America’s Great Depression Fifth Edition INSTITUTE MISES America’s Great Depression Fifth Edition Murray N. Rothbard 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 TO JOEY, the indispensable framework The Ludwig von Mises Institute dedicates this volume to all of its generous donors, and in particular wishes to thank these Patrons: Dr. Gary G. Schlarbaum – George N. Gallagher (In Memoriam), Mary Jacob, Hugh E. Ledbetter – Mark M. Adamo, Lloyd Alaback, Robert Blumen, Philip G. Brumder, Anthony Deden (Sage Capital Management, Inc.), Mr. and Mrs. Willard Fischer, Larry R. Gies, Mr. and Mrs. W.R. Hogan, Jr., Mr. and Mrs. William W. Massey, Jr., Ellice McDonald, Jr., MBE, Rosa Hayward McDonald, MBE, Richard McInnis, Mr. and Mrs. Roger Milliken (Milliken and Company), James M. Rodney, Sheldon Rose, Mr. and Mrs. Edward Schoppe, Jr., Mr. and Mrs. Robert E. Urie, Dr. Thomas L. Wenck – Algernon Land Co., L.L.C., J. Terry Anderson (Anderson Chemical Company), G. Douglas Collins, Jr., George Crispin, Lee A. Everhart, Douglas E. French, John William Galbraith, Walker S. Green, Mr. and Mrs. Max Hocutt, Donald L. Ifland, Joe R. Lee, Arthur L. Loeb, William R. Machgan, Dorothea H. Marica, Bernard Morton, Daniel W. Muirhead, James O’Neill, Charles H. Reeves (Reeves Family Foundation), Donald Mosby Rembert, Stephen K. Salisbury, Mr. and Mrs. Allan Sawatzky, Joseph P. Schirrick, Mr. and Mrs. Thomas W. Singleton (Nehemiah Foundation), Robert W. Smiley, Jr. (The Benefit Capital Companies), Byron L. Stoeser, Joseph J. Syslo, James E. Tempesta, M.D., top dog™, Alex T. Van Rensselaer, Lawrence Van Someren, Sr., Mr. and Mrs. Quinten E. Ward, David Westrate, Anne Williamson, Keith S. Wood – Robert Bero, Robert J. Birnbach, Richard Bleiberg, John Hamilton Bolstad, Mr. and Mrs. Justin G. Bradburn, Jr., David and Elizabeth Butler, John W. Carpenter, Dr. John P. Cochran, John Cooke, Henry V. Curll, James V. De Santo (DTL Inc.), Chris A. Doose, Mr. and Mrs. Ted C. Earle, Jay Elliott, Eric Englund, Dr. Larry J. Eshelman, Lawrence N. Field, Elton B. Fox (The Fox Foundation), Capt. and Mrs. Maino des Granges, Christopher J. Hackett, John A. Halter, John R. Harper, Frank W. Heemstra, Douglas M. Joy, Michael G. Keller, D.O., Robert N. Kennedy, Richard J. Kossmann, M.D., David Kramer, Steven R. Krause, Gary R. Letsinger, Diana Lewis, J. Edward Martin, Norbert McLuckie, Samuel Mellos, Joseph Edward Paul Melville, Robert Mish, Dr. Dorothy Donnelley Moller, Jerry W. Moore, Keith E. Moore, D.M.D., Reed W. Mower, Brantley I. Newsom, Professor and Mrs. Stanley E. Porter, James A. Reichert, Thomas S. Ross, Conrad Schneiker, Roy Schroeder, William V. Stephens, Charles Toops, II (Mo-Ark Guide Service), Robert H. Walker (Walker Die Casting Company), Mr. and Mrs. Victor Zadikov, Jeannette Zummo Introduction v vi America’s Great Depression Acknowledgments W hile the problem of 1929 has long been of interest to myself as well as most Americans, my attention was first specifically drawn to a study of the Great Depression when Mr. Leonard E. Read, President of the Foundation for Economic Education, asked me, some years ago, to prepare a brief paper on the subject. I am very grateful to Mr. Read for being, in this way, the sparkplug for the present book. Having written the article, I allowed the subject to remain dormant for several years, amid the press of other work. At that point, on the warm encouragement of Mr. Richard C. Cornuelle, now of the Foundation for Voluntary Welfare, I proceeded on the task of expansion to the present work, an expansion so far-reaching as to leave few traces of the original sketch. I owe a particular debt to the Earhart Foundation, without whose aid this study could never have been written. My supreme debt is to Professor Ludwig von Mises, whose monumental theory of business cycles I have used to explain the causes of the otherwise mysterious 1929 depression. Of all Professor Mises’s notable contributions to economic science, his business cycle theory is certainly one of the most significant. It is no exaggeration to say that any study of business cycles not based upon his theoretical foundation is bound to be a fruitless under- taking. The responsibility for this work, of course, is entirely my own. vi 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 viii [...]... INFLATIONARY BOOM: 19 21 19 29 4 THE INFLATIONARY FACTORS 85 The definition of the money supply 87 Inflation of the money supply, 19 21 19 29 91 Generating the inflation, I: reserve requirements 95 Generating the inflation, II: total reserves 10 1 Treasury currency 11 6 Bills discounted 11 7 Bills bought–acceptances .12 6 U.S government securities 13 3 5 THE DEVELOPMENT... DEVELOPMENT OF THE INFLATION 13 7 Foreign lending 13 7 Helping Britain 14 2 The crisis approaches .15 9 6 THEORY AND INFLATION: ECONOMISTS AND THE LURE OF A STABLE PRICE LEVEL .16 9 PART III: THE GREAT DEPRESSION: 19 29 19 33 7 PRELUDE TO DEPRESSION: MR HOOVER AND LAISSEZ-FAIRE 18 5 The development of Hoover’s interventionism: unemployment 18 8 The development of Hoover’s... 6: Member Bank Reserves and Deposits 10 2 TABLE 7: Changes in Reserves and Causal Factors 19 21 19 29 10 9 TABLE 8: Per Month Changes in Reserves and Causal Factors 19 21 19 29 11 0 TABLE 9: Factors Determining Bank Reserves July–October 19 29 16 6 TABLE I: National Product 3 41 TABLE II: Income Originating in Government 342 TABLE III: Private Product 342 TABLE... NATIONAL PRODUCT, 19 29 19 32 339 INDEX 349 xi America’s Great Depression TABLES TABLE 1: Total Money Supply of the United States, 19 21 19 29 .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 .10 0 TABLE 6: Member Bank Reserves and Deposits 10 2 TABLE 7: Changes... interventionism: labor relations 19 9 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 Contents x 9 19 30 .239 More inflation 239 The Smoot–Hawley Tariff .2 41 Hoover in the second half of 19 30 243 The public works agitation... 253 10 19 31 “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 2 71 Hoover in the last quarter of 19 31 272 The spread of collectivist ideas in the business world 277 11 THE HOOVER NEW DEAL OF 19 32... The inflation program 3 01 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 3 21 The attack on property rights: the final currency failure 323 Wages, hours, and employment during the depression 330 Conclusion: the... economy Industrial production, which had been 11 4 in August 19 29, was 54 by March 19 33, a fall of more than half, while manufactured durables fell by 77 percent, nearly four-fifths Business construction fell from $8.7 billion in 19 29 to only $1. 4 billion in 19 33 Introduction xv Unemployment rose over the same period from a mere 3.2 percent to 24.9 percent in 19 33, and 26.7 percent the following year At... midst of a full-scale inflationary depression The inflationary recession of 19 69– 71 has been quickly succeeded by a far more inflationary depression which began around November 19 73, and skidded into a serious depression around the fall of 19 74 Since that time, physical production has declined steadily and substantially, and the unemployment rate has risen to around 10 percent, and even higher in key... calling for tax increases during a severe depression, a change of front that few people consider worth noting, much less trying to explain Part of the general bewilderment is due to the fact that the current, severe 19 81 83 depression followed very swiftly after the recession of 19 79–80, so that it begins to look that the fitful and short-lived recovery of 19 80– 81 may have been but an interlude in the . reserves 10 1 Treasury currency 11 6 Bills discounted 11 7 Bills bought–acceptances 12 6 U.S. government securities 13 3 5 THE DEVELOPMENT OF THE INFLATION 13 7 Foreign lending 13 7 Helping Britain 14 2 The. 10 0 TABLE 6: Member Bank Reserves and Deposits 10 2 TABLE 7: Changes in Reserves and Causal Factors . . . 19 21 19 29 10 9 TABLE 8: Per Month Changes in Reserves and Causal Factors . . . 19 21 19 29. Private Product 347 xi America’s Great Depression xii America’s Great Depression Introduction to the Fifth Edition T he Wall Street collapse of September–October 19 29 and the Great Depression which