Classics of Conservatism - Part XXIV - America's Great Depression

This month's Classic of Conservatism is Murray Rothbard's 1963 work, "America's Great Depression."



25 years have elapsed since I read this book, but I will never forget its main lesson (and that of the other Austrian economics books I read at that time). The Depression of the 1930's was caused by the alternating periods of expansion and contraction of the money supply by the Federal Reserve Board. The Federal Reserve, under the leadership of Benjamin Strong (Governor of the Federal Reserve Bank of New York) began a long credit expansion in 1922. This expansion continued until the summer of 1929, when the FED reversed course and began contracting the money supply. Several months later, the stock market crashed. The stock market crash is typically considered the beginning of the Great Depression. In fact the Depression had its roots at the beginning the 1920's. (I am somewhat fuzzy on the dates due to the time elapsed since I read the book.)

MSM/DNC mythmakers usually assign the crash of October 1929 as the beginning and attempt to address stock trading practices as the cause. They have convinced generations of students that the activities of a few stock traders somehow caused the collapse of the entire economy. The "historians" ignore the role of centralized credit expansion on the entire economy over a period of years. The term "fractional reserve banking" never appears in print in today's "newspapers."

Instead of focusing on the period from 1922 through 1929, the establishment mouthpieces have caused the average reader to focus on the activities of a few stock brokers at the very end of the great credit expansion. Even conservatives who try to explain the issue in terms of FED policy blame the FED for contracting in the summer of 1929 instead of blaming the FED for creating the bubble over the course of a decade.

If fractional reserve banking did not exist, the economy would not grow nearly as fast as it has during the various bubbles of the 20th (and 21st) century, but the inevitable collapses would not have occurred either. Growth would be slow, steady and safe. We need not fear the crises that have plagued our economy on a regular basis since 1913 (and the inevitable and predictable crisis that now threatens to destroy the economy completely).

Rothbard is one of the few writers to explain the Depression in terms of the 1920's credit expansion instead of the non-issues that the most writers and teachers focus on. In Rothbard's book, you will not read first hand accounts of bread lines and soup kitchens. Nor will you see a rehash of such events as the "bonus army" or the creation of the WPA. These events were the results of the policies that created the Depression. Most writers focus only on these results and teach nothing about the causes.

Rothbard explains the business cycle theory and its application to the credit expansion of the 1920's.

We all acknowledge that today's crisis results from bankers making bad loans to unqualified individuals. But very few have bothered to ask why so many lenders made these mistakes at the same time. This is the question that Rothbard asks in America's Great Depression. Like anyone else, businessmen will make mistakes (and usually pay the consequences). But the business cycle over the past century features all businesses making the same mistakes at the same time. Whether these mistakes include risky lending, overproduction, investment in unprofitable lines, overspending, etc., the mistakes are coordinated throughout the economy and are not limited to one region or one city or one sector. Rothbard shows that this phenomenon occurred even in the 1920's - well before today's "global economy" existed. The one factor that tied all of these errors together was Federal Reserve policy. And Federal Reserve policy has served this function in every recessionary cycle since the FED was created in 1913.

If you are not sure of the extent of misinformation that relates to the Depression, ask a friend if he knows when the Federal Reserve Board was created. Far too many people will say that the FED was created by FDR as one of his many reforms following the stock market crash. Only when one realizes that the FED existed 16 years before the stock market crash will one see an example of how common beliefs about the Depression and economic conditions have become so muddled.

Rothbard provides detail and documentation to demonstrate where the blame truly belongs. After reading America's Great Depression, you will realize that today's crisis was inevitable decades ago and that modern policies and "solutions" will only make the problem worse.

For further reading on the business cycle and the role of a central bank, see Ludwig von Mises' "Theory of Money and Credit." For more history of the Depression and how it related to credit policies following the creation of the FED, see Garet Garrett's "Bubble that Broke the World."