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Rothbard Introduction to the Fourth Edition Copyright © 1983 by Murray N.. Rothbard Introduction to the Fifth Edition Copyright © 2000 by The Ludwig von Mises Institute Copyright © 2000

America’s Great Depression

Fifth Edition

Copyright © 1963, 1972 by Murray N Rothbard

Introduction to the Third Edition Copyright © 1975 by Murray N Rothbard Introduction to the Fourth Edition Copyright © 1983 by Murray N Rothbard Introduction to the Fifth Edition Copyright © 2000 by The Ludwig von Mises Institute

Copyright © 2000 by The Ludwig von Mises Institute

All rights reserved Printed in the United States of America.

No part of this book may be reproduced in any manner whatsoever without written permission except in the case of reprints in the context of reviews For information write The Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832.

ISBN No.: 0-945466-05-6

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Mr and Mrs Victor Zadikov, Jeannette Zummo

Introduction v

vi America’s Great Depression

Acknowledgments

While the problem of 1929 has long been of interest to

myself as well as most Americans, my attention wasfirst specifically drawn to a study of the GreatDepression when Mr Leonard E Read, President of theFoundation for Economic Education, asked me, some years ago, toprepare a brief paper on the subject I am very grateful to Mr Readfor being, in this way, the sparkplug for the present book Havingwritten the article, I allowed the subject to remain dormant forseveral years, amid the press of other work At that point, on thewarm encouragement of Mr Richard C Cornuelle, now of theFoundation for Voluntary Welfare, I proceeded on the task ofexpansion to the present work, an expansion so far-reaching as toleave few traces of the original sketch I owe a particular debt tothe Earhart Foundation, without whose aid this study could neverhave been written

My supreme debt is to Professor Ludwig von Mises, whosemonumental theory of business cycles I have used to explain thecauses of the otherwise mysterious 1929 depression Of allProfessor Mises’s notable contributions to economic science, hisbusiness cycle theory is certainly one of the most significant It is

no exaggeration to say that any study of business cycles not basedupon his theoretical foundation is bound to be a fruitless under-taking

The responsibility for this work, of course, is entirely my own

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Introduction vii

viii America’s Great Depression

Contents

Introduction to the Fifth Edition xi

Introduction to the Fourth Edition xvii

Introduction to the Third Edition xxv

Introduction to the Second Edition xxxi

Introduction to the First Edition xxxv

PART I: BUSINESS CYCLE THEORY 1 THE POSITIVE THEORY OF THE CYCLE 3

Business cycles and business fluctuations 4

The problem: the cluster of error 8

The explanation: boom and depression 9

Secondary features of depression: deflationary credit contraction 14

Government depression policy: laissez-faire 19

Preventing depressions 23

Problems in the Austrian theory of the trade cycle 29

2 KEYNESIAN CRITICISMS OF THE THEORY 37

The liquidity “trap” 39

Wage rates and unemployment 42

3 SOME ALTERNATIVE EXPLANATIONS OF DEPRESSION: A CRITIQUE 55

General overproduction 56

Underconsumption 57

The acceleration principle 60

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Introduction ix

Dearth of “investment opportunities” 68

Schumpeter’s business cycle theory 72

Qualitative credit doctrines 75

Overoptimism and overpessimism 80

PART II: THE INFLATIONARY BOOM: 1921–1929 4 THE INFLATIONARY FACTORS 85

The definition of the money supply 87

Inflation of the money supply, 1921–1929 91

Generating the inflation, I: reserve requirements 95

Generating the inflation, II: total reserves 101

Treasury currency 116

Bills discounted 117

Bills bought–acceptances 126

U.S government securities 133

5 THE DEVELOPMENT OF THE INFLATION 137

Foreign lending 137

Helping Britain 142

The crisis approaches 159

6 THEORY AND INFLATION: ECONOMISTS AND THE LURE OF A STABLE PRICE LEVEL 169

PART III: THE GREAT DEPRESSION: 1929–1933 7 PRELUDE TO DEPRESSION: MR HOOVER AND LAISSEZ-FAIRE 185

The development of Hoover’s interventionism: unemployment 188

The development of Hoover’s interventionism: labor relations 199

8 THE DEPRESSION BEGINS: PRESIDENT HOOVER TAKES COMMAND 209

The White House conferences 210

Inflating credit 214

Public works 216

The New Deal Farm Program 217

9 1930 239

More inflation 239

The Smoot–Hawley Tariff 241

Hoover in the second half of 1930 243

The public works agitation 250

The fiscal burdens of government 253

10 1931—“THE TRAGIC YEAR” 257

The American monetary picture 260

The fiscal burden of government 263

Public works and wage rates 264

Maintaining wage rates 267

Immigration restrictions 270

Voluntary relief 271

Hoover in the last quarter of 1931 272

The spread of collectivist ideas in the business world 277

11 THE HOOVER NEW DEAL OF 1932 285

The tax increase 286

Expenditures versus economy 288

Public works agitation 292

The RFC 296

Governmental relief 300

The inflation program 301

The inflation agitation 308

Mr Hoover’s war on the stock market 316

The home loan bank system 317

The bankruptcy law 318

The fight against immigration 319

12 THE CLOSE OF THE HOOVER TERM 321

The attack on property rights: the final currency failure 323

Wages, hours, and employment during the depression 330

Conclusion: the lessons of Mr Hoover’s record 336

APPENDIX: GOVERNMENT AND THE NATIONAL PRODUCT, 1929–1932 339

INDEX 349

TABLE 1: Total Money Supply of the United States,

1921–1929 92

TABLE 2: Total Dollars and Total Gold Reserves 94

TABLE 3: Member Bank Demand Deposits 98

TABLE 4: Demand and Time Deposits 99

TABLE 5: Time Deposits 100

TABLE 6: Member Bank Reserves and Deposits 102

TABLE 7: Changes in Reserves and Causal Factors

1921–1929 109

TABLE 8: Per Month Changes in Reserves and Causal Factors 1921–1929 110

TABLE 9: Factors Determining Bank Reserves July–October 1929 166

TABLE I: National Product 341

TABLE II: Income Originating in Government 342

TABLE III: Private Product 342

TABLE IV: Government Expenditures 343

TABLE V: Expenditures of Government Enterprises 345

TABLE VI: Expenditures of Government and Government Enterprises 345

TABLE VII: Receipts of Government and Government Enterprises 346

TABLE VIII: Government and the Private Product 347

xi America’s Great Depression

xii America’s Great Depression

The Wall Street collapse of September–October 1929 and

the Great Depression which followed it were among themost important events of the twentieth century Theymade the Second World War possible, though not inevitable, and

by undermining confidence in the efficacy of the market and thecapitalist system, they helped to explain why the absurdly ineffi-cient and murderous system of Soviet communism survived for solong Indeed, it could be argued that the ultimate emotional andintellectual consequences of the Great Depression were not final-

ly erased from the mind of humanity until the end of the 1980s,when the Soviet collectivist alternative to capitalism crumbled inhopeless ruin and the entire world accepted there was no substitutefor the market

Granted the importance of these events, then, the failure of torians to explain either their magnitude or duration is one of thegreat mysteries of modern historiography The Wall Street plungeitself was not remarkable, at any rate to begin with The UnitedStates economy had expanded rapidly since the last downturn in

his-1920, latterly with the inflationary assistance of the bankers andthe federal government So a correction was due, indeed overdue.The economy, in fact, ceased to expand in June, and it wasinevitable that this change in the real economy would be reflected

in the stock market

The bull market effectively came to an end on September 3,

1929, immediately the shrewder operators returned from vacationand looked hard at the underlying figures Later rises were merely

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Introduction xiii

hiccups in a steady downward trend On Monday October 21, forthe first time, the ticker tape could not keep pace with the news offalls and never caught up Margin calls had begun to go out bytelegram the Saturday before, and by the beginning of the weekspeculators began to realize they might lose their savings and eventheir homes On Thursday, October 24, shares dropped verticallywith no one buying, and speculators were sold out as they failed torespond to margin calls Then came Black Tuesday, October 29,and the first selling of sound stocks to raise desperately needed liq-uidity

So far all was explicable and might easily have been predicted.This particular stock market corrective was bound to be severebecause of the unprecedented amount of speculation which WallStreet rules then permitted In 1929 1,548,707 customers hadaccounts with America’s 29 stock exchanges In a population of 120million, nearly 30 million families had an active association withthe market, and a million investors could be called speculators.Moreover, of these nearly two-thirds, or 600,000, were trading onmargin; that is, on funds they either did not possess or could noteasily produce

The danger of this growth in margin trading was compounded

by the mushrooming of investment trusts which marked the lastphase of the bull market Traditionally, stocks were valued at aboutten times earnings With high margin trading, earnings on shares,only one or two percent, were far less than the eight to ten percentinterest on loans used to buy them This meant that any profitswere in capital gains alone Thus, Radio Corporation of America,which had never paid a dividend at all, went from 85 to 410 points

in 1928 By 1929, some stocks were selling at 50 times earnings Amarket boom based entirely on capital gains is merely a form ofpyramid selling By the end of 1928 the new investment trusts werecoming onto the market at the rate of one a day, and virtually allwere archetype inverted pyramids They had “high leverage”—anew term in 1929—through their own supposedly shrewd invest-ments, and secured phenomenal stock exchange growth on thebasis of a very small plinth of real growth United FoundersCorporation, for instance, had been created by a bankruptcy with

Introduction to the Fifth Edition xiv

an investment of $500, and by 1929 its nominal resources, whichdetermined its share price, were listed as $686,165,000 Anotherinvestment trust had a market value of over a billion dollars, but itschief asset was an electric company which in 1921 had been worthonly $6 million These crazy trusts, whose assets were almostentirely dubious paper, gave the boom an additional superstructure

of pure speculation, and once the market broke, the “high age” worked in reverse

lever-Hence, awakening from the pipe dream was bound to be painful,and it is not surprising that by the end of the day on October 24,eleven men well-known on Wall Street had committed suicide.The immediate panic subsided on November 13, at which pointthe index had fallen from 452 to 224 That was indeed a severe cor-rection but it has to be remembered that in December 1928 theindex had been 245, only 21 points higher Business and stockexchange downturns serve essential economic purposes They have

to be sharp, but they need not be long because they are ing All they require on the part of the government, the businesscommunity, and the public is patience The 1920 recession hadadjusted itself within a year There was no reason why the 1929recession should have taken longer, for the American economy wasfundamentally sound If the recession had been allowed to adjustitself, as it would have done by the end of 1930 on any earlier anal-ogy, confidence would have returned and the world slump neednever have occurred

self-adjust-Instead, the stock market became an engine of doom, carrying

to destruction the entire nation and, in its wake, the world By

July 8, 1932, New York Times industrials had fallen from 224 at the

end of the initial panic to 58 U.S Steel, the world’s biggest andmost efficient steel-maker, which had been 262 points before themarket broke in 1929, was now only 22 General Motors, alreadyone of the best-run and most successful manufacturing groups inthe world, had fallen from 73 to 8 These calamitous falls weregradually reflected in the real economy Industrial production,which had been 114 in August 1929, was 54 by March 1933, a fall

of more than half, while manufactured durables fell by 77 percent,nearly four-fifths Business construction fell from $8.7 billion in

1929 to only $1.4 billion in 1933

This pattern was repeated all over the industrial world It wasthe worst slump in history, and the most protracted Indeed therewas no natural recovery France, for instance, did not get back to its

1929 level of industrial production until the mid-1950s The worldeconomy, insofar as it was saved at all, was saved by war, or itspreparations The first major economy to revitalize itself wasGermany’s, which with the advent of Hitler’s Nazi regime inJanuary, 1933, embarked on an immediate rearmament program.Within a year, Germany had full employment None of the othersfared so well Britain began to rearm in 1937, and thereafter unem-ployment fell gradually, though it was still at historically high levelswhen war broke out on September 3, 1939 That was the date onwhich Wall Street, anticipating lucrative arms sales and eventuallyU.S participation in the war, at last returned to 1929 prices

It is a dismal story, and I do not feel that any historian has isfactorily explained it Why so deep? Why so long? We do notreally know, to this day But the writer who, in my judgment, hascome closest to providing a satisfactory analysis is Murray N

sat-Rothbard in America’s Great Depression For half a century, the

con-ventional, orthodox explanation, provided by John MaynardKeynes and his followers, was that capitalism was incapable of sav-ing itself, and that government did too little to rescue an intellec-tually bankrupt market system from the consequences of its ownfolly This analysis seemed less and less convincing as the yearswent by, especially as Keynesianism itself became discredited

In the meantime, Rothbard had produced, in 1963, his ownexplanation, which turned the conventional one on its head Theseverity of the Wall Street crash, he argued, was not due to the unre-strained license of a freebooting capitalist system, but to government

Introduction to the Fifth Edition xvi

insistence on keeping a boom going artificially by pumping ininflationary credit The slide in stocks continued, and the realeconomy went into freefall, not because government interfered toolittle, but because it interfered too much Rothbard was the first tomake the point, in this context, that the spirit of the times in the1920s, and still more so in the 1930s, was for government to plan,

to meddle, to order, and to exhort It was a hangover from the FirstWorld War, and President Hoover, who had risen to worldwideprominence in the war by managing relief schemes, and had thenheld high economic office throughout the twenties before movinginto the White House itself in 1929, was a born planner, meddler,orderer, and exhorter

Hoover’s was the only department of the U.S federal ment which had expanded steadily in numbers and power duringthe 1920s, and he had constantly urged Presidents Harding andCoolidge to take a more active role in managing the economy.Coolidge, a genuine minimalist in government, had complained:

govern-“For six years that man has given me unsolicited advice—all of itbad.” When Hoover finally took over the White House, he fol-lowed his own advice, and made it an engine of interference, firstpumping more credit into an already overheated economy and,then, when the bubble burst, doing everything in his power toorganize government rescue operations

We now see, thanks to Rothbard’s insights, that the Hoover–Roosevelt period was really a continuum, that most of the “inno-vations” of the New Deal were in fact expansions or intensifica-tions of Hoover solutions, or pseudo-solutions, and that FranklinDelano Roosevelt’s administration differed from Herbert Hoover’s

in only two important respects—it was infinitely more successful

in managing its public relations, and it spent rather more ers’ money And, in Rothbard’s argument, the net effect of theHoover–Roosevelt continuum of policy was to make the slumpmore severe and to prolong it virtually to the end of the 1930s.The Great Depression was a failure not of capitalism but of thehyperactive state

taxpay-I will not spoil the reader’s pleasure by entering more deeply

into Rothbard’s arguments His book is an intellectual tour de force,

Introduction xvii

in that it consists, from start to finish, of a sustained thesis, sented with relentless logic, abundant illustration, and great elo-quence I know of few books which bring the world of economichistory so vividly to life, and which contain so many cogent les-sons, still valid in our own day It is also a rich mine of interestingand arcane knowledge, and I urge readers to explore its footnotes,which contain many delicious quotations from the great and thefoolish of those days, three-quarters of a century ago It is not sur-prising that the book is going into yet another edition It has stoodthe test of time with success, even with panache, and I feel honored

pre-to be invited pre-to introduce it pre-to a new generation of readers

PAUL JOHNSON

1999

Introduction to the Fourth Edition

There seems to be a cycle in new editions of this book The

second edition was published in the midst of the 1969–71inflationary recession, the third in the mighty inflationarydepression of 1973–75 The economy is now in the midst ofanother inflationary depression at least as severe, and perhaps evenmore so, than the 1973–75 contraction, which had been the worstsince the 1930s

The confusion and intellectual despair we noted in the duction to the third edition has now intensified It is generally con-ceded that Keynesianism is intellectually bankrupt, and we aretreated to the spectacle of veteran Keynesians calling for taxincreases during a severe depression, a change of front that fewpeople consider worth noting, much less trying to explain Part of the general bewilderment is due to the fact that the cur-rent, severe 1981–83 depression followed very swiftly after therecession of 1979–80, so that it begins to look that the fitful andshort-lived recovery of 1980–81 may have been but an interlude inthe midst of a chronic recession that has lasted since 1979 Pro-duction has been stagnating for years, the auto industry is in badshape, thrift institutions are going bankrupt by the week, andunemployment has reached its highest point since the 1930s

intro-A notable feature of the 1981–83 depression is that, in contrast

to 1973–75, the drift of economic thought and policy has not beentoward collectivist planning but toward alleged free-market poli-cies The Reagan administration began with a fanfare of allegedlydrastic budget and tax cuts, all of which lightly masked massive

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