America’s Great Depression

this is one of the most enraging books I have ever read about anything related to economics. The author seems to forget that underneath ALL of the formulas and “trends” in any field of economics lies WEALTH. REAL, SUBSTANTIAL, PRODUCTIVE, LABOR-RELATED WEALTH. This is something even Keynesian economists fail in recognizing…any book which does not recognize the intervention of FDR’s fiscal policy as a return to the philosophy of our founding fathers (IE. Henry Clay, Alexander Hamilton)and the only way we could have possibly survived the depression and the mobilization to fight fascism is a POORLY written book from an author who is obviously misinformed by the popular trash of classroom and related ivory tower academia.
Rating: 1 / 5

If you want to learn more about the Great Depression (as I did) don’t buy this book. This book is not about the Great Depression, it is only about some Economics theory. And ONLY about that theory. It is a absolute dry read. I would not recommend this book.
Rating: 1 / 5

This book makes some important points about the role of the Fed in causing the Great Depression, but so many things are missing. If you read this book, please supplement it with something else. Also, Rothbard’s economic analysis is outdated by a few decades. Modern quantitative economic studies have considerably advanced our understanding of the Great Depression in just the last 20 years. Rothbard makes some good points but misses many things.

For the economics of the Great Depression, The best book on the economics of the Great Depression is Fed Chairman Ben Bernanke’s Essays on the Great Depression. Also consider the classic (and slightly outdated) Monetary History of the United States, 1867-1960 by Milton Friedman and Anna Jacobson Schwartz” (which helped Friedman win the Nobel Prize in Economics). Other excellent book on the economics of the Great Depression include the rigorous 1996 Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (NBER Series on Long-Term Factors in Economic Development) by Barry Eichengreen and Harold James and the outstanding Lessons from the Great Depression (Lionel Robbins Lectures). Another groundbreaking book on the economics of the Great Depression was the 1973 “A World in Depression” by Charles Kindleberger that focused on the international aspects (including the gold standard), but Bernanke’s book is even better.

For a reputable historian’s view of the Great Depression that is overly-critical of FDR and does not give FDR enough credit, read David Kennedy’s Pulitzer-Prize winning Freedom from Fear: The American People in Depression and War, 1929-1945 (Oxford History of the United States). Also read Conrad Black’s masterpiece Franklin Delano Roosevelt: Champion Of Freedom, which the reputable Economist Magazine called “a masterpiece.”

The weakly regulated financial system falling like a house of cards was the biggest cause of the Great Depression. The Fed loose money policy followed by the Fed over-tightening (especially) would not have been enough to plunge the country in the Great Depression. The collapse of the weakly-regulated financial system is what finally caused the economic collapse. No financial system should be so flimsy that it will fall like a house of cards under such adversity. It was the Fed over-tightening AND the financial system falling like a flimsy house of cards that brought on the Great Depression. Also, the overly-severe contraction of the money supply was partly caused by the ruinous gold standard. So the Fed alone did not cause the Great Depression. The weakly regulated financial system falling like a house of cards was the biggest cause, and the flawed gold standard contributed, too. That is why the New Deal abolished that gold standard and imposed regulations on the securities and banking industries – to prevent the financial system from falling like a house of cards when tough economic times inevitably came again in the future.

What Rothbard has to say is valuable. It’s just not the whole story.

Rothbard argues that the Federal Reserve first created inflation with a loose money policy, which is mostly accurate, and then contracted the money supply. The Fed started the Depression. That is accurate, although that is not the complete picture (which I will explain shortly). According to Rothbard, the Fed contraction was made worse by Hoover’s actions to interfere with the natural correcting mechanisms of the economy. However, Rothbard time and time again does not tell the whole story, and he spins the facts to make them not entirely accurate. For example, rather than explaining that the Republican Party had long been the party of the rigidly balanced budget and tariffs, including raising taxes during downturns to conservatively balance the budget and raising tariffs again and again for a century, Rothbard singles out Hoover (to save the conservatives) and says Hoover alone raised taxes and tariffs, when in fact Hoover had doubts about the tariff pushed by the Republican Congress. Rothbard is not entirely truthful, and you owe it to yourself to investigate more recent sources that have better information.

Rothbard is correct about the flawed actions by the Federal Reserve, but he does not properly explain the role of the disastrous gold standard in turning the contraction into the truly catastrophic Great Depression. (No surprise since Rothbard was a staunch believer in the gold standard and hated the Fed.) The gold standard was a major cause of the Depression. Instead, Rothbard would have you believe that the economy will always self-correct and that no government policies are ever needed. That is very dangerous and inaccurate, as I will explain.

Rothbard does not adequately detail the effects of the massive collapse of the weakly regulated American financial system and the subsequent contraction of money caused by the sharp drop in lending activity. Half of all mortgages were in default. Over 10,000 banks failed, which was a catastrophe. The banks were THE financial system of the United States at that time. That banking collapse further restricted the money supply when failed banks could not make any loans and solvent banks refused to make loans for fear of losing money. The money supply plunged, but it gets even worse.

Using Milton Friedman’s simple monetary equation MV = GI, where M equals money, V equals velocity (the rate of money flow), G equals growth, and I equals inflation, the level of the money supply will dictate the growth of the economy, unless it is too much, and then inflation rises. Monetarist, and Rothbard, believe that velocity is constant and stable, BUT THAT IS WRONG.

When the financial sytem collapses, velocity plunges. Money stops circulating. You can pump money into the system, but the money injection is like pushing up on a string, when the financial system has collapsed. Times any number (M) by a zero velocity and what do you get? Zero! It does not work. Rothbard’s book is TERRIBLY INFERIOR to modern economic studies of the Great Depression which rely on decades worth of economic data. Rothbard gets about 30% of this analysis correct, and the other 70% is missing. The economy will not recover by itself when the financial system has collapsed. (My argument does not need the Keynesian view that the economy can naturally rest at an equilibrium point well below full-employment.)

Rothbard is so blindly for unregulated markets that he says we should have NO safeguards in place to make sure the financial system does not collapse and money velocity plunge!

History shows that New Deal reforms have prevented the financial system from ever collapsing again or the nation from entering a depression again. Before the New Deal, there were many depressions and panics, but never again. The FHA has kept the mortgage market stable. The SEC has made financial markets safer. FDIC insures bank deposits, forever abolishing bank runs. The Glass-Steagall Act created a firewall between the riskiest securities and banks. Unfortunately, the Glass Stegall Act was repealed and exotic mortgages are now allowed. This weakening of New Deal safeguards is a big mistake. If the financial system becomes destabilized, it brings down the whole economy. Yet Rothbard’s book has no analysis covering this.

The American economy would never have recovered from the massive banking collapse and the constrictive gold standard without intervention. The conventional economic thinking of tariffs, balanced budgets, the gold standard, and weakly regulated financial markets was wrong.

The Republican party had long been the party of tarriffs since the Civil War. The Smoot-Hawley tariff was named after two Republicans and pushed by the Republican leadership. Rothbard puts too much blame on Hoover to protect the Republicans. By the way, this is not meant to reflect on the Republicans of today, who generally oppose tariffs.

The Republican leadership back then staunchly supported a sound currency through a strictly balanced budget and the gold standard, along with high tariffs, which we now know was a disaster.

The Depression could not have ended – and did not end – until the disastrous gold standard was eliminated by FDR. The monetary contracton related to the gold standard and the banking collapse, which contracted loans and more money further, were the main causes.

With no disrespect to Rothbard or his views in general, this outdated dinosaur book on the Great Depession is simply outdated. He makes many good points but misses some, too.
Rating: 2 / 5