Reaping the Whirlwind

A Review of Murray N. Rothbard’s America’s Great Depression

Murray N. Rothbard is a major American public intellectual with a commitment to individual liberty. He developed a new political philosophy over a period of 45 years to promote his style of libertarianism. He has devoted close attention to monetary theory and emphasizes the virtues of the classical gold standard and 100% reserve banking in many of his books.

BY KEOKI YUEN

A follower of Ludwig von Mises’s Austrian school of economic thinking, Murray N. Rothbard contends that “economic theories cannot be ‘tested’ by historical or statistical fact [but by] the correctness of the premises and the logical chain of reasoning” in hisAmerica’s Great Depression.1 From the perspective of the Austrian School of Economics, Rothbard explores the Great Depression’s economic catastrophe, explaining that the Great Depression was caused not by the normal forces of the free market, but rather by the inflationary monetary policy of the United States. Furthermore, these governmental monetary policies were aggravated by the interventionist polices of the Hoover Administration. Rothbard opens with his theory in comparison with other business cycle theories on the imbalances between investment and consumption and ends with the close of the Hoover term in 1933.

Rothbard explains the Austrian business cycle theory and addresses other alternative theories and criticisms. He uses the Misesian interpretation of the business cycle, which is “the economic analysis of the necessary consequences of intervention in the free market by bank credit expansion” as the only one theory that can provide a correct explanation.2 He refutes the theory of “stabilization” when he argues that changes take place continually in all spheres of the economy. Alterations in the proportions of investment, consumption, labor force, and time preferences typically exist as features of any economic system. Therefore, if one stabilizes these fluctuations, any rational productive activity would be eradicated. Furthermore, Rothbard distinguishes between business cycles and business fluctuations, stating that everyone lives in a society of continual change. Entrepreneurs try to forecast changes on the market. Due to American society’s inclination toward unending change, one can never precisely chart change in the future. The “boom bust” cycle is generated when the central bank has artificially reduced the cost of borrowing money by monetary intervention in the market and when bank credit is expanded to business. When artificially reducing the cost of borrowing money, businesses are encouraged to expand beyond what the market is able to bare. This results in a problem referred to as “The Cluster of Error.” Largely in the business of forecasting the market, entrepreneurs invest in the present in expectation of recouping a profit by sale to the consumers. However, the bank credit’s tampering with the free market will later cause a period of wasteful disinvestments also known as the “boom.” Inevitably, the crisis occurs when the consumers come to reinstate their desired proportions. The “Depression” is the process by which the economy adjusts to the errors and wastes of the “boom.” Rothbard emphasizes that the depression “is the recovery process, and the end of the depression heralds the return to normal, and to optimum efficiency.”3 He is stating that the depression is necessary to return to economic normalcy. Therefore, government intervention can only distort the market further. Rothbard gives a subchapter in the first chapter of his book on preventing depressions. In order to prevent depressions, he suggests that the government needs to stop any inflationary credit expansion. He also suggests that governmental policy in a case of depression should enforce strict laissez-faire. He also claims and explains how “[i]nflation is a form of taxation.”4 While it may seem to readers that it is a bit too extreme to tie inflation with taxation, Rothbard explains that when government created “imaginary” money out of thin air and used that non-existent money to offer away resources from private individuals, one may consider it a form of taxation for government officials. Continued governmental inflation leads to hyperinflation, which is far worse than any depression due to the fact that it destroys the currency, the economy, and the middle class. One major theory Rothbard uses in comparison with the Austrian or Misesian theory is the Schumpeterian theory. Joseph Schumpeter, a famous economist in the Czech Republic, had seen the boom-bust as the necessary price to be paid for capitalist development. However, Rothbard notes that only the Austrian theory saw the depression as necessary to eliminate distortions create from the boom. In Part 1 of his book, he mainly points out that the economy can never recover until the “bust” or liquidation process is completed and that any attempts to stop the liquidation process will only lengthen the severity and duration of the bust.

Based on theories that he explains in Part 1 concerning inflation, Rothbard points out inflationary factors and the development of inflation in the second part of his book, “The Inflationary Boom: 1921-1929”. The prime factor in “generating the inflation of the 1920s was the increase in total bank reserves.”5 This increase expanded the number of member banks and non-member banks. Monetary gold stock increased bank reserves due to the fact that when someone deposited gold in a commercial bank it added to the Federal Reserve. One preeminently controlled factor of increase, Rothbard says, was the Federal Reserve’s purchased assets. This was all under the control of the Federal Reserve authorities. Reserves had clearly increased to the same extent as Federal Reserve assets. For example, if the Federal Reserve purchased the asset from a member bank, it bought the asset and, in exchange, granted the bank an increase in its reserve. Another source of inflation in 1921-1923 was the increase in Treasury currency. The Pittman Act, legislation that permitted the national government to sell silver to Great Britain as a wartime measure, represented silver certificates at 100 percent of its value. Therefore, out of the $225 million gross increase in Treasury currency, $211 million was as a result of the inflationary silver certificates. These were all factors of inflation, and Rothbard in the fifth chapter explains the development of inflation. One motive for inflation was the United States’ desire to “help foreign governments and American exporters.”6 However, in order to supply foreign countries, the government promoted cheap money in the United States and stimulated foreign borrowing instead of simply lowering tariffs. This foreign aid injured the bulk of the American population. However, the United States’ aiding Britain and their respective depression particularly proved to be the most insidious and damaging foreign aid policy. In order to supply the aid for Great Britain, the United States “inflated” itself, in a sense. Foreign aid, Federal Reserve assets, and increase in Treasury currency all posed major factors that effected inflationary boom from 1921 to 1929.

The close of the inflationary boom was, in fact, the final stage of the great American boom under the stock market crash. A prelude to the Depression, laissez-faire was set in America’s first Great Depression. President Hoover sought New Deal anti-depression programs, which were marked by government intervention. Even though President Hoover was and still is said to be a follower of the laissez-faire theory, Rothbard contradicts this statement by asserting that Hoover did not respond to the Great Depression in a way that could be described as laissez-faire. Instead, he responded by jumpstarting unprecedented interventional programs in attempt to avoid a depression. Hoover expounded interventionism in many areas in the 1920s. Areas under Hoover interventionism were labor relations and unemployment. The union American Federation of Labor came into development, and American Association for Labor legislation and Public Works were all interventional programs created by Hoover. Farm intervention was one of the important policies of the New Deal for farm price support. Food Administration Grain Corporation had fixed high prices of wheat in order to stimulate production. “Whenever government intervenes in the market, it aggravates rather than settles the problems it has set out to solve,” says Rothbard, ultimately stating again that these government interventions are aggravating the problems of the Great Depression and are not letting the economy liquidize to normalcy.7 According to Rothbard, additionally, the depression “is the recovery process, and the end of the depression heralds the return to normal, and to optimum efficiency.”8

The last four chapters are solely based on the period of time from Hoover’s presidential administration in the 1930s to the end of the depression in 1933. In 1930, Hoover believed that further state and local action to expand public works would help cure unemployment. He opened up the biggest public works expenditure, the Hoover Dam on the Colorado River. In the second half of his term, he “took an unusual step to relieve the unemployment problem […] and to help keep wage rates up” he was to effectively ban further immigration into the United States.9 Rothbard relates this drastic situation to Hitler’s “cure” for unemployment by forcibly sending married women back to the home. Hoover believed that by reducing the labor force, it would cure unemployment. In Chapter 10, Rothbard expand more in detail “The Tragic Year” of 1931, the year that many politicians and economists were sure would herald recovery. Instead, the year brought a deeper crisis and depression. “The European collapse affected the United States monetarily and financially,” Rothbard states.10 The European collapse caused people to doubt the firmness of American adherence to the gold standard and considering that American banks held almost $2 billion worth of German bank acceptances. The Depression grew even worse, not because of the European situation, but because of turmoil within the United States. Production continued to plummet drastically. Prices and foreign trade plummeted as well. The unemployment skyrocketed to almost 16 percent of the population. One thing the government tried to maintain was wage rate. The federal government enacted the Bacon-Davis Act, which required a maximum eight-hour day on construction of public buildings and the payment of a reasonable wage in the locality. In the last quarter of 1931, Hoover “returned to a favorite theme: attacking short-selling, this time the wheat market.”10 Ready for drastic measures, he sought the “Hoover New Deal of 1932.” Some of the important programs he presented were to expand government aid to Federal land banks. Others were to grant direct loans of $300 million to states for relief and in another attempt, to legalize Hoover’s order restricting immigration. While Hoover’s New Deal is often described as a change of direction, it is more accurate to say that the New Deal was an intensification of what Hoover attempted in the past. President Hoover put into effect “the greatest program of offense and defense” against depression ever attempted in America.11

Rothbard explains the Austrian business cycle theory and addresses many of the alternative theories and criticism. He compares theories by Schumpeter to compare and contrast with his theory based on Austrian Mises thought. From the perspective of the Austrian School of Economics, Rothbard explores the Great Depression’s economic catastrophe by explaining that the Great Depression was not caused by the normal forces of the free market, but rather by inflationary monetary policies by the national government. He shows how an expansion monetary policy creates imbalance between investment and consumption. Rothbard’s thesis is that the only “possible way of resolving the issue is the realm of pure theory—by examining the conflicting premises and chains of reasoning.”12 His intention on writing this is not to write a complete economic history of the period, but to describe and emphasize the causes of the 1929 depression in America based on his theory of the business cycle. His and the Austrian point of view on how the government should react when in a depression is based on the ideas of Laissez-Faire; allowing industry to be free from state intervention.

Jack L. Rutner makes negative criticism on Rothbard’sAmerica’s Great Depression. Rutner dislikes Rothbard’s utilization of economic tools to explain how the Great Depression came to be. Furthermore, the critic doesn’t believe in theories based upon reason, but rather in those based upon economic facts. He believes that it “is the scientist’s task to tease the evidence […] from recalcitrant facts and observations for the hypothesis or theory being proposed.”13 He attacks the fact that economic theories “need recourse to facts and observations and refutable hypotheses.”14 Rutner relates Rothbard’s theory based on Misesian to be no better than Marxism because it is assertion based on ideas rather than facts. Another credible review is given by Roger W. Garrison. He admires Rothbard’s writing with “verve and aplomb.”15 Garrison agrees with Rothbard thinking based on reason and believe that that Rothbard’s “rendition of the Austrian theory of the business cycle, critique of alternative theories, and detailed history of the early part of the Great Depression captured the attention of a small but growing group of students and researchers for nearly four decades.”16 While Rutner gives a negative critique on Rothbard’s book, Garrison gives a rather positive critique.

In his America’s Great Depression, one of Rothbard’s greatest strengths emerges in exposing the dynamics behind the scenes that caused the crisis and its terrible crushing length and enormous suffering. Rothbard does a great job in conveying it in detail. He divides the book into three parts. In the first part, he explains economic theories and business cycle theories to make further sense in portraying his point of view in parts two and three. In his book he completely demolishes the idea that the Great Depression was caused by under-regulation and that Roosevelt and his New Deal got Americans out of the Depression. Another one of his strengths is that he is able to give his point of view and explanations in a simplistic way without overly-complicated terms and words. Many economists use complex economic terms to convey and back up their theory but to the reader it was more clear and to the point when he used simple language. However, one of Rothbard’s weaknesses is his lack of informational facts because of his Austrian thinking that one cannot base theories and the future of economy merely on facts but by reason. However, readers feel rewarded when he gives good informational facts. Rothbard created a great masterpiece by using economic reason and an in-depth analysis on the causes of the Great Depression.

One common question about Rothbard’s book is whether the Great Depression might have been caused by government policy when the entire government intervention took place after the Great Depression had already come close to peaking. However, Rothbard answers by asserting that the Great Depression was caused by inflation and various government interventions before the buildup of malinvestments during the boom and prolonged depression hit by various government interventions. Rothbard states the clearest injunction “don’t interfere with the market’s adjustment process.”

In conclusion, Rothbard clearly shows “how government intervention generated the unsound boom of the 1920s and how Hoover’s new departure aggravated the Great Depression by massive measures of interference.”17 Rothbard’s economic theory demonstrates that only governmental inflation can generate a boom and bust cycle. He shows that depression will be prolonged when government interferes with the liquidation process but resting squarely on the Misesian interpretation of the business cycle. As readers using his business cycle theory, we further understand how an economic boom can turn into an economic depression and the reason why there is a “cluster of errors.” Rothbard fulfilled the intention of his book which was to clearly find a solution by examining the conflicting premises and chains of reasoning.

Endnotes

Student Bio

Being a student at Irvine High School, Keoki Yuen displays the Irvine High School “IHS” values: Integrity, Honor, and Social Responsibility. Yuen is always dedicated in his work and always tries his best in academic classes and in his school athletics Cross Country and Track team.