the future within a small, precise margin of error. And yet, we should not scoff unduly at the eulogists who composed paeans to our economic system as late as 1929. For, insofar as they had in mind the first strand—the genuine prosperity brought about by high saving and investment—they were correct. Where they erred gravely was in overlooking the second, sinister strand of credit expansion. This book concentrates on the cyclical aspects of the economy of the period—if you will, on the defective strand.
As in most historical studies, space limitations require confin-ing oneself to a definite time period. This book deals with the period 1921–1933. The years 1921–1929 were the boom period preceding the Great Depression. Here we look for causal influences predating 1929, the ones responsible for the onset of the depression. The years 1929–1933 composed the historic contraction phase of the Great Depression, even by itself of unusual length and intensity. In this period, we shall unravel the aggravating causes that worsened and prolonged the crisis.
In any comprehensive study, of course, the 1933–1940 period would have to be included. It is, however, a period more familiar to us and one which has been more extensively studied.
The pre-1921 period also has some claim to our attention.
Many writers have seen the roots of the Great Depression in the Introduction
xliii
inflation of World War I and of the post-war years, and in the allegedly inadequate liquidation of the 1920–1921 recession.
However, sufficient liquidation does not require a monetary or price contraction back to pre-boom levels. We will therefore begin our treatment with the trough of the 1920–1921 cycle, in the fall of 1921, and see briefly how credit expansion began to distort production (and perhaps leave unsound positions unliquidated from the preceding boom) even at that early date. Comparisons will also be made between public policy and the relative durations of the 1920–1921 and the 1929–1933 depressions. We cannot go beyond that in studying the earlier period, and going further is not strictly necessary for our discussion.
One great spur to writing this book has been the truly remarkable dearth of study of the 1929 depression by economists. Very few books of substance have been specifically devoted to 1929, from any point of view. This book attempts to fill a gap by inquiring in detail into the causes of the 1929 depression from the standpoint of correct, praxeological economic theory.7
MURRAY N. ROTHBARD
7The only really valuable studies of the 1929 depression are: Lionel Robbins, The Great Depression (New York: Macmillan, 1934), which deals with the United States only briefly; C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937); and Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), which does not deal solely with the depression, but covers twentieth-century economic history. Otherwise, Thomas Wilson’s drastically overrated Fluctuations in Income and Employment (3rd ed., New York: Pitman, 1948) provides almost the “official” interpretation of the depression, and recently we have been confronted with John K. Galbraith’s slick, superficial narrative of the pre-crash stock market, The Great Crash, 1929 (Boston: Houghton Mifflin, 1955). This, aside from very brief and unilluminating treatments by Slichter, Schumpeter, and Gordon is just about all.
There are many tangential discussions, especially of the alleged “mature economy” of the later 1930s. Also see, on the depression and the Federal Reserve System, the recent brief article of O.K. Burrell, “The Coming Crisis in External Convertibility in U.S. Gold,” Commercial and Financial Chronicle (April 23, 1959): 5, 52–53.
Part I
Business Cycle Theory
1
The Positive
Theory of the Cycle
Study of business cycles must be based upon a satisfactory cycle theory. Gazing at
As in most historical studies, space limitations require confin-ing oneself to a definite time period. This book deals with the period 1921–1933. The years 1921–1929 were the boom period preceding the Great Depression. Here we look for causal influences predating 1929, the ones responsible for the onset of the depression. The years 1929–1933 composed the historic contraction phase of the Great Depression, even by itself of unusual length and intensity. In this period, we shall unravel the aggravating causes that worsened and prolonged the crisis.
In any comprehensive study, of course, the 1933–1940 period would have to be included. It is, however, a period more familiar to us and one which has been more extensively studied.
The pre-1921 period also has some claim to our attention.
Many writers have seen the roots of the Great Depression in the Introduction
xliii
inflation of World War I and of the post-war years, and in the allegedly inadequate liquidation of the 1920–1921 recession.
However, sufficient liquidation does not require a monetary or price contraction back to pre-boom levels. We will therefore begin our treatment with the trough of the 1920–1921 cycle, in the fall of 1921, and see briefly how credit expansion began to distort production (and perhaps leave unsound positions unliquidated from the preceding boom) even at that early date. Comparisons will also be made between public policy and the relative durations of the 1920–1921 and the 1929–1933 depressions. We cannot go beyond that in studying the earlier period, and going further is not strictly necessary for our discussion.
One great spur to writing this book has been the truly remarkable dearth of study of the 1929 depression by economists. Very few books of substance have been specifically devoted to 1929, from any point of view. This book attempts to fill a gap by inquiring in detail into the causes of the 1929 depression from the standpoint of correct, praxeological economic theory.7
MURRAY N. ROTHBARD
7The only really valuable studies of the 1929 depression are: Lionel Robbins, The Great Depression (New York: Macmillan, 1934), which deals with the United States only briefly; C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937); and Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), which does not deal solely with the depression, but covers twentieth-century economic history. Otherwise, Thomas Wilson’s drastically overrated Fluctuations in Income and Employment (3rd ed., New York: Pitman, 1948) provides almost the “official” interpretation of the depression, and recently we have been confronted with John K. Galbraith’s slick, superficial narrative of the pre-crash stock market, The Great Crash, 1929 (Boston: Houghton Mifflin, 1955). This, aside from very brief and unilluminating treatments by Slichter, Schumpeter, and Gordon is just about all.
There are many tangential discussions, especially of the alleged “mature economy” of the later 1930s. Also see, on the depression and the Federal Reserve System, the recent brief article of O.K. Burrell, “The Coming Crisis in External Convertibility in U.S. Gold,” Commercial and Financial Chronicle (April 23, 1959): 5, 52–53.
Part I
Business Cycle Theory
1
The Positive
Theory of the Cycle
Study of business cycles must be based upon a satisfactory cycle theory. Gazing at
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