The Austrian School on the Causes and Recovery of the Great Depression

 

As we approach the centenary of the onset of the Great Depression, a pivotal moment in global economic history that started with the infamous stock market crash in October 1929 and stretched until the late 1930s, the debate surrounding its causes remains rich and complex. The discourse of economists and historians who, though concurring on foundational facts like the market crash and subsequent bank failures, engage in the ongoing debate concerning the specific catalysts and relative importance of different economic factors that led to the Depression. The Monetarist and Keynesian theories dominate the literature, but there is a lesser-known theory (at least amongst the general population) that offers a distinctive interpretation of the causes of the Great Depression.

The Austrian School of Economics originated in the late 19^th century and its adherents argue that the only way to really understand the economy is by examining the actions of individuals. They strongly oppose governmental efforts to interfere with the market, believing that doing so leads to problems. The two most prominent Austrian theorists of the twentieth century were Ludwig von Mises and Friedrich August von Hayek, more commonly known as F.A. Hayek. To best understand this economic theory, we need to understand their views on the potential to control the economy. Hayek, in a speech he made when he accepted the Nobel Prize for Economic Sciences in 1974 stressed that it was foolish for social scientists, economists among them, to think they could control society in the same way a physical scientist could control his subject.[1]

 The Austrian School posits that the Great Depression was not a random event or a result of unregulated market forces. Rather, it was the predictable outcome of rampant overinvestment fueled by the Federal Reserve Bank’s artificially low-interest rates throughout the 1920s. Central to accepting this concern is the Austrian Business Cycle Theory (ABCT) which argues that when central banks lower interest rates, business firms are tempted to borrow and invest in ways that they would not under different criteria. This, according to the Austrian School, leads to malinvestment. Hayek wrote, "the past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from being regulated by the market process."[2] In other words, interference with the money supply leads to instabilities because individuals who make up the market are having to make economic decisions in an environment that does not flow naturally.

 The primary cause of the Great Depression according to Hayek was the fact that central banks, to fix falling prices, which Hayek argued were beneficial and in the case of the United States were due to technological advancements making manufacturing cheaper, extended the boom by keeping access to money easy and thus fueling malinvestment. He argued that if the central banks had not interfered in 1927 then the boom would have ended two years early and not led to the disaster that it did.[3]

 On the matter of economic revitalization from the Great Depression, it is inevitable that the Austrian School diverges from many mainstream economic theories, positing that the economic recovery was largely enabled by market mechanisms rather than government interventions. Despite the far-reaching implementation of New Deal policies, Hayek and his Austrian contemporaries viewed these as obstacles to the market's natural recovery process. Hayek cautioned, "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”[4]

 Hayek's warning encapsulates the Austrian viewpoint that these interventions potentially interfered with the natural corrective processes of the market, and instead of fostering recovery, might have exacerbated the situation and prolonged the depression. They argue that these measures, while they might have provided temporary relief, did not contribute to a lasting, sustainable recovery.

 Hayek and the Austrian School have never influenced policymakers to the extent Keynesian theory has and due to the ratchet effect and the fact that through crises in the twentieth century that paved the way for bigger and bigger government, we have become accustomed and even sought to have greater economic control by the government means we are not able to study the merits or lack thereof of the Austrian theory. Hayek even contributed insight into the reason for the ratchet effect by arguing that the crises that brings about increased government interference develops a bureaucracy that becomes entrenched and that even when the crisis subsides the populace remains convinced of the need for the bureaucracy because they believe it possesses technical expertise that unless maintained may throw the system back into chaos.[5] The unfortunate consequences of the ratchet effect should inspire us to consider the Austrian School as a more viable option for responding to economic downturns.

 In conclusion, through the lens of the Austrian School and fortified by Hayek's insights, the Great Depression can be seen as both precipitated and prolonged by monetary policy manipulation and government intervention. This perspective underscores the importance of allowing markets to self-regulate and adjust naturally, offering invaluable insights into one of the most significant economic downturns in history.

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[1] Friedrich August von Hayek – Prize Lecture. NobelPrize.org. Nobel Prize Outreach AB 2023. Sun. 30 Jul 2023. https://www.nobelprize.org/prizes/economic-sciences/1974/hayek/lecture/         

[2] Friedrich August von Hayek, The Denationalisation of Money, the Argument Refined: An Analysis of the Theory and Practice of Concurrent Currencies (London: The Institute of Economic Affairs, 1978), 102. 

[3] Antonio Magliulo, "Hayek and the Great Depression of 1929: Did He Really Change His Mind?" The European Journal of the History of Economic Thought 23, no. 1 (2016/01/02 2016), https://dx.doi.org/10.1080/09672567.2013.792373: 38-39.

[4] Friedrich A. von Hayek, and William Warren Bartley, The Fatal Conceit: The Errors of Socialism, University of Chicago Press ed., vol. 1, vol. (Chicago: The University of Chicago Press, 1989), 76. 

[5] Robert Higgs, "Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon," Explorations in Economic History 22, no. 1 (2013-02-24 1985): 13.

 

James Cash Penney: A Legacy of Innovative Entrepreneurship and Human-Centered Management

James Cash Penney, the founder of the retail store chain that shares his name, crafted a unique style of entrepreneurship and exceptional management that resonated through much of the 20th century. His journey began in 1902 with a modest dry goods store in Kemmerer, Wyoming, which, through his perseverance, metamorphosed into one of America's most notable retail chains.

Born into a poor family in 1875 in Missouri, Penney wanted to study law after high school but was forced to work as a clerk in a local dry goods store to help support his family after his father's death. When Penney was a young man, he was diagnosed with tuberculosis and advised by his doctor to move to a dryer climate, which he did in 1898 by moving to Colorado. He soon began working for Guy Johnson and Thomas Callahan, who owned two dry goods stores called Golden Rule. Johnson and Callahan were impressed with Penney's business acumen, along with his values of integrity and hard work, so they paved the way for him to open a third store and gave him one-third of the profits from the new store, which he opened in Kemmerer, Wyoming in 1902. Within a year, he had opened another store, paving the way towards developing a chain of stores. A significant change occurred in 1912 when Penney acquired sole ownership of the company and changed its name to J.C. Penney.[1] In 1913, Penney relocated the company headquarters from Salt Lake City to New York City to be closer to garment production, which comprised a significant percentage of his profits. By 1927, he owned 773 stores with over $100 million in sales.[2]

The entrepreneurship demonstrated by Penney was characterized by calculated risk-taking and remarkable foresight. As a business model, Penney prioritized quality and value instead of focusing on bargain sales. He followed in the footsteps of Callahan and applied fixed prices in all his stores when haggling was still the norm, thus promoting fairness and integrity in his operations. Moreover, he required his customers to pay in cash before they could take the goods from his stores.[3] His method of expansion was unique and highly entrepreneurial. Instead of following a top-down approach, Penney mentored promising employees and offered them partnership and managerial positions in new stores, thus fostering a sense of ownership, dedication, and motivation among his workforce. One of the expectations of these new associates was for them to find reliable promising young men and prepare them to open their own store, thus securing the continued growth of the business.[4] To help inspire and support the company’s growing workforce Penney started a monthly newsletter that circulated between 1917 and 1932 called The Dynamo. The newsletter offered merchandising suggestions, letters from company buyers, celebrations of store and manager accomplishments, and other general company news, to name a few, and demonstrated that James Cash Penney really did strive to build relationships with his employee partners. Each newsletter offered several articles written by people related to the industry and thus secured a connection between headquarters and employees that promoted quality and exceptional service. For example, one saleswoman was celebrated by her manager for securing a sale by helping the customer envision the finished product using two yards of fabric that she thought would be a quality substitute since they did not carry what the customer requested.[5]     

Penney's management prowess extended beyond his employees to his relationship with customers and suppliers. His "Golden Rule" philosophy built trust and loyalty with his customer base. He treated suppliers as partners, ensuring prompt payment and building solid relationships. Penney believed in the power of decentralization and delegated operational authority to store managers, instilling in them a sense of responsibility and entrepreneurship.[6] Another distinguishing pursuit that demonstrated Penney’s business ingenuity was that he was among the first businessmen to create private labels for the J.C. Penney brand. This allowed him to cut costs by making high-quality products cheaper than the name brands. Moreover, since advertising was not required for these items, which already drew in customers due to the success of the name-brand alternative, he was further able to maximize profits.[7] This business strategy is now common in the retail industry.

 The 1929 economic downturn was a challenging period for Penney, who personally guaranteed his company's debt, leading to his financial ruin. However, his resilience and dedication to the brand saw him through these turbulent times.

 In conclusion, J.C. Penney's story shows how visionary entrepreneurship coupled with exceptional management can build a legacy. Penney's ability to identify opportunities, his innovative business model, and the respect and trust he established with customers, employees, and suppliers laid the foundation of the J.C. Penney Company. His approach to entrepreneurship and management was characterized by his pursuit of the "Golden Rule" policy that he inherited from his Baptist Minister father not only as a business strategy but also as an ethos that helped weather financial storms and maintain the relevance of the brand that lasts even today, although has struggled because of online shopping and the hegemony of discount stores like Walmart. The retail industry continues to draw inspiration from Penney's innovative strategies and human-centered leadership.

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[1] Bert Spector, "The Evolution of a Private-Label Brand Strategy at J.C. Penney, 1902-33," Management & Organizational History: 8, no. 4 (2013), https://dx.doi.org/10.1080/17449359.2013.831736: 391.

[2] Michael  Lisicky, "From Its Beginnings to Bankruptcy, a Historical Timeline of Jcpenney," Forbes, May 17, 2020, https://www.forbes.com/sites/michaellisicky/2020/05/17/from-its-beginnings-to-bankruptcy--a-company-timeline-of--jcpenney/?sh=6a02f20431de.

[3] Bill Hare, Celebration of Fools: An Inside Look at the Rise and Fall of JCPenney, 1st ed., vol. (New York, NY: AMACOM, American Management Association, 2004), 24.

[4] State Historical Society of Missouri, "J.C. Penney," accessed July 22, 2023, https://historicmissourians.shsmo.org/j-c-penney/.

[5] L.M. Luther, "A Lesson in Practical Salesmanship," The Dynamo, November 1924, https://digitalcollections.smu.edu/digital/collection/dyn/id/49.

[6] Bill Hare, Celebration of Fools: An Inside Look at the Rise and Fall of JCPenney, 1st ed., vol. (New York, NY: AMACOM, American Management Association, 2004).

[7] Bert Spector, "The Evolution of a Private-Label Brand Strategy at J.C. Penney, 1902-33," Management & organizational history: no. 4 (2013), https://dx.doi.org/10.1080/17449359.2013.831736.

Comparison of Wages and Cost of Living between New England and California in 1874

             Even the driest statistics and datasets can tell a story or at the very least prompt a historian to ask questions that will reveal a story. The numbers represent the lives of real individuals and this story begins with just a few pages of a report on wages and costs of living expenses published by the Government Printing Office. The average weekly wage reveals that wool sorters in California were paid about half the wages of someone in New England doing the exact task in 1874. The average weekly wage of sorters in California was $5.25 whereas the average in New England was $10.92, with Maine workers being paid the least at $9.80 and Rhode Islanders being paid the most at $12.00.[1] What could account for such a drastic difference in wages? Like all topics it is best understood in its context. A recession that began in Germany had reached the United States by late July 1873. This recession was known as the Great Depression until Americans encountered an even more devastating one as a result of the stock market crash in 1929 and would use the moniker to identify the latter one instead. The data represents wages after Americans had already begun to feel the effects. What is interesting is because of the precious metal mining in the west, states like California and cities like San Francisco in particular fared the economic crisis better than the New England states. Therefore, one might expect to have seen California wages higher in comparison as a result. When comparing the New England wages five years early you see the impact the recession had already done by 1874. New England wool sorter weekly wages on average in 1869 were $11.42, which is 50¢ more a week than they will earn five years later during the economic crises. 1869 data was not available for California so the same analysis cannot be made there.[2]

Wool manufacturing was profitable and of high quality in the San Francisco Bay Area[3], so there appears no justification for the lower salary. Perhaps lower wages were the result of lower costs of living in California than in New England in 1874 so that is a question worth considering, but when the costs of basic necessities between the two regions is compared it is obvious New Englanders were able to get by with less so their increased wages were really justified because of cost of living expenses.  To illustrate the point a dozen eggs cost on average 33¢ in New England, whereas 39¢ in the Pacific states, 37¢ for a pound of butter versus 42¢, 18.5¢ for a yard of cotton flannel as opposed to 20.5¢ for the same and male boarders could expect to pay $4.00 a week in New England as opposed to $6.17 in the Pacific states.[4]

Upon closer look at the data compiled by the American government that year there is an interesting notation next to the average yearly salary for workers in California and that symbol identifies that all workers in that occupation were Chinese. Chinese immigration to California increased during the Civil War and Reconstruction era because of famine and lack of opportunities in China. As low as their wages were in California as wool sorters, they were worse off in China where for the entire year’s wages they earned the equivalent in California in just two weeks and they had a high population will limited food supplies.[5] While California climate and soil was suitable for plantation agriculture, slavery was prohibited when it was granted statehood in 1850. With the lack of competing free labor, settlers in California could reasonably expect a competitive wage market. This does not mean that business owners agreed and therefore sought increased profits by exploiting cheap Chinese labor. In the next decade non-Chinese Californians would push for restriction and ultimately exclusion of new Chinese immigration precisely because it was difficult for white laborers who began flooding the west in earnest after the Civil War to compete for reasonable wages.[6]

So many more questions could be considered on this topic with more space allowed, however the exercise of exploring the historic wage data serves as a reminder that real people were behind those numbers and sometimes historians, especially when studying the working class condition, need to make effective use of this economic figures to give a richer account of the lives of average people from the past.

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[1] Edward Young, and States United, Labor in Europe and America; a Special Report on the Rates of Wages, the Cost of Subsistence, and the Condition of the Working Classes in Great Britain, Germany, France, Belgium, and Other Countries of Europe, Also in the United States and British America, vol. vi, 864 p. (Washington: Government Printing Office, 1876). //catalog.hathitrust.org/Record/100475589, 753.

[2] Ibid.

[3] John Ross Browne, Resources of the Pacific Slope: A Statistical and Descriptive Summary of the Mines and Minerals, Climate, Topography, Agriculture, Commerce, Manufactures and Miscellaneous Productions of the States and Territories West of the Rocky Mountains : With a Sketch of the Settlement and Exploration of Lower California (New York: Appleton and Co., 1869, [c1868]). https://link.gale.com/apps/doc/CY0107738747/SABN?u=vic_liberty&sid=bookmark-SABN&xid=96878a41&pg=268, 268.

[4] Young, Labor in Europe and America, 797-807.

[5] Russell Herman Conwell, and Hammatt Billings, Why and How: Why the Chinese Emigrate and the Means They Adopt for the Purpose of Reaching America: With Sketches of Travel, Amusing Incidents, Social Customs, &C (Boston; (Cambridge [Mass.]): Lee and Shepard; (University Press, Welch, Bigelow, & Co.), 1871, 1871). https://link.gale.com/apps/doc/CY0105625594/SABN?u=vic_liberty&sid=bookmark-SABN&xid=22d3a6a7&pg=66, 62.

[6] Beth Lew-Williams, "America's Experiment in Diplomatic Immigration Control before Restriction  Became Exclusion," Pacific Historical Review 83, no. 1 (2014), accessed 2023/07/06/, https://dx.doi.org/10.1525/phr.2014.83.1.24: 29.

*Image is from Russell Herman Conwell and Hammatt Billings book.

 

The Cookie Grandma

She exuded an air of regality and sternness, like a matriarch ruling over her brood. Regrettably, my encounters with my father's mother were infrequent; I can count using only my own hands the number of times I crossed paths with her in my lifetime, even though she was alive for almost three decades of my life. Despite living in proximity to us, merely a few states away, my sister and I spent our summers with our maternal grandparents on the other side of the country, thus forging a closer bond with them. As a result, my knowledge of our family's history is primarily rooted in that side of the family.

My paternal grandmother's reserved and enigmatic nature intrigued me, as I seldom heard her utter a word during our brief encounters. She graced my baptism and wedding ceremonies, but I struggle to recall the sound of her voice, unlike my maternal grandparents, whose voices remain vivid in my memory, despite their passing over two decades ago.

 Gail Louise Bauman entered this world on January 24, 1909, in Seattle, Washington. At the tender age of twenty, she married Henry "Hank" Sebastian Ravet, and together they welcomed seven children: three daughters, and four sons, with my father, John Phillip Ravet, occupying the middle-child position. Tragedy befell my grandmother when she became a widow at the age of 67. She also had to bury her first born in 1993 who died in a car accident. At the age of 92, my grandmother breathed her last. In a cruel twist of fate, none of her children lived to see their seventieth birthday.

These familial losses have been one of the challenges that I have encountered while exploring Grandma Ravet's early life. Although I have twenty-three cousins, only a handful knew my grandmother well, and my search for information about her early life has yielded little success. I recall hearing stories that her father abandoned her and her family when she was young, and while I have managed to find some details about him on myheritage.com, such as his name, date of birth, and death, his life remains largely unrecorded, much like hers.

My grandmother's countenance often appeared forlorn, which piqued my curiosity as to its origin. However, she was a devout Catholic who attended daily mass and had an active social life in her senior home community. During family gatherings, her face often bore a reflective, sad expression, but accounts from those who knew her suggest that she was not unhappy. I vividly recall a Thanksgiving spent at her mobile retirement community home, where she baked the most delectable cookies, earning her the moniker "Cookie Grandma" among my older cousins who shared that with me years later.

 My last living aunt shared some photographs with me, evoking a sense of yearning for more time with my grandmother. I am especially curious about her faith and the history of her family, who immigrated from Germany on both sides. While census, birth, and death records provide meager glimpses into her life, I know there is much more to her story that I have yet to encounter.

Grandma Ravet as a young girl. I think that is the biggest smile I have ever seen on her face. I never knew she had a dog. I know my dad did not have one when growing up.

My grandparent's wedding. I think I see where she got her stern expression from. Her mom and grandmother who are on the right.

I wonder what she is thinking about?

Grandma and her seven children, none of which survive today. This picture is c. 1990. My father is the one in the back with the hat.

Catholic Involvement During the American Revolution

    Three of my grandparents had been raised Catholic and thus, I was raised Catholic. During much of the year I was in the San Francisco Bay Area going to Catholic schools and felt much at home. Every summer my younger sister and I were put on an airplane to go to New Hampshire, where we would stay with my grandparents. My Papa was raised Northern Baptist and his wife, my Nana converted to Protestantism after being disowned by her Catholic family for marrying him. During the summer when we were around our aunts, uncles, and cousins, we were the sole Catholics and that just felt odd. The small town my grandparents lived in had a small Catholic Church, but during the summer services moved to a larger building near the lake so that tourists from Massachusetts and New York could attend Sunday mass. When I was at home in California, I saw so many Catholic Churches and assumed that most Americans were Catholic, but every summer I was reminded that was not the case. The history of Catholics in America has always been interesting to me, and my favorite topics are Colonial America and the Revolution. My husband comes from a prominent Protestant family that can trace its history in both New England and in Georgia. Searching for my family is a much more daunting task. I even searched in vain to find evidence of their involvement in the American Revolution in a hope to join DAR, but no luck. The ones who had moved to the Americas from Europe were established in Quebec, however most would not arrive until a century or two later.

    The Catholic nations of Europe simply were never as enthusiastic about spreading out and settling like the Protestants of England of even the Netherlands, thus they had exceedingly small numbers even decades after their settlement in the Americas. I was curious what could find in the way of older sources on the contributions of Catholics during the American Revolution, so I searched the database Sabin Americana, which has a wide collection of monographs and pamphlets on Americas, written in many languages and spanning the 16th through early 20th centuries. I came up with a text on the Catholic History of North America and explored the chapter on the American Revolution. This text is a collection of lectures that were given by Thomas D’Arcy McGee who had authored a book on the Irish during the Reformation and their settlement in North America.

    McGee confirms what I already knew about Catholics in America but has stories and data to back it up. For example, in 1774, there were only sixteen Catholic missionaries in all of Pennsylvania and Maryland and all of them were Jesuits and that the Catholics who did join the Continental Army came from the lower classes of Catholic immigrants.[1] Although most colonists were not Catholic, there was still a role played by Catholics in support of the revolutionary experience. The French sent thousands of Catholic troops in support of the Americans and the Lithuanian-Polish hero Tadeusz Kościuszko also played a crucial role in obtaining an American victory.[2]

     Although these contributions were certainly important, what Americans really wanted was for Quebec to join the American side. One reason so little is mentioned of Catholic contributions during the American Revolution besides due to their numerically smaller numbers in comparison to Protestants is the fact that even America’s most talented diplomat, Ben Franklin, failed to arouse the interest of the people of Quebec into joining the American war effort.[3]

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[1] Thomas D'Arcy McGee, The Catholic History of North America: Five Discourses: To Which Are Added Two Discourses on the Relations of Ireland and America (Boston: P. Donahoe, 1855, 1855). https://link.gale.com/apps/doc/CY0100535948/SABN?u=vic_liberty&sid=bookmark-SABN&xid=e1bae8f4&pg=85, 78.

[2] McGee, The Catholic History of North, 84.

[3] Charles H. Metzger, "Catholics in the Period of the American Revolution," Records of the American Catholic Historical Society of Philadelphia 59, no. 3 (1948), accessed 2023/04/09/, http://www.jstor.org/stable/44210031, 216.