflected the “release” or “liquidation” of such assets accumulated during the war. The assets that one party sold, another party acquired, and in nearly all cases both parties to the transaction were Americans, so no assets were “released” from the overall U.S. economy.

Professor Yeager’s claim that the war-spawned liquid financial assets, by “continuing in circulation,” “lubricat[ed] transactions in goods and services” and thereby “helped restore production and employment” requires more space for discussion than I have here. Whatever my skepticism, however, I would think twice about debating this question with a monetary theorist of ProfessorYeager’s eminence.

Did the Framers Have Economic Motives?

In his essay in the July-August Freeman, Professor Burton Folsom, Jr., undertakes to demolish Charles A. Beard, “[t]he first historian to challenge the motives of the Founders” as men “primarily in the Constitution-writing business to protect their ‘property interests.’” Beard allegedly did this in aid of making a partially “discredited” Constitution into something to be “changed as the Progressives saw fit.” Further, Forrest McDonald is supposed to have decisively refuted Beard, when in fact he demonstrated the complexity of the issues and the limitations of Beard’s categories.

But if Beard stressed fund-holders excessively, he also described a coalition that also included merchants, manufactures, and land speculators. If he went wrong on a few individuals and made the relation between interests and ideas seem rather mechanical (a boon to his critics), his broad reading can be sustained. Indeed, much of Beard’s case was first made by former Antifederalists like John Taylor. Beard might have done better to follow their lead more rigorously.

Broadly speaking, Federalists had in mind protecting their present and securing their future interests by establishing a mercantilist state that could help them make money. If this involved “the transfer of tax dollars from ordinary citizens,” well that is the nature of public debt. The key was the expectation that the new government could forcibly jack outstanding continental notes up toward their nominal value. This mattered to many actors of the day, whatever the plight of Gorham, Morris, and Few. The beneficiaries might not correlate exactly with Federalists in conventions or elsewhere, but there would be a nice overlap.

In addition, the question remains whether Americans were in any great need of a miraculous “founding” in 1787. Professor Folsom assumes that the Constitution cannot possibly be controversial.Yet conservative, property-owning interests frequently have their reasons for supporting bigger government. And broad powers, once granted, find new uses.

Beard’s hurried approach and simplifications hurt his case, but there are many later quasi-Beardians who have corrected Beard on various details while sustaining much of his reading, for example: E. James Ferguson, The Power of the Purse (1961); Jackson Turner Main, The Antifederalists (1961); Robert Maguire and Robert Ohsfeldt, “Economic Interests and the Constitution: A Quantitative Rehabilitation of Charles A. Beard,” Journal of Economic History (1984), and “Self-Interest, Agency Theory, and Political Voting Behavior: The Ratification of the United States Constitution,” American Economic Review (1989); Thomas Ferguson, Golden Rule (1995); and Jac C. Heckelman and Keith L. Dougherty, “Personalty and Interests at the Constitutional Convention: New Tests of the Beard Thesis” [online].

-JOSEPH R. STROMBERG

by e-mail

Burton Folsom replies:

Mr. Stromberg and I are not in strong disagreement. I do think that Forrest McDonald “decisively refuted Beard” and that Beard’s research errors on Gorham, Morris, and Few support that view. But I also agree with Stromberg that in refuting Beard, McDonald often “demonstrated the complexity of the issues and the limitations of Beard’s categories.” That part indeed constitutes much of McDonald’s argument. Stromberg cites authorities sympathetic to Beard, but many other historians (for example, Robert Brown, Lee Benson, and even Beard’s student Phillip Crowl) are critical of Beard.

Stromberg correctly focuses on the public securities as a key focus of debate. Would the new government, with its new constitution, repay the debts incurred during the Revolutionary War or not? Naturally, Robert Morris and others (McDonald estimates 20,000 holders of public securities) wanted their money back with interest. That was what the agreement was. Thus writing the new constitution was indeed controversial. Those who did not hold public securities had no incentive to foist a new system on the nation that made it easier to write into law new tax bills. Some of those holders of securities ended up at the Constitutional Convention and supported the signing of the Constitution. McDonald’s research is a breath of fresh air because he shows that some of the holders of public securities opposed the Constitution, and others, like Morris, ultimately lost a fortune by supporting repayment of the American debts. The Founders cannot be reduced merely to a self-interested group of wealth holders promoting a new constitution to protect their economic interests. Beard and the Progressives, when they push the discussion in that direction, have oversimplified the issue.

Does Utilitarianism Deserve Bashing?

In an otherwise meritorious article (“The ‘Risk’ of Liberty: Criminal Law in the Welfare State,” September 2008), Michael N. Giuliano parrots the tiresome old bashing of utilitarian ethics. (He sometimes says “consequentialism,” but since versions of utilitarianism make up almost the entire set of consequentialist doctrines, the distinction is unnecessary here.) “The main component of utilitarianism,” Giuliano writes, “holds that the rightness or wrongness of an action is determined purely by its consequences. . . . The law’s reach under the utilitarian mentality is predicated on the belief that the ends justify the means.” Unlike English and American tradition, which recognized personal liberties either preexisting or superseding government power, “The ‘greatest happiness of the greatest number’ rule . . . declar[es] that the ends justify the means. . . . The trek toward greater utilitarianism was in avowed opposition to the natural rights that . . . once ‘morally’ exonerated the humblest citizen in defiance of the highest authority.”

Where does Giuliano get his notions about utilitarianism? Clearly not from the writings of such great philosophers and economists as David Hume, John Stuart Mill, Henry Hazlitt, Ludwig von Mises, R. M. Hare (and F. A. Hayek, who was a utilitarian despite evidently disliking that label). Nor from Aristotle, whose eudemonism foreshadows the soundest strands of utilitarianism. No, Giuliano seems to be thinking, at n-th hand, of an extreme “act-utilitarianism” or “situation ethics,” which would disregard principle and treat each case on its own supposed merits. This caricature version, if ever actually advocated, has nowadays become no more than a straw man for critics to blow down while claiming victory for their own favorite doctrines.

A sounder version, “rules” or “indirect” utilitarianism, recognizes powerful reasons for respecting principles, including those of natural or personal rights; and it distinguishes between good and bad personal characters, thus incorporating “virtue ethics.” This version quite rejects recommending any specific behavior or policy just because its intended good consequences are thought likely to outweigh any bad ones. Instead, it endorses enduring principles like those of Giuliano himself, and precisely on grounds of utility, on the grounds that they are essential to “social cooperation,” as Mises said, the kind of society affording free individuals the best prospects of achieving their various goals in life-in a word, happiness.

Like many of the critics whom he parrots, Giuliano takes Jeremy Bentham as his whipping boy. Not all but much that John Stuart Mill wrote deserves applause, including his essay on “Bentham” (1838). Mill understood Bentham’s distinctive personality. Bentham was good at probing for the exact meanings, if any, of noble-sounding but possibly empty words and slogans. He was good at probing for the rationale of inherited institutions and legal technicalities. But Mill did not think much of Bentham as an original philosopher and regretted the publication of his Deontology. Bentham’s offhand remark about the greatest good for the greatest number, uncharitably interpreted, is indeed nonsense. His faith in the great benefits that suitably instructed legislators could achieve is, as we now see, gravely misplaced. Bentham was far from being the soundest of utilitarians, and it is just wrong to take him as defining what utilitarianism is all about.

Public policy is largely ethics, applied or misapplied. What, then, does Giuliano conceive of as the soundest basis for ethics? Principles of honesty, property, freedom, and rights, as well as the distinction between good and evil, are decisive for a good society and human happiness; but they are not irreducibly intuited ultimates: they can be explained and argued for. Would Giuliano not argue for them? What grounds for them could he find, other than ultimately utilitarian grounds? Conceivably the authors of the policies that Giuliano rightly condemns had the parrot-like misinterpretation of utilitarianism at the back of their minds. That is no excuse, however, for giving the misinterpretation further currency.

-LELAND B.YEAGER Auburn University (Emeritus)

Michael Giuliano replies:

Professor Yeager’s response to my article suggested that the view of utilitarianism represented therein was a “caricature version” that “has nowadays become no more than a straw man for critics to blow down.” The article was referring to a certain species of utilitarianism in order to provide one possible explanation, among several, as to how the welfare state has lowered the threshold of allowable risk such that more and more behavior is elevated toward artificial criminality.

My reason for criticizing this “caricature” version of utilitarianism, this version that is “indeed nonsense” according to Yeager, is that it is the version that legislators and other lawmakers so often adopt if only implicitly and independently of any actual theory. It is rarely sophisticated “rules” utilitarianism that is the force behind legislative crusades. Bentham’s “oversimplified test” involving “Pleasure-and-Pain, or the Greatest Happiness,” as Hazlitt observed, could conceivably be applied in a blind “manner to all traditional ethical judgments.” That much of our legislation follows a similarly sweeping rule was the true object of my criticism.

Bentham was used as the example because these oversimplified tests are, in the most basic way, generally identified with utilitarianism applied in the more common situational and legislative settings. I had no intention of suggesting that this was truly the best of utilitarianism as understood in an academic, philosophical sense. I am compelled to defer to the esteemed Professor Yeager as to the best and most appropriately understood utilitarianism as that concept might be used before an academic background.

My argument was hardly that, emanating from the ink and pen of Bentham, his ideas directly flowed through the strands of history into the conscious minds of lawmakers. Perhaps there might be a certain indirect relationship. The point was simply that much of the criminal legislation at issue (though I do not suggest a formalistic distinction between criminal and other enactments) was based on transient public demands and outcries and limited by no particular ethical judgment at all.

As Professor Yeager concluded his response with the observation that the lawmakers might have “had the parrot-like misinterpretation of utilitarianism at the back of their minds,” it is apparent that he essentially recognized my point, however clouded it may have been by a semantically sweeping condemnation that had as its purpose a brief point in the essay. The utilitarianism I referred to was not, excepting the point on Bentham, intended to generally diminish scholarly utilitarian thought, but was instead focused toward the garden-variety utilitarianism that often animates the lawmakers creating the legal landscape we live in.

Can the Word “Capitalism” Be Salvaged?

I should like to rescue the word “capitalism” from the Marxians and [the late] Clarence Carson. In spite of Carson’s claim in his “Capitalism: Yes and No” (reprinted in May) that it is a value-laden word describing an economic system that leads to “greater and greater concentrations of wealth” in the hands of a few, I maintain that it is a suitable term for describing the free-market private-property economy.

Clarence Carson was primarily an historian. But he was a “classical” economist, not a Misesian or an “Austrian.” He did not understand modern, subjective-value, marginal-utility economics.

Along with Adam Smith and Karl Marx, Carson accepted the “classical” separation of the factors of production into three distinct categories: land, labor and capital. Thus he defines capitalism in the Marxian value-laden sense as a system of mass production that uses “capital,” that is, tools and machines, together with “the exercise of government power,” forcing the “transformation of some greater or lesser portion of the wealth of a people into capital.”

It is useless to argue about the definition of any word. A writer, speaker, or economist can use any term as he wishes, so long as he defines it and makes his meaning clear. Mises was wont to say that “An economist is no more willing to use another economist’s term than he is to use his toothbrush.” However, some definitions of words are more suitable than others.

Capital, as a concept, represents the calculation of the value of all capital goods in monetary terms. Capital goods embrace not only industrial tools and machines but all factors of production–produced and semi-produced factors, nature-given factors (land and natural resources), labor, time, and even techniques, recipes, and ideas used in production. Thus capitalism is a perfectly good word for describing the economic system based on the use in production of “capital,” that is, capital goods.

Granted, the term “capitalism” was first actually used by Karl Marx in a pejorative sense. However, I would argue that “capitalism” is a suitable word for describing the voluntary market system, process, or arrangement, of production, exchange and trade of privately owned property, accumulated capital. . . . Defined in this way, it is a neutral, non-value-laden term for describing the cooperative market system in which everyone depends on everyone else.

-BETTINA BIEN GREAVES by e-mail

Does Deficit Spending Only Shift Costs Forward?

Roy Cordato’s June article, “Deficit Spending and Future Generations: Not What You Might Think,” is confusing. He writes that “Every dollar the government spends has to come out of some existing person’s pocket and therefore preempts the use of that dollar somewhere else in the economy–not in the future, but here and now.”

Every dollar government spends does not come out of some existing person’s pocket. Dollars not coming from a pocket are those that the Federal Reserve System (FRS) gets off its printing presses. These printing-press dollars dilute the value of existing dollars (money-supply inflation). This is what I have learned by reading The Freeman. If I have been misled or misunderstand, I would like to know.

As Cordato says, if government taxes and spends existing dollars, such dollars are unavailable for investment by private individuals. Printing-press dollars cannot be available for use by private individuals unless the dollars are given directly to them by the FRS (does this ever happen?) or through the banking system, or by the Treasury Department.

Cordato states that “The real costs of government spending, no matter how it is financed, are experienced here and now.” But this can’t be completely correct, else, as he says, we would not in the future have “coercive wealth transfers from future taxpayers to future government bondholders.” (Does “future government bondholders” presume debt has not been repudiated directly or through monetary inflation?)

If General Motors or Chrysler gets dollars collected via taxation, that is one thing; if they get dollars borrowed through Treasury bonds or notes, that is another, because repaying borrowed dollars requires payment of interest along with, at some future time, the principal; if they get printing-press dollars, these will be spent as these companies choose (with bankruptcy court permission while in bankruptcy?) to spend them and then will begin circulating elsewhere in the economy, likely making more dollars available for fewer, or no increase, in goods, causing price inflation.

Finally, he states that “Deficit spending creates the occasion for coercive wealth transfers from future taxpayers to future government bondholders. When the bills come due, most of our children and grandchildren will have part of their incomes coercively transferred through higher taxes to those who hold the Treasury notes. Government debt makes our children less free.”

Government debts makes all of us less free today and tomorrow. Hence, to modify Cordato’s words, the “handwringing . . . about passing on the cost of ‘stimulating’ our economy onto future generations is [not] misplaced.” Else why the “coercive wealth transfers from future taxpayers?” The reasoning is confusing.

-EARL ZARBIN Phoenix, Ariz.

Roy Cordato replies:

Thanks to Mr. Zarbin for his comments. First I want to point out that I was not attempting to address all possible scenarios when it comes to deficit spending. Instead I was addressing a particular argument; by “borrowing now, taxing later–Congress and the President are forcing future generations to pay for our problems. [They] are shifting the costs of this massive spending scheme to our children.” I was basically trying to dispel the myth that the current generation is somehow free-riding, through deficit financing, on future generations. I was not trying to suggest that there were no costs to future generations. Indeed, I was pointing to those costs in the last couple paragraphs, where I discuss the loss of freedom that will be experienced by our children and grandchildren. If this was not clear, I apologize.

In keeping my argument narrowly focused I was indeed assuming that the debt was neither monetized nor explicitly repudiated. Of course this is not a realistic assumption, particularly with respect to monetization, which is already occurring. Because of this I did indeed overlook many issues that would arise in a situation where the Fed plays an active role in buying up the debt.

That said, I would like to defend the idea that even when the government spends newly created money it does indeed come from existing persons’ pockets.  This is why inflation is often referred to as a tax. As the Fed creates new money, the money that I am currently holding, as Mr. Zarbin rightly points out, is diluted–that is, worth less. In this sense new money that is spent is coming out of people’s pockets and, in terms of real purchasing power, is preempting the use of existing dollars in the economy. More importantly, government spending, regardless of where the money comes from, preempts the use of real resources by the private sector in the here and now. Real resources– labor, natural resources, capital, and so on–are bid away from those who would direct their use in the absence of the government spending. This is true even if the source of the revenues for that government spending is the printing press. This is why I felt comfortable in pointing out that “all current spending must come from current revenues and can only utilize current resources.”

More on the FDIC

My compliments to Jeffrey Miron on the article concerning FDIC in the May Freeman. It is a correct explanation of the unintended consequences that develop when government attempts to cure a perceived problem. As he discussed, the unintended consequences may be a greater problem than the original perceived problem. And he also discussed the possibility that the perceived problem might not have been a problem were it not for a preceding government regulation.

I was president of a small bank in a small town for 25 years. I observed the effect FDIC had on the attitude, motivations, and decisions of bankers; and also the effect it had on the public in their choice of banks. FDIC has tended to increase credit expansion and risk taking. Whether that is a good or a bad thing should be left to the free market and not decided by government.

As with any government regulation there is also a tendency to expand the scope of regulation. FDIC, originally . . . a protection for the public in their bank deposits, became a vehicle to enforce what officials deemed to be socially desirable actions. Consider the FDIC enforcement of making loans in certain geographic areas (the [anti-] red-lining concept). Or consider the encouragement of lending to certain racial or social groups. Or the disfavor of lending practices that resulted in loan ratios being below a certain percent considered desirable by the FDIC. And yes, they did keep . . . figures on all three of the above and jawbone the bankers to meet what the FDIC considered our social responsibility. The threat was that should an [uncooperative] bank want to establish a branch or expand its operation . . . the FDIC would . . . consider the bank as not having met the standard of public need.

-RAE C. HEIPLE Whitefish Bay, Wis.