VOL. 51, NO. 9, SEPTEMBER 2001

America's Great Depression, fifth edition
by Murray N. Rothbard
Auburn, AL: Ludwig von Mises Institute, 2000, pp. xlii + 368. 

Reviewed by Roger W. Garrison

It 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.
        Each 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?
        The Great Depression has cast a long shadow of its own over twentieth-century economic history and contemporary policy issues. In many circleseven in academic circlesit 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.
        Reasserting 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.
        Equally 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 health.
        Rothbard, 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.
        But 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.
        Blaming business cycles on government was a hard sell in the 1960s, the decade in which Keynesianism ruled supremeboth 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.
        Just 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 primaryif not the exclusivefocus of this trumped-up classical analysis.
        Though 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 naturethough not the significanceof 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).
        While 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 mechanismand the potential for policy-induced disequilibriumthat 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.