51, NO. 9, SEPTEMBER 2001
America's Great Depression, fifth
by Murray N. Rothbard
Auburn, AL: Ludwig von Mises Institute, 2000,
pp. xlii + 368.
Reviewed by Roger W. Garrison
may not be conventional to review the fifth edition of a book that appears
several years after its author's passing. But America's Great Depression
is not a conventional book. It is written with verve and aplomb. And its
rendition of the Austrian theory of the business cycle, critique of alternative
theories, and detailed history of the early part of the Great Depression
(1929-1933) have captured the attention of a small but growing group of
students for nearly four decades.
of the five editions (1963, 1972, 1975, 1982, and 2000) has had a different
publisher; each of the first four has had its own introduction by the author.
With the fifth edition, we get a quality hardback and a new typesetting
with footnotes instead of endnotes, and we get a spirited introduction
by historian Paul Johnson. A new dust jacket is fashioned from a black-and-white
photo showing throngs of grown men in winter coats and fedoras standing
despondently in line and casting long shadows. The image cries out for
an explanation: How could things have gone so wrong?
Great Depression has cast a long shadow of its own over twentieth-century
economic history and contemporary policy issues. In many circles—even
in academic circles—it is still acceptable
simply to point to the experience of the 1930s as clear evidence that market
economies are prone to collapse. Rothbard provides an alternative understanding.
Unsound policies of the central bank set the economy off on an unsustainable
growth path in the 1920s, creating the conditions for the crash at the
end of that decade. Attempts on the part of the executive and legislative
branches to undo or mitigate the damage only made matters worse. The excesses
of the twenties, the eventual downturn, and the dramatic slide into deep
depression are all traced to governmental disruptions of the market process.
the Austrian view of boom and bust, the initial publication of America's
Great Depression had a certain strategic significance. Through the
1930s and into the early 1940s, F. A. Hayek had contributed importantly
to our understanding of the business cycle, especially in his Prices
and Production (1931 and 1935), but had then abandoned the topic in
favor of the broader issues of political economy. Lionel Robbins had dealt
with both theory and application in his Great Depression (1934)
but had subsequently experienced a conversion to more Keynesian ways of
thinking. He was to write in his 1971 autobiography that his earlier Austrian-oriented
view was a matter of "deep regret," and that he regarded his 1934 book
as "something which [he] would willingly see forgotten" (Robbins, Autobiography
of and Economist, Macmillan, 1971, pp. 154-55). Rothbard offered the
Austrian view anew in 1963 and without any subsequent regret. America's
Great Depression stood as a supplement to his Man, Economy, and
State (1962), which had been published the year before, and as a complement
to the relevant chapters of Ludwig von Mises's Human Action (3rd
rev. ed., 1963) which was issued in a revised edition that same year.
significant in 1963 was the book's contrast with competing views of the
events of the interwar period and its relationship to the general development
of macroeconomic thought. In that same year, Milton Friedman and Anna Schwartz
published their Monetary History of the United States: 1867-1960
(1963). They too blamed the Federal Reserve for the Great Depression. However,
the central focus in their treatment of the episode was the collapse of
the money supply (1929-1933) that took the economy into deep depression.
There was no suggestion that during the previous boom, credit expansion
had caused interest rates to be artificially low and hence had caused resources
to be systematically misallocated in a way that would eventually require
liquidation and reallocation. To the contrary, the nearly constant level
of prices throughout the twenties was taken as a sign of macroeconomic
theorizing at a lower level of aggregation, showed that policy-distorted
interest rates give rise to a mismatch between the intertemporal production
plans of entrepreneurs and the underlying intertemporal consumption preferences,
the latter being expressed by people's willingness to save. With the central
bank's policy of cheap credit, more investment projects are initiated than
can actually be completed. Too many resources are committed to the early
stages of production, leaving insufficient resources for the late stages.
The artificial boom is destined to end in a bust.
wasn't it the subsequent collapse of the money supply that converted bust
into deep depression? Rothbard (p. 263) says no and that the Federal Reserve,
instead of trying to reflate in the early 1930s, should have deliberately
deflated—"to bolster confidence in gold" and
to "speed up the adjustments needed to end the depression." With this argument,
he dismisses the monetarists' concern about monetary deflation and about
the resulting economywide discoordination that accompanies the piecemeal
downward adjustment of prices. Both then and now, some of Rothbard's readers
(but not all) would acknowledge the harmful effects of the monetary collapse-though
without this acknowledgment detracting unduly from the Austrian insights
about the genesis of the initial downturn.
business cycles on government was a hard sell in the 1960s, the decade
in which Keynesianism ruled supreme—both in
the seats of power and in the halls of academe. Keynesian theory and its
implications for policy activism was offered as an alternative to "classical
theory," a term that Keynes used to refer to virtually everyone except
himself, Thomas Malthus, and a few monetary cranks. Mises and Hayek were
certainly included under this label.
two years before the publication of Rothbard's book, Gardner Ackley, a
textbook writer with a distinct Keynesian bent of mind, dealt a serious
blow to the Austrian theory by introducing in his Macroeconomics
(Macmillan, 1961) a "classical model" that was for years to serve as a
foil for defending the Keynesian alternative. Where Keynes had lumped all
investment into a single aggregate to be contrasted with consumption, the
classical economists, according to Ackley, had simply added the two aggregates
together. The economy's "output" (of consumption goods and investment goods)
became the primary—if not the exclusive—focus
of this trumped-up classical analysis.
modern renditions of the classical model are faithful to Ackley's, the
recognition of how this model actually relates to classical (and Austrian)
thought has been almost wholly lost. Ackley himself understood the nature—though
not the significance—of the simplifying assumptions
needed to transform honest-to-God classical thought into his strawman classical
model. His introductory remarks are revealing:
Actually, Classical price theory
(as opposed to
monetary theory) implies that the volume of employment
and output is determined in the first instance not by the level
but by the
structure of prices. ... We shall simplify this part
of the analysis very greatly by assuming (1) that perfect competition prevails
in all industries; and (2) that each industry is vertically integrated:
it hires only labor and produces final output (using a given stock of capital
goods and natural resources); there are no intermediate goods. These assumptions
can be removed with no major change in results... (Ackley, 1961, p. 124).
the dichotomization of price theory and monetary theory is characteristic
of much of classical thought, it was certainly not characteristic of the
writings of Rothbard and of Austrian economists generally. For them, the
structure of prices that govern the various stages of production were as
relevant to their macroeconomic theorizing as to their microeconomic theorizing.
Accordingly, Ackley's second simplifying assumption (complete vertical
integration and the absence of intermediate goods) removes from consideration
the essential equilibrating mechanism—and
the potential for policy-induced disequilibrium—that
is central to the Austrian theory. Rothbard is to be credited for keeping
alive (during a period when the Austrian school was almost completely in
eclipse) the key ideas about how the market process goes right if left
on its own and how it goes so wrong when the central bank induces more
growth than savers are willing to finance.
In the introduction
to the fourth edition, Rothbard remarked that interest in his book on business
cycles has itself exhibited a cyclical pattern. Each subsequent edition
was published during a period of macroeconomic disorder-high unemployment,
high inflation, or both. His final introduction was written during the
inflationary recession of the early 1980s. Since that time, the economy
has experienced an economic expansion interrupted only by the so-called
Bush recession of 1990-91. It seems fitting, then, that the fifth edition
appears at the end of a record-breaking expansion that is widely attributed
to the pro-growth policies of the central bank.