The Great Depression: Australia’s record humiliates Roosevelt and refutes Keynesianism

This is another response to a Keynesian critic.

My Keynesian critic says I “cannot compare the USA in 1938 and Australia in 1938 apart from both having stimulatory policy”. Well, I can and I did and justifiably so. It’s ludicrous to argue that comparisons are not justified. You also stated that in 1937 America “had the greatest change in fiscal policy under Roosevelt”. Complete baloney – and I have spent considerable time examining the data from official sources. I made my case in my post on the 1937-1938 crash. Prove me wrong and I will cheerfully (well, perhaps not cheerfully) publish it and graciously admit my error.

After that you returned to your GDP mantra even though GDP does not measure growth. In heavens name, how can an economy enjoy economic growth while at the same time consuming its capital? This is akin to a community getting rich by eating its seed corn. I pointed out in my post that it was estimated that net capital consumption dropped by minus 15.2 per cent¹. Your response was to completely ignore that fact and keep on stressing Roosevelt’s grossly misleading super-duper GDP record.

You then argued that Australia’s 1931 budget raised unemployment to 30%. I pointed that for the preceding two years unemployment rocketed by 74 per cent and then 42 per cent respectively. After the so-called “silly” budget the increase in unemployment for that ear slowed dramatically to only 5.8 per cent. It seems to me that you have no perspective when it comes to history and statistics.

What you call a devaluation is what used to be called “exporting unemployment’. You seem incapable of distinguishing between a deliberate depreciation of the currency and a genuine devaluation designed to ensure that the currency reflects its purchasing power parity which was certainly the case with Australia. You also ignored my point that any classical economist would have argued in favour of a devaluation. Furthermore, devaluations are no more responsible for inflation than are deficits. You have since posted another comment in which you once again asserted that devaluation generated an inflation that cut real wages and by doing so put people back to work. As you refuse to produce any evidence to support your case allow me to produce evidence to support mine. The chart below is constructed from a table of real wages produced by Douglas Copland², a prominent economist at the time and a key player in contemporary economic events in Australia.

The first thing to note is that the series starts with the first quarter of 1930 with a base of 100 below which real wages never fell. The real average wage for the first quarter of 1931 is 104. This is of particular interest because it was in January 1931 that the Australian currency was devalued—and yet exactly one year later the real wage is still 104. During the remainder of the period the real wage averaged 104.5. The next chart is built on Schedvin’s figures³, which are extremely close to Copland’s results, and reveal that the average real wage of factory workers remained basically flat during the years 1927-8 to 1936-7.

The next chart was constructed by me and is based on statistics from the same source that Schedvin used⁴.

We can see that not only did real wages not fall back to their 1929 level but the average real wage for the period exceeded it. (However, a caveat is in order. The differences between the years are too small statistically to really matter. Therefore, all that we can really say about the charts is that they tell us that real wages remained comparatively flat, even after the devaluation). What also stands out is that retail and whole sale prices continued to fall despite the devaluation. For example, from 1931 to 1936 coal and metal prices fell by 14.2 per cent⁵. In addition, as I mentioned in my previous post, manufacturing prices did not start rising until 1937-38, some seven years or so after the devaluation. The rising prices and the downward trend in real wages that Nottrampis constantly refers to are nothing but figments of his Keynesian imagination.

I am accused of “putting too much influence on just manufacturing”. It would have been highly incompetent of me not to have done so. Now I emphasised manufacturing for the same reason most economists and economic historians who study the period do. Firstly, manufacturing led the recovery. Secondly, 43 per cent of the unemployed were from manufacturing. The situation in America was very similar. Another reason is that it allowed me to calculate the ratio of the money wage to the money value of output for a large segment of the labour force.

I have already explained that employers do not hire on the basis of a price level. What matters to them is the ratio of the money wage to the money value of the product, though they never put it that way, regardless of what the price level is doing. So what we had in Australia was a situation in manufacturing where real wages remained unchanged, prices fell but the demand for labour rose. When we examine the data we find that the demand for factory labour started to rapidly rise once the real factory wage⁶ started its steep decline, just as standard economics predicts. Given all the evidence the only solution to the alleged puzzle is that the fall in input prices combined with increased efficiency widened profit margins thereby encouraging increased production. In short, the recovery was production-driven.

“We had recession levels of unemployment until WW2 started then it miraculously fell to 4%. Amazing what occurs when aggregate demand is increased!” There is no miracle involved in putting huge numbers of men in uniform and then claiming you just slashed the unemployment rate.

“Germany was the only country to reach full employment until WW2. The USA would have got there in 1936 as well IMHO if they cut real wages.” This statement is a real beauty. The Nazi Party achieved full employment by implementing a policy of massive rearmament in preparation for its forthcoming war. This is very easy for a totalitarian party to do and only those with suicidal tendencies would have openly opposed the policy.

In preparing for war the Nazi Party became a massive customer for industry. Payments could easily be made through massive taxation, compulsory contributions and bank credit, which is inflationary. The effect was to expand heavy industry by severely restricting consumption, which is why consumption and therefore real wages fell. There is nothing here that a classical economist would fail to recognise.

It seems to me that you are little schizophrenic when it comes to real wages, jobs and consumption. To argue that Roosevelt could have achieved full employment by 1936 if only he had cut real wages is to agree with the classical school and those who follow in its footsteps that widespread persistent unemployment is the result of raising the cost of labour above its market clearing rate and keeping it there. On the other hand, you also argue that consumption drives the economy. If this is so, then cutting real wages has the same effect as reducing consumption, which is what Hoover and Roosevelt believed. More importantly, if excess real wages caused the unemployment then demand deficiency becomes a Keynesian fiction, which it is.

You correctly observe that “most countries experience a contraction after a war”. You then assert, because you only produce assertions and never any evidence, that “pent up demand means it doesn’t last. In the USA it occurred after both world wars!” Another Keynesian rationalisation. The classical economists noted that “distress immediately accompanies a change from war to peace” because war alters the “channels of trade”. Once peace has been declared prices must be left alone so that markets can make the necessary adjustments.

However, as it turns out I am in the process of producing a post on the “The Great Depression of 1946” that no one noticed. It will show that the idea of “pent-up” demand was invented by Keynesians to rationalise away their failed predictions of mass unemployment. There will also be a post on “The Great Depression of 1953” that President Eisenhower caused when he stupidly cut spending by a whopping 25 per cent. No wonder he went down in history as “General Hoover”.

The facts are as straightforward as can be. According to Keynesianism cutting spending and running surpluses during the Great Depression should have devastated the Australian economy. It didn’t. What followed was a rapid expansion of manufacturing and a steady fall in unemployment. If this had happened in America Keynesians would never have stopped promoting it as an economic miracle.

During the war numerous Keynesians predicted that once peace was declared and the servicemen demobbed there would be a depression and mass unemployment. They were wrong. They have been rationalising away their failure ever since. When Eisenhower became president he slashed spending by 25 per cent. According to Keynesianism this policy should have tanked the economy and created mass unemployment. It didn’t. Not only is this another Great Depression that never happened but the whole incident has mysteriously vanished into the Keynesian memory hole.

Nottrampis has since made another comment in which he refers to real wages, interest rates and money supply. Regardless of what he thinks the statistical evidence shows that real wage remained basically flat. As for the money supply, it always increased after a depression and interest rates always fell again. This is precisely what happened after every nineteenth century depression and it is what happened in Australia but with something of a twist with respect to the money supply. From March 1929 to September 1931 M1 shrank by 27.2 per cent, after which it began expanding again. However, from March 1932 to September 1933 M1 contracted again, this time by 10.3 per cent and yet the economy did not even burp.

* * * * *

¹Arthur Lewis, W. Arthur Lewis, Economic Survey 1919-1939, Unwin University Books, 1970, p. 205.

²Douglas Copland, Australia in the World Crisis 1929-1933, Macmillan and Company, 1934, p. 203. The series only went to the first quarter of 1933 because he was in the process of having the book published. His base year for the wage was actually 1928 but I adjusted it for 1930. This does not, of course, alter the percentage changes.

³C. B. Schedvin, Australia and the Great Depression, Sydney University Press, 1988, p. 350. “[I]t is apparent that there was no significant downward trend in average real earning in manufacturing…” (ibid).

⁴Official Year Book of the Commonwealth of Australia, No. 32—1939, pp. 424. 437.

⁵(ibid p. 424)

⁶The real factory wage is the ratio of the average manufacturing money wage to the value of manufacturing output.