America's Great Depression [Hardcover]

Murray Rothbard's thesis is clear and succinct. Intervention in the free market economy by governments and the banking systems they control, are solely responsible for economic "booms". Also that when these booms lead to the inevitable "bust", governments often delay recovery by more intervention. Mr Rothbard gives a detailed and fascinating description of the road to ruin that led to the great American Depression and the reasons for its longevity.

All economic "boom's" share certain characteristics. Credit expansion and its inflationary effects are the source of the problem. Government contributes to this problem by its expansive monetary policies. It also allows the banks to indulge in irresponsible lending which often reaches levels that can never be redeemed given their lack of tangible assets. Rothbard reserves a special dislike of banks. Essentially all banks are potentially bankrupt due to lack of sufficient assets to support their loans. At worst they are a giant "Ponzi" scheme. Hence the susceptibility of banks to a run on their assets in a downturn.

Governments however shoulder the responsibility for this inflationary credit expansion as they exercise control of the banks through the Federal Reserve in the US and the Bank of England in the UK.

Governments tend to delay recovery by further expanding the money supply (recently labelled "quantitative easing" in the current world economic turmoil) in an attempt to stave off deflation. Such interventionist activity defers the inevitable liquidations and bankruptcy requisite for an early recovery. The book plots the prolonging of the US depression in the 1930's through President Hoover's interventionist policies in the 1930's, in fascinating detail.

This book is timeless in its lessons. It's presages the boom and bust of the last ten years in almost exact detail. It's a pity our politicians lack any sense of the past. This book should be made compulsory reading for them. I strongly recommend it.

I jumped into this book aged 17 while interviewing at University, and I had the feeling I'd jumped in at the deep end. Up to that point I had only experienced one or two basic introductions to Austrian Economics (including the excellent Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics ), and before that only a few pop-economics books like Freakonomics and The Undercover Economist. Of course, I had studied a year of A level economics, but A level economics, in my opinion, has a net-negative effect on one's powers of economic analysis. America's Great Depression is a book of deep and powerful analysis.

The book is structured in three sections, after the numerous (and interesting) introductions. Firstly, we have an exposition of the competing theories of the business cycle. Secondly, we have an historical analysis of the period from the end of the previous depression (1921) leading up to Hoover's inauguration as president in 1929. Thirdly, we have an analysis of the actions of Hoover's presidency.

In the first section, Rothbard convincingly argues that Keynesian, Monetarist and other theories of the Great Depression are, at their best, misled, and at their worst, utterly unrelated to the facts of the matter. This comes with one of the best elucidations of the Austrian Theory of the Business Cycle (ATBC or ABCT).

In the second section, Rothbard shows us how there was a significant inflation of the money supply 1921-29, instigated primarily by the banking elite on Wall Street and facilitated through the relatively new federal reserve apparatus.

In the third section, Rothbard ministers the coup de grace on the myth that Hoover was a do-nothing president, showing how many of the most significant alphabet agencies and legislation of FDR's presidency were directly built on Hoover's legacy. He shows how Hoover, far from the free market president he built a reputation as after the 30s, actually ran the greatest peacetime deficit of all time and engaged in vast, rights-violating actions, destroying any chance of a quick recovery as seen in 1920-21 under Harding. He even shows how FDR actually ran for government on a traditional Democratic platform of small, liberal, government, and then perpetrated a vast betrayal of voters with his fascistic methods directly aping those of Hitler and Mussolini.

This book is a must-read for anyone studying the period of the Great Depression in the USA, especially those focusing on Hoover's presidency, and is also a great exposition of ABCT. Moreover, I even suggest that Keynesians, American "liberals" and socialists should read this book; it is eye-opening, and interesting, even for those who disagree.

Popular belief is that Hoover was a firm believer in Laissez-Faire. This book sets out to clarify that he wasn't. Although he started to reverse his position late on in his presidency, most of his actions reflected an economic view not dissimilar to leaders in our present situation.

On the free markets, selling prices determine costs, not vice versa. This means that in a time of deflation, keeping wages high leads to more jobs losses, as wages reduce profitability, and in some cases even lead to closure of private enterprise. Yet, this was the course Hoover was on, declaring that wages should be kept high to retain spending power - ignoring that real spending power will increase during times of deflation, even with static wages. As an example - in the 1921 recession wages had been swiftly cut by 19%, and as a result, the United States were quick to emerge from the recession.

In the run-up to the depression (1927), Europe - and England especially - were in dire straits. The US Fed decided to cut interest rates, thereby artifially helping England, but also thereby boosting exports. However, once the European countries started faltering once again, the policy of cheap credit meant a substantial inflow of capital into the stock market, increasing stock prices and causing inflation. Furthermore, banks also shuffled deposits into time-locked accounts, thereby reducing reserve requirements, and allowing them to lend out even more money.

Once the depression hit, Hoover decided to increase public spending through infrastructure construction, and make cheap credit available to banks and heavy industry. The banks however, with interest rates on the decline, didn't find many opportune risk-reward scenarios, and cut lending thereby aggravating the situation. Furthermore, with the price of especially wheat and cotton prices on the decline, the government responded by artificially propping up the prices of both to keep farmers from going bankrupt. This led to farmers increasing acreage thereby compounding the problem. It also led to significant damage to US exports, as their competitiveness was reduced by this action. Ultimately, this led to losses and protectionism, which led to further damage to US exports.

But the similarities with the current situation doesn't stop there.
- Much like Gordon Brown's current policy, anyone questioning the policies where "unpatriotic" and "selling America short".
- Interest rates were swiftly cut, driving up the market temporarily, but ultimately only postponing the pain.
- Blame was placed with foreign immigrants, reducing wages (very similar to the cut in the H1B program).
- Short sellers were roundly condemned, and ultimately, restrictions put in place.
- Bankruptcy laws were weakened. This led to a reduction in available credit (risk/reward), and enabled people to refuse to pay their debts.
- Taxes increased significantly, thereby reducing the appetite of investors.
- "Hoarders" were blamed. As the gold standard is no longer used, today's equivalent would be the thrifty saver.
- Banks and heavy industry (railroads) were bailed out in secrecy, allegedly to keep "faith in institutions". Ultimately, however, the veil of secrecy was partially lifted, and substantial allegations of political collusions were made.
- Heavy industry responded in kind to the bailouts, by repaying loans to the banks. With loans repaid, the Missouri Pacific promptly went bankrupt.

And finally, when the US Fed pursued a strategy to purchase bonds to reduce interest rates (ie Quantative Easing), foreigners responded in kind by withdrawing gold as these policies would ordinarily lead to inflation. However, when this deliberate policy of inflation failed, the flow of gold was reversed.

However, there are significant differences. State spending a part of GDP was a fraction of what it is today, and all the way up to (and including) 1930, the United States ran a budget surplus, and debts were insignificant. This is widely different to today, where most of the Western World run a significant deficit. In 1932, the US Fed was given the power to change the value of the dollar in relation to gold late on in Hoover's presidency, and in 1933/34 under Franklin D. Roosevelt, the dollar was devalued from $20/ounce to $35/ounce. And if one were to speculate, this could very well be the path current world governments are attempting to put us on at present time.

A few things kind of nagged me about this book - it seems too hypothetical. It is considered that all regulation is bad, but surely it can be proven that this is not always the case, or we'd be up to our eyeballs in Chinese lead paint. It also works on the premise of a "fair" global economic landscape - but since regulations DO differ, this will produce unfairness. And finally, when the US finally emerged from the depression, it was due to the Second World War. And what is a war but public spending on a massive scale?

A sidenote about Keynes - he claimed pre-crisis that Hoover's currency management was "a triumph", and post (1930) that the US was "on track to recovery". And yet, we base our current economic policies on his ideas.