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America's Great Depression

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America's Great Depression
Fifth Edition
Murray N. Rothbard
MISES
INSTITUTE

Copyright (c) 1963, 1972 by Murray N. Rothbard
Introduction to the Third Edition Copyright (c) 1975 by Murray N. Rothbard
Introduction to the Fourth Edition Copyright (c) 1983 by Murray N. Rothbard
Introduction to the Fifth Edition Copyright (c) 2000 by The Ludwig von Mises Institute
Copyright (c) 2000 by The Ludwig von Mises Institute
All rights reserved. Printed in the United States of America.
No part of this book may be reproduced in any manner whatsoever without written permission except in the case of reprints in the context of reviews. For information write The Ludwig von Mises
Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832.
ISBN No.: 0-945466-05-6

TO JOEY,
the indispensable framework

The Ludwig von Mises Institute dedicates this volume to al of its generous donors, and in particular wishes to thank these Patrons:
Dr. Gary G. Schlarbaum
George N. Gal agher (In Memoriam), Mary Jacob, Hugh E. Ledbetter
Mark M. Adamo, Lloyd Alaback, Robert Blumen,
Philip G. Brumder, Anthony Deden (Sage Capital Management, Inc.),
Mr. and Mrs. Wil ard Fischer, Larry R. Gies,
Mr. and Mrs. W.R. Hogan, Jr., Mr. and Mrs. Wil iam W. Massey, Jr.,
El ice McDonald, Jr., MBE, Rosa Hayward McDonald, MBE,
Richard McInnis, Mr. and Mrs. Roger Mil iken (Mil iken and Company),
James M. Rodney, Sheldon Rose, Mr. and Mrs. Edward Schoppe, Jr.,
Mr. and Mrs. Robert E. Urie, Dr. Thomas L. Wenck
Algernon Land Co., L.L.C., J. Terry Anderson (Anderson Chemical Company),
G. Douglas Col ins, Jr., George Crispin, Lee A. Everhart, Douglas E. French,
John Wil iam Galbraith, Walker S. Green, Mr. and Mrs. Max Hocutt,
Donald L. Ifland, Joe R. Lee, Arthur L. Loeb, Wil iam R. Machgan,
Dorothea H. Marica, Bernard Morton, Daniel W. Muirhead, James O'Neil ,
Charles H. Reeves (Reeves Family Foundation), Donald Mosby Rembert,
Stephen K. Salisbury, Mr. and Mrs. Al an Sawatzky, Joseph P. Schirrick,
Mr. and Mrs. Thomas W. Singleton (Nehemiah Foundation),
Robert W. Smiley, Jr. (The Benefit Capital Companies), Byron L. Stoeser,
Joseph J. Syslo, James E. Tempesta, M.D., top dogTM, Alex T. Van Rensselaer,
Lawrence Van Someren, Sr., Mr. and Mrs. Quinten E. Ward,
David Westrate, Anne Wil iamson, Keith S. Wood
Robert Bero, Robert J. Birnbach, Richard Bleiberg, John Hamilton Bolstad,
Mr. and Mrs. Justin G. Bradburn, Jr., David and Elizabeth Butler,
John W. Carpenter, Dr. John P. Cochran, John Cooke, Henry V. Curl ,
James V. De Santo (DTL Inc.), Chris A. Doose, Mr. and Mrs. Ted C. Earle,
Jay El iott, Eric Englund, Dr. Larry J. Eshelman, Lawrence N. Field,
Elton B. Fox (The Fox Foundation), Capt. and Mrs. Maino des Granges,
Christopher J. Hackett, John A. Halter, John R. Harper, Frank W. Heemstra,
Douglas M. Joy, Michael G. Kel er, D.O., Robert N. Kennedy,
Richard J. Kossmann, M.D., David Kramer, Steven R. Krause,
Gary R. Letsinger, Diana Lewis, J. Edward Martin, Norbert McLuckie,
Samuel Mel os, Joseph Edward Paul Melvil e, Robert Mish,
Dr. Dorothy Donnel ey Mol er, Jerry W. Moore,
Keith E. Moore, D.M.D., Reed W. Mower, Brantley I. Newsom,
Professor and Mrs. Stanley E. Porter, James A. Reichert, Thomas S. Ross,
Conrad Schneiker, Roy Schroeder, Wil iam V. Stephens,
Charles Toops, I (Mo-Ark Guide Service),
Robert H. Walker (Walker Die Casting Company),
Mr. and Mrs. Victor Zadikov, Jeannette Zummo

Acknowledgments
While the problem of 1929 has long been of interest to myself as wel as most Americans, my attention was first specificaly drawn to a study of the
Great Depression when Mr. Leonard E. Read, President of the Foundation for Economic Education, asked me, some years ago, to prepare a brief
paper on the subject. I am very grateful to Mr. Read for being, in this way, the sparkplug for the present book. Having written the article, I al owed the
subject to remain dormant for several years, amid the press of other work. At that point, on the warm encouragement of Mr. Richard C. Cornuel e, now of
the Foundation for Voluntary Welfare, I proceeded on the task of expansion to the present work, an expansion so far-reaching as to leave few traces of
the original sketch. I owe a particular debt to the Earhart Foundation, without whose aid this study could never have been written.
My supreme debt is to Professor Ludwig von Mises, whose monumental theory of business cycles I have used to explain the causes of the otherwise
mysterious 1929 depression. Of al Professor Mises's notable contributions to economic science, his business cycle theory is certainly one of the most
significant. It is no exaggeration to say that any study of business cycles not based upon his theoretical foundation is bound to be a fruitless undertaking.
The responsibility for this work, of course, is entirely my own.

Contents
Introduction to the Fifth Edition
Introduction to the Fourth Edition
Introduction to the Third Edition
Introduction to the Second Edition
Introduction to the First Edition
PART I: BUSINESS CYCLE THEORY
1. THE POSITIVE THEORY OF THE CYCLE
Business cycles and business fluctuations
The problem: the cluster of error
The explanation: boom and depression
Secondary features of depression: deflationary credit contraction
Government depression policy: laissez-faire
Preventing depressions
Problems in the Austrian theory of the trade cycle
2. KEYNESIAN CRITICISMS OF THE THEORY
The liquidity "trap"
Wage rates and unemployment
3. SOME ALTERNATIVE EXPLANATIONS OF DEPRESSION: A CRITIQUE
General overproduction
Underconsumption
The acceleration principle
Dearth of "investment opportunities"
Schumpeter's business cycle theory
Qualitative credit doctrines
Overoptimism and overpessimism
PART II: THE INFLATIONARY BOOM: 1921-1929
4. THE INFLATIONARY FACTORS
The definition of the money supply
Inflation of the money supply, 1921-1929
Generating the inflation, I: reserve requirements
Generating the inflation, I: total reserves
Treasury currency
Bil s discounted
Bil s bought-acceptances
U.S. government securities
5. THE DEVELOPMENT OF THE INFLATION
Foreign lending
Helping Britain
The crisis approaches
6. THEORY AND INFLATION: ECONOMISTS AND THE LURE OF A STABLE PRICE LEVEL
PART III: THE GREAT DEPRESSION: 1929-1933
7. PRELUDE TO DEPRESSION: MR. HOOVER AND LAISSEZ-FAIRE
The development of Hoover's interventionism: unemployment
The development of Hoover's interventionism: labor relations

8. THE DEPRESSION BEGINS: PRESIDENT HOOVER TAKES COMMAND
The White House conferences
Inflating credit
Public works
The New Deal Farm Program
9. 1930
More inflation
The Smoot-Hawley Tariff
Hoover in the second half of 1930
The public works agitation
The fiscal burdens of government
10. 1931--"THE TRAGIC YEAR"
The American monetary picture
The fiscal burden of government
Public works and wage rates
Maintaining wage rates
Immigration restrictions
Voluntary relief
Hoover in the last quarter of 1931
The spread of col ectivist ideas in the business world
11. THE HOOVER NEW DEAL OF 1932
The tax increase
Expenditures versus economy
Public works agitation
The RFC
Governmental relief
The inflation program
The inflation agitation
Mr. Hoover's war on the stock market
The home loan bank system
The bankruptcy law
The fight against immigration
12. THE CLOSE OF THE HOOVER TERM
The attack on property rights: the final currency failure
Wages, hours, and employment during the depression
Conclusion: the lessons of Mr. Hoover's record
APPENDIX: GOVERNMENT AND THE NATIONAL PRODUCT, 1929-1932
INDEX

TABLES
TABLE 1: Total Money Supply of the United States, 1921-1929
TABLE 2: Total Dol ars and Total Gold Reserves
TABLE 3: Member Bank Demand Deposits
TABLE 4: Demand and Time Deposits
TABLE 5: Time Deposits
TABLE 6: Member Bank Reserves and Deposits
TABLE 7: Changes in Reserves and Causal Factors... 1921-1929
TABLE 8: Per Month Changes in Reserves and Causal Factors... 1921-1929
TABLE 9: Factors Determining Bank Reserves July-October 1929
TABLE I: National Product
TABLE I: Income Originating in Government
TABLE II: Private Product
TABLE IV: Government Expenditures
TABLE V: Expenditures of Government Enterprises
TABLE VI: Expenditures of Government and Government Enterprises
TABLE VI: Receipts of Government and Government Enterprises
TABLE VII: Government and the Private Product

Introduction to the Fifth Edition
The Wal Street colapse of September-October 1929 and the Great Depression which folowed it were among the most important events of the
twentieth century. They made the Second World War possible, though not inevitable, and by undermining confidence in the efficacy of the market and the
capitalist system, they helped to explain why the absurdly inefficient and murderous system of Soviet communism survived for so long. Indeed, it could be
argued that the ultimate emotional and intel ectual consequences of the Great Depression were not final y erased from the mind of humanity until the end
of the 1980s, when the Soviet col ectivist alternative to capitalism crumbled in hopeless ruin and the entire world accepted there was no substitute for the
market.
Granted the importance of these events, then, the failure of historians to explain either their magnitude or duration is one of the great mysteries of
modern historiography. The Wal Street plunge itself was not remarkable, at any rate to begin with. The United States economy had expanded rapidly
since the last downturn in 1920, latterly with the inflationary assistance of the bankers and the federal government. So a correction was due, indeed
overdue. The economy, in fact, ceased to expand in June, and it was inevitable that this change in the real economy would be reflected in the stock
market.
The bul market effectively came to an end on September 3, 1929, immediately the shrewder operators returned from vacation and looked hard at
the underlying figures. Later rises were merely hiccups in a steady downward trend. On Monday October 21, for the first time, the ticker tape could not
keep pace with the news of fal s and never caught up. Margin cal s had begun to go out by telegram the Saturday before, and by the beginning of the
week speculators began to realize they might lose their savings and even their homes. On Thursday, October 24, shares dropped vertical y with no one
buying, and speculators were sold out as they failed to respond to margin cal s. Then came Black Tuesday, October 29, and the first sel ing of sound
stocks to raise desperately needed liquidity.
So far al was explicable and might easily have been predicted. This particular stock market corrective was bound to be severe because of the
unprecedented amount of speculation which Wal Street rules then permitted. In 1929 1,548,707 customers had accounts with America's 29 stock
exchanges. In a population of 120 mil ion, nearly 30 mil ion families had an active association with the market, and a mil ion investors could be cal ed
speculators. Moreover, of these nearly two-thirds, or 600,000, were trading on margin; that is, on funds they either did not possess or could not easily
produce.
The danger of this growth in margin trading was compounded by the mushrooming of investment trusts which marked the last phase of the bul
market. Traditional y, stocks were valued at about ten times earnings. With high margin trading, earnings on shares, only one or two percent, were far less
than the eight to ten percent interest on loans used to buy them. This meant that any profits were in capital gains alone. Thus, Radio Corporation of
America, which had never paid a dividend at al , went from 85 to 410 points in 1928. By 1929, some stocks were sel ing at 50 times earnings. A market
boom based entirely on capital gains is merely a form of pyramid sel ing. By the end of 1928 the new investment trusts were coming onto the market at
the rate of one a day, and virtual y al were archetype inverted pyramids. They had "high leverage"--a new term in 1929--through their own supposedly
shrewd investments, and secured phenomenal stock exchange growth on the basis of a very smal plinth of real growth. United Founders Corporation, for
instance, had been created by a bankruptcy with an investment of $500, and by 1929 its nominal resources, which determined its share price, were listed
as $686,165,000. Another investment trust had a market value of over a bil ion dol ars, but its chief asset was an electric company which in 1921 had
been worth only $6 mil ion. These crazy trusts, whose assets were almost entirely dubious paper, gave the boom an additional superstructure of pure
speculation, and once the market broke, the "high leverage" worked in reverse.
Hence, awakening from the pipe dream was bound to be painful, and it is not surprising that by the end of the day on October 24, eleven men wel -
known on Wal Street had committed suicide. The immediate panic subsided on November 13, at which point the index had fal en from 452 to 224. That
was indeed a severe correction but it has to be remembered that in December 1928 the index had been 245, only 21 points higher. Business and stock
exchange downturns serve essential economic purposes. They have to be sharp, but they need not be long because they are self-adjusting. Al they
require on the part of the government, the business community, and the public is patience. The 1920 recession had adjusted itself within a year. There
was no reason why the 1929 recession should have taken longer, for the American economy was fundamental y sound. If the recession had been al owed
to adjust itself, as it would have done by the end of 1930 on any earlier analogy, confidence would have returned and the world slump need never have
occurred.
Instead, the stock market became an engine of doom, carrying to destruction the entire nation and, in its wake, the world. By July 8, 1932, New York
Times industrials had fal en from 224 at the end of the initial panic to 58. U.S. Steel, the world's biggest and most efficient steel-maker, which had been
262 points before the market broke in 1929, was now only 22. General Motors, already one of the best-run and most successful manufacturing groups in
the world, had fal en from 73 to 8. These calamitous fal s were gradual y reflected in the real economy. Industrial production, which had been 114 in August
1929, was 54 by March 1933, a fal of more than half, while manufactured durables fel by 77 percent, nearly four-fifths. Business construction fel from
$8.7 bil ion in 1929 to only $1.4 bil ion in 1933.
Unemployment rose over the same period from a mere 3.2 percent to 24.9 percent in 1933, and 26.7 percent the fol owing year. At one point, 34
mil ion men, women, and children were without any income at al , and this figure excluded farm families who were also desperately hit. City revenues
col apsed, schools and universities shut or went bankrupt, and malnutrition leapt to 20 percent, something that had never happened before in United
States history--even in the harsh early days of settlement.
This pattern was repeated al over the industrial world. It was the worst slump in history, and the most protracted. Indeed there was no natural
recovery. France, for instance, did not get back to its 1929 level of industrial production until the mid-1950s. The world economy, insofar as it was saved

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