America's Great Depression

Murray Rothbard published America's Great Depression in 1963 to explain the American economy from 1921 to 1933. Its first part sets out a business cycle theory in which bank credit, expanded with central bank support, pushes interest rates below the level voluntary saving would sustain and draws resources into projects consumers will not fund to completion. A second part applies the theory to the credit boom of 1921 to 1929. Herbert Hoover occupies the third, which runs from the crash to early 1933 and argues that federal efforts to hold up wages and farm prices and to rescue weak firms turned a necessary liquidation into a prolonged depression. Rothbard stops before the New Deal.

Read it for the connection between capital theory and a monetary record whose claims can be compared with rival histories. The Mises Institute serves the fifth edition of 2000, which keeps Rothbard's introductions of 1971, 1975 and 1982 and adds an introduction by the historian Paul Johnson, a later interpreter whose claims about the world after 1933 are his own.

A stable price level in the 1920s was, on Rothbard's reading, evidence of inflation, which he defines as monetary expansion. American productivity rose fast during the decade, and an unhampered market would have let prices drift downward as output per worker climbed. Wholesale and consumer indexes instead held roughly flat, which he reads as money growth large enough to cancel that fall. His broad money aggregate adds time and savings deposits, savings-and-loan shares and life insurance surrender values to currency and demand deposits. The same chapters credit the decade with real gains from saving and invention, so his claim is that a central bank aiming at price stability can let credit expansion run unnoticed while productivity masks it.

The cycle theory explains why the hidden expansion ends in a bust. New credit enters as business loans, and the lower rate tells entrepreneurs that the public has become willing to wait longer for output. Firms start longer, more capital-intensive processes in machinery and construction. Consumers' time preferences have not moved, so once the credit flow slows, spending restores the old proportion between consumption and investment, capital goods prices fall relative to consumer goods, and projects that paid at the artificial rate show losses. Rothbard treats the depression as that correction and adds that it can proceed without any fall in the money supply. He also separates consumer credit from the business lending that drives his cycle, so the theory concerns one channel of credit and does not condemn borrowing in general.

If recovery requires capital goods prices and wage rates to fall relative to consumer goods, any policy that freezes them delays the adjustment, and the case against Hoover follows. Rothbard's central example is the White House conferences of late 1929, where large employers pledged to maintain wage rates; he adds the Farm Board's support of wheat and cotton prices, accelerated public works and Reconstruction Finance Corporation lending. Each measure, in his account, protected existing firms and employed workers while blocking the price changes that would have cleared markets. Rothbard's Hoover still had limits. When Gerard Swope proposed in 1931 a compulsory cartellization that would force every industry into trade associations under federal control to stabilize prices and production, Hoover refused to back the plan and attacked it as fascism. The Hoover Presidential Library exhibit on the Great Depression confirms the wage pledges and the public works program, although a policy's existence does not measure its effect.

Rothbard's table of average hourly earnings in twenty-five manufacturing industries shows money rates near their 1929 level until late 1931, while falling prices lifted real hourly rates more than ten percent above that level. He states that weekly earnings and total payroll fell, so his claim joins high hourly rates for workers still employed with shrinking employment and income for labor as a whole. Composition limits the inference, since layoffs that fall first on lower-paid workers raise the average for those who remain.

A parallel distinction governs the monetary chapters. During 1932 total bank reserves rose by an amount Rothbard calls unprecedented for the System, while his money supply fell, mostly in bank deposits. The Federal Reserve bought securities from late February through July, and gold outflows, rising currency in circulation and banks repaying Fed debt offset most of the reserves those purchases added as deposits fell sharply. After the buying stopped, reserves kept rising, now mainly through a gold inflow, and the money supply held roughly constant. Rothbard traces the gap between reserves and money to the banks, which, worried by failures and depositor confidence, held growing excess reserves and declined to expand. The Fed could push reserves up, outside flows could move them either way, and deposits grew or shrank as banks and their depositors chose. He acknowledges the broad contraction of 1929 to 1933 while distinguishing the Fed's reserve injections from the measured path of money.

The book's main limitation is its method, which Rothbard states openly. His original introduction holds that a theory stands on true premises and valid reasoning, and that statistics can neither confirm nor refute it, so history supplies cases where the theory applies. The sequence from boom to Hoover's interventions therefore illustrates the theory without estimating what each step contributed. His cycle theory also bears more directly on the origin of the boom than on the depth and duration of 1930 to 1933, where the explanation shifts to blocked wages and prices. Gary Richardson's 2013 Federal Reserve History essay on the Great Depression explains that severity through monetary contraction, debt deflation and a Federal Reserve that did too little to rescue failing banks, a criticism of the Fed that carries no endorsement of Rothbard. His remedy of closing failed banks, leaving depositors as forced savers holding illiquid assets, remains a contested counterfactual the book never shows would have been costless or quick.

In the national product appendix, Rothbard subtracts government spending from his gross private product and labels it depredation, a normative accounting choice. On his series the ratio of total depredations to that product nearly doubled from 1929 to 1932, mostly because private product shrank while the nominal outlays he classifies fell, and the ratio measures burden on his definition with no estimate of its effect on the slump. Anyone grounded in capital theory should read the book beside a contraction-centered history; it explains how a credit boom can run under stable prices and why Austrian theory locates the slump's length in blocked adjustment. Read the fifth edition in the America's Great Depression PDF from the Mises Institute.