'America’s Great Depression' 50th Anniversary

0:00I'm really going to try to keep within my time schedule here, and if you indulge me, I'll read my remarks. I just wanted to start with a little story, though. When I received Roger's paper, he noted that it was six years after the publication of America's Great Depression that he purchased the book. Well, I vividly recall taking the subway to Manhattan in about 1965 and purchasing both Man Economy and State and America's Great Depression at the Nathaniel Brandon Institute. I don't know if any of you remember this, I find that now both amusing and somewhat disconcerting because shortly thereafter you can no longer buy Murray's books at Nathaniel Brandon Institute, because he had by that time been purged from the inner circle. So they no longer carried any of his stuff. But Roger's remark really does remind me of how long ago that was. And so it seems fitting on the 50th anniversary of the publication of that book that we take acknowledgement of the resonance and the great influence of this book and it's had to this

1:15I would like to suggest that it was a kind of a book of the times in one sense, but it was also a very interesting book in terms of promoting further research, and in preparation for this panel, I set myself the task of trying to look into chapters two and three of America's Great Depression, those chapters in which Rothbard responds to Keynesian criticisms of the Austrian Business Cycle Theory. And also in chapter three, it takes on an Austrian critique of alternative depression theories. Now, most of these theories, I think, can be grouped around a kind of a rubric that I will identify as mainstream Keynesianism.

2:05What's interesting, I think, for me in that is that when Rothbard was writing the book, Mainstream Keynesism was very much a target of his work and it hasn't much changed really that much since then. So that's why I say it's a book of the past but it has great relevance still today. So what I would like to do is offer a couple of observations on these chapters for the purpose of inducing some themes that establish the relevance of America's Great Depression for today's world. The upshot of these remarks is quite simple, that America's Great Depression is not only relevant back then, but still highly relevant for contemporary work. And that relevance may be more urgently needed now than even when he wrote the book in 1963. Yet, I think there's an important difference between then and now as well. During the 1960s, Keynesianism was ascendant. It was coming to dominate and probably had already dominated academia. And the difference now, I think, is that while there is a much greater degree of diversity in monetary economics now, the

3:16fact is that from a policy standpoint, it has really just co-opted the entire argument pretty much. And so that we now live in a time when, while the intellectual foundations of Keynesianism has come under some critique, the policy application of those very same and doctrines that Rothbard was complaining about still are very much with us and I think with us in spades. So it's in that sense that I think America's Great Depression really does matter for the here and now. And I think changing some of these trajectories both in terms of critiquing Keynesian theories, which I take to be the substance of those two chapters as well as stating the positive alternatives i.e. Austrian business cycle theory are really very much on this table right now and make America's Great Depression a very valuable text.

4:19With that said, I want to just take two examples out of these two chapters and I'd like to I'd like to talk about Rothbard's criticism of the liquidity trap, which was very dominant back then, and also I would like to talk about Rothbard's implied attack on the use of aggregates in macroeconomics today. These things really do make a difference in terms of the kinds of policies that are being pursued these days, and I'll get into a little bit more of that in a moment. But let me turn to Keynes' notion of the liquidity trap, which arises from his theory of interest, which itself is a curious stew of any number of unpalatable ingredients.

5:05For Keynes, his liquidity preference theory is based on convention, it's a purely monetary phenomenon, it's unhinged from time preference, It's independent of the capital structure and the price margins between stages of production. And it's a policy variable principally available for the central bank to manipulate. Now for a given stock of money, the level of the interest rate is determined by the speculative demand for money in Keynes' mind. But speculators operate, according to Keynes, only at one margin, holding cash balances or perpetuities. which in turn is determined as Keynes says quote not by the absolute level of the interest rate but by the divergence of that of what is considered a fairly safe rate but the safe rate is nothing more than a convention that is taken as given by Keynes and thus if the interest rate is below the rate speculators deem the quote safe rate they will avoid the prospect of capital value losses by holding money as cash balances on the presumption that interest rates will rise

6:11The basic narrative within the Keynesian system that is that once the liquidity trap clamps down, there is no mechanism really within the market system to restore the system to equilibrium. As Keynes argues, the system gets locked into an underemployment equilibrium, I'm quoting, in which interest rates fluctuate, quote, for decades about a level which is chronically too high for full employment. Now even if one were to agree with that diagnosis, which I don't, Keynes denounces speculators' behavior by introducing these fixed expectations as a kind of a wild card that upstages a reliable role for interest rates within the context of his helter-skelter system.

7:01Interest rates, as Rothbard highlights, should be allowed to rise as part of the corrective process. Yet the Keynesian approach subverts this adjustment by attempting to push rates lower. For Keynesians, the significance of the liquidity trap was to render further intervention by the central bank impotent. Rothbard, however, turns this argument on its head by demonstrating that credit expansion in creating an unsustainable boom requires a correction that could not be achieved by further credit expansion and lower interest rates. For Rothbard, the desire of investors to increase their cash balances was not only rational but also necessary in correcting the distortions generated by the preceding boom.

7:53But Rothbard's argument does not require the sort of ad hoc assumptions about expectations that Keynes deployed. Instead, cash balances increase as investors seek to convert financial wealth into the safer haven of money until the necessary market-level price-cost adjustments are made that increase profit spreads. As Rothbard says in quote, an expectation of rising interest rates really means that People expect increases in the rate of net return on the market via wages and other producers' goods prices falling faster than do consumer goods. Investors expect falling wages and other factor prices and they are therefore holding off investing in factors until the fall occurs. Rothbard emphasizes this resistance by investors to falling interest rates on In the Bernanke-driven Fed of today, we are in a kind of liquidity trap, but this is fully a by-product of deliberate policy to set short rates roughly at zero levels and to keep long rates in the two-thirds of the world.

9:14In inflation adjusted terms, these rates imply negative real rates at the short end and real rates of 1-2% roughly at the long end. This unfortunately makes perfect sense to Keynesians these days because the price adjustments that must be made at the market level to restore profit margins and confidence are for them not relevant at all for policy purposes. policies. Meanwhile, the effect of these policies is to layer yet more distortions onto the system and at the same time reinforce and institutionalize the very rigidities that are used to rationalize such policies. These Fed policies have been in play since 2008 at least, ones I'm speaking of at least, without having had any appreciable effect on output and employment, an outcome that would not have surprised Rothbard.

10:11Now I'd like to lead, this leads me into my second example. My discussion thus far illustrates Rothbard's unwavering insistence on the necessity of allowing the economy to correct itself, and these adjustments can only occur at the market level where prices are determined, but as hopefully discerned from my discussion of interest rates, that the Fed's actions are such that if the economy doesn't go through, One minute is fine, that the approach that these ideas represent are totally at variance with Rothbard's implicit arguments. At bottom, the problem is both causes and solutions to the boom bust cycle are framed in terms of a fictitious aggregate combined with the belief that the job of policy makers is to manipulate that aggregate. Keynes yearned indeed for or a theory of output and employment as a whole, right?

11:09And now we have the policy version of this version, vision quite securely ensconced as a precept of money macro policy. These central themes that Rothbard explores, both in terms of his critique of Keynesian economics and his defense of the Austrian approach, okay, are so important for us today because we are on this kind of precipice where the Fed's actions are really putting us into a very dangerous position of going off a cliff. So Man Economy and State is the book to read. It has all of the, I think, the framework for the correct answers, and of course, it is still highly relevant and necessary for today's understandings. Thank you very much.