'America’s Great Depression' 50th Anniversary

0:00Preparing for this session, I obviously, like my colleagues on the panel, ended up rereading America's Great Depression. But when I picked up the book off my shelf, and I admit I had not read it for quite a while, I opened it up, and it reminded me when I first met Murray Rothbard, because he was my autographed copy that he signed. And the date is June 1974, which means a mere lad back then, probably in diapers. I had taken my copy to that first Austrian economics conference in South Royalton, Vermont that had been organized by the Institute for Humane Studies. And it made me remember my first reaction when I met Murray.

0:46Now I was an undergraduate in California, he's in New York, I've never met him. I only know him through his works and, you know, the occasional photo on the inside of of a Dust Jacket of a Book. In my mind, my picture of Murray Rothbard from just reading him, he was tall, very thin, and unbelievably serious. So I arrive at South Royalton, Vermont, and people starting arrive. And I'm looking around for Murray Rothbard, and there's this group of people of which I think probably Joe was one, because that was the first time Joe and I met, Around this short, kind of, return, roly-poly guy, who's just laughing and cackling. And I'm thinking, who's this?

1:33Let me introduce you to Murray Rothbard. So that's how I first met Murray. And it was, that shows that expectations can often be frustrated by reality. But that was obviously a memorable event, meeting Rothbard and all these other scattered Austrian and Economists, including others who are on this panel too. Roger Garrison I met there for the first time.

2:04This book, as already some of my colleagues on this panel have said is an important book. And for some of the following reasons, let me suggest. As was already pointed out, we need to remember that when Rothbard's America's Great Depression came out, What is now 50 years ago in 1963, the economics profession was dominated by the ideas of John Maynard Keynes and the Keynesian Revolution. Indeed, for most economists at that time, Rothbard's argument in this book was unintelligible. Indeed, that comes out very clear if you go Go back to the economics journals of 1963, 1964, and you look up and find the only handful of reviews that were done of the book in the scholarly journals of the time.

2:57They don't understand the historical and intellectual context out of which Murray is developing this argument, the Austrian tradition, especially out of Mises but also Hayek obviously in terms of the business cycle. They don't understand the conceptual framework of a microeconomics of understanding macro problems at all, and in fact they basically reject it as a theoretically un-understandable historically clearly false and therefore no economics at all. This was due to the fact that for the economics profession at that time, they were obsessed focused on macroeconomic aggregates of total employment, total output, the general price level and Rothbard's attention to a microeconomics monetary process analysis seemed totally irrelevant and misplaced in the context of their sense that the analytical schema to understand economy-wide Fluctuations had to be the aggregates that had been developed through aggregate demand, aggregate supply in Keynes's work. These were the tools that were necessary for any serious analysis. Now, in this general sense, one thing that Rothbard can be credited for is that his book can be considered an early contribution to the search for what has become

4:27come to be known in macroeconomics as the search for microeconomic foundations of macroeconomic phenomena. But also, and more importantly for us, I suppose, is the fact that what Murray's book does is represent after a practically 30-year hiatus, a revival of the Austrian tradition of money in the Business Cycle. Because beginning in the 1930s and in the 1940s, the ascendancy and triumph of Keynesian economics had resulted in all of these alternative approaches to understanding business cycles, including the Austrian, being submerged in a tidal wave of Keynesian success.

5:16Now one of the tragedies in a sense of Rothbard having to do this is that all of what he presents in this book was already clearly explained and analyzed by that earlier generation of Austrian economists. It was Mises and Hayek who in the 1920s and then in the 1930s who were presenting this case of understanding how distortions of interest rates through monetary expansion brought about about an imbalance and a disequilibrium in the relationships between savings and investment, and that this would set in motion a series of sequences of events over time that would inevitably lead to a downturn that would require a correction.

6:06Furthermore, it wasn't, and this is too lost, and Rothbard refers to some of these The Expositions and the Presentations of this theory was in literally dozens of books and articles. For example, Lionel Robbins, who had brought Hayek to the London School, wrote his own exposition and application of the Austrian business cycle theory in his 1934 book, The Great Depression.

6:51In the same year of 1934, Mises's former protege, Fritz Machlub, had published a book called A Guide Through Crisis Policies, in which he had demonstrated how misguided were all of the interventionist policies being instituted in that time, and in fact they They were exacerbating the very cure for the depression the policies were meant to provide. Also in 1934, one of the most famous economists of that time, a Cambridge University economist, Arthur Pagu, came to give a series of lectures at the London School of Economics with Mises and Hayek and Lionel Robbins in the audience. And in one of the lectures, obviously under the persuasion of some of these Austrian ideas, says that clearly the situation that Britain has gotten into is due to the misallocations of resources and misdirections of capital and labor brought about before the downturn.

7:49And he even says in this lecture following the Austrians that it might very well be the most effective way to bring about a correction and a rebalance to experience a deflationary decline in prices and wages to find the appropriate equilibrium levels. We also find in the Britain of that time a left-wing branch of Austrian monetary theory. Hugh Gateskill, EFM Durbin, who after the Second World War became leaders of the British Labour Party, were themselves writing articles or books in the early 1930s applying Hayek's ideas to understand what had happened in generating the business cycle and to undermine what they they viewed as the economic heretics who are saying that will the solution is just increased demand. Now, perversely, their solution was to say, you see, this is the instability in the current monetary system, the solution is nationalization of business and banks.

8:53Over in Geneva, Switzerland, over in Geneva, Switzerland, at the League of Nations, Alexander Professor Loveday, who was the director of the economics intelligence unit at the league, had been commissioning a variety of economists with Austrian views to write special monographs for internal use by the league to present a variety of expositions. Mises, Gottfried Habler, and one of the leading German free market economists of that time, Moritz J. Bonn, to analyze why it was that it was inherently impossible and dangerous to attempt to stabilize the price level through monetary manipulation, and that gold had not caused any of the causes leading to the Great Depression, and that a restoration of a properly functioning gold standard might be a means to bring about rebalance and stability in the economy.

9:50Over here in the United States, and Rothbard of course refers to him, Benjamin Anderson, The Senior Economic Analyst for Chase Bank in the 1920s and early 30s was grinding out Chase bulletins every other month or every once every three months from the beginning of the mid-1920s on the dangers of price stabilization and Fed credit expansion. And perhaps less well-known is that in 1932, Aaron Director, who later became the brother-in-law of Milton Friedman did a brief monograph on unemployment in which the analytical framework that he refers to as an explanation of how the unemployment has been created is in fact a two-page exposition and summary of Hayek's own argument.

10:40This is the lost tradition that Rothbard was re-presenting at this time. The one other element I would just briefly point out is that Rothbard was also explaining the role historically and the policy importance of a gold standard. That the gold standard, however imperfectly, had acted as a limit and a check on the government's ability to expand the money supply. And how central banks being in charge of the gold standards of that time, including the The American Central Bank of the Federal Reserve had weakened the ability of the rules of the gold standard to prevent the monetary expansion and price distortions that set in motion the inevitability of the Great Depression.

11:28And of course, also in the book on fines, already Rothbard referring to, something that has become a controversy among many Austrians today in monetary theory. And that is, how should a competitive free banking system work, fractional reserves, or 100% reserve banking. But let me suggest this, that if Mises' distinctions concerning the different forms of fiduciary media, money substitutes, had been the guide for economic policy then, in the 1920s and 30s, and had been the guide for monetary policy in the decades leading up to our current crisis, These crises would have never occurred. If checking accounts were viewed as warehouse receipts against which 100% reserves have to be held, if savings accounts were viewed all as time deposits in which the depositor agrees to leave his money on deposit for a specified period of time so that the banks could take that specified savings and loan it to investors for a similar specified Period of Time for a coordination of the savings and investment decisions of the two

12:41members of the society through the intermediary of banking. None of these crises of either the 1930s or our own time would have occurred. That is what makes this book and the ideas in it not only a wake up and an understanding of an earlier era, but essentially of important relevance for our own time. Thank you very much.