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SS has three questions about The Return of the Great Depression:

I’ve been meaning to write for some time about your book, The Return of the Great Depression. First things first- it’s a great book, and I’d like to heartily congratulate you for writing a very valuable resource for those of us who are relatively new to Austrian economics. (The pricing for the Kindle edition helped too, even though I know you’re not exactly a fan of the proprietary .azw format.) I was particularly interested in your explanation of the Austrian Theory of the Business Cycle; it was simple, straightforward, and easy to understand. It’s become very clear to me over the last few years that most of what I learned about mathematical economics in London is simply wrong and needs to be discarded; the only coherent and empirically tested theory of the business cycle that seems to work is the one put forward by the Austrian School, in my experience. That said, I have a couple of questions for you regarding specific issues raised in the book.

First, you seem to argue (I believe it is in Chapter 9, but could be wrong) that the imposition of the Smoot-Hawley tariffs in 1930 weren’t actually much of a problem relative to the Hoover-FDR interventions. Yet in FDR’s Folly, Jim Powell specifically argued that unemployment peaked at 9.6% in January 1930 and was heading back down towards 6% by June; after Smoot-Hawley was passed, unemployment hit 14% by year-end. This is backed up in Gene Smiley’s Rethinking the Great Depression. Therefore, I am quite curious as to why you think that trade wasn’t a major causal factor of the collapse that followed between 1930 and 1933. Or have I misinterpreted your writing?

Second, in Chapter 11 you argue in point 6 that the Gramm-Leach-Bliley Act should be repealed. That Act removed the barriers between investment banking and commercial/personal banking that had existed since the days of the Glass-Steagall Act. Yet Jim Powell showed in his book that when Glass-Steagall was passed, one of its most immediate results was to significantly weaken the healthiest banks in the country. J.P. Morgan & Co. was particularly affected, as it had to divest its investment banking arm to create Morgan Stanley. I have no sympathy for the Masters of the Universe who messed up so badly, but it seems to me that weakening the banks yet further would be contraindicated at this point.

Third, it didn’t look like you raised any arguments for or against a return to an explicit hard-money standard in the US (again, I could be wrong). I see that you have argued in favour of auditing the Fed (which I strongly support), but why not go the whole distance and argue in favour of restoring the gold standard….

Finally, I’d just like to state that your work in RGD was more than enough to convince me to download The Irrational Atheist. As an atheist who has read The God Delusion and found its writing to be sub-par and its arguments to be vague, I look forward to reading your dissections of Dawkins, Hitchens, Denning, et al. Thank you again for the excellent work on RGD; I look forward to reading many more of your comments and works in the future.

SS is very welcome, of course. It’s encouraging to hear that those whose academic background is in economics also feel they have been able learn something from RGD. In answer to the first question, while I have not read their books, both Howell and Smiley would appear to be making an incorrect assumption about an intrinsic correlation between the timing of the passage of the tariff and the subsequent rise in unemployment. I can only conclude that they did not look at the more relevant import and export statistics for that historical period, (See International Transactions and Foreign Commerce, Series U 1-186, US Colonial to 1970), for as I did indeed mention in Chapter 9, the annual percentage decline in exports was smaller from 1929 to 1933 than it was from 1920 to 1922. Since that was insufficient to clarify the matter, I will point out that in 1929, US exports were 5 percent of GDP at $5,441 million, down 37 percent from the $8,664 million they had been in 1920. They declined another 16.7 percent to $4,013 million, or 3.6 percent of 1929 GDP, in 1930. So, it’s simply not credible that this one-year decline in exports, much less precipitous than the 1921 decline and equal at most to 1.4 percent of GDP could possibly be the culprit in producing such high levels of unemployment, especially given the equally large 26 percent decline in imports. (Non-economists, remember that a reduction in imports is GDP positive and the idea behind a tariff is to encourage the substitution of domestic goods and services for foreign ones.) The fact that exports began increasing again in 1934, long before the tariff was relaxed in 1937, shows that the tariff did not have the trade-limiting effects it is conventionally supposed to have had, as does the subsequent decline in international trade in 1937 and 1938.

In fact, after the tariff was CUT by two-thirds in 1937, exports dropped 9 percent in 1938. And the 26 percent decline in exports from 1929 to 1930 was nearly doubled by the 47 percent collapse in them from 1920 to 1921 which occurred nine years prior to Smoot-Hawley. So, while Smoot-Hawley may not have helped the unemployment situation, it is not credible to assert that it was the primary causal factor in the high level of 1930s unemployment.

Second, the fact that investment banking may have once helped strengthen a historical US bank does not change the fact that investment banking brought all the largest banks in the USA to their knees last year. The point of separating the functions of depository institutions and investment institutions is to permit the latter to take outsized risks and fail without destroying the stability of the former. It’s not a question of weakening the banks, but rather refusing to permit them to cut their own throats, then live on life support at the public’s expense. The historical example is simply irrelevant because modern investment banking, with all its default swaps and derivatives, now represents a weakness, not a strength.

Third, regarding monetary standards, I think that subject would merit a book in its own rights and there is no way I could have done justice to it in what would have been the very limited space provided. Moreover, because I do not feel that I have a sufficient grasp on all the various complexities of the concept of money and modern currency, that is a book I am unlikely to write. Despite my certainty about the unsustainable nature of the present debt-based system, I would be very hesitant to make any case for a return to the gold standard or any other hard money standard without doing considerably more research on the topic than I have done. Unlike most economics writers, I’m not even certain about the $57 trillion question regarding inflation/deflation, although as is clear from the book, I tend to lean towards the latter.

Finally, I am pleased that SS has reached the logical conclusion that a writer who is capable of credibly analyzing complex economic matters may have something reasonable to say about other subjects. I am, of course, dismissive of the notion that expertise in one subject necessarily grants any in another, unrelated subject, but it is ridiculous to assert, as some have, that anyone who has demonstrated the ability to knowledgeably discuss economics at this level could be incapable of contemplating science or making valid points in the atheism/religion discussion. One tends to suspect that those making the assertion simply don’t know enough about economics to understand that the issues involved tend to be considerably more complicated than those customarily disputed in the usual evolution, morality, and existence of God debates.

Given SS’s pertinent questions, it should be interesting to learn his opinion of TIA. Assuming, of course, that he manages to make it past Mount Chapter IV and finish the book without being inspired to seek employment in a house of ill repute in Southampton.