Economic Depressions: Their Cause and Cure

0:00Economic Depressions, Their Cause and Cure, by Murray N. Rothbard We live in a world of euphemism. Undertakers have become morticians, press agents are now public relations counselors, and janitors have all been transformed into superintendents. In every walk of life, plain facts have been wrapped in cloudy camouflage. No less has this been true of economics. In the old days, we used to suffer nearly periodic economic crises, the sudden onset of which was called a panic, and the lingering trough period after the panic was called depression. Depression. The most famous depression, in modern times of course, was the one that began in a typical financial panic in 1929 and lasted until the advent of World War II. After the disaster of 1929, economists and politicians resolved that this must never happen again.

1:01The easiest way of succeeding at this resolve was simply to define depressions out of existence. From that point on, America was to suffer no further depressions, for when the next sharp depression came along in 1937-38, the economists simply refused to use the dread name, and came up with a new, much softer sounding word, recession. From that point on, we have been through quite a few recessions, but not a single depression. But pretty soon, The word recession also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only had downturns, or even better slowdowns, or sidewise movements. So be of good cheer.

1:54From now on, depressions and even recessions have been outlawed by the semantic fiat of of Economists. From now on, the worst that can possibly happen to us are slowdowns. Such are the wonders of the new economics. For 30 years, our nation's economists have adopted the view of the business cycle held by the late British economist John Maynard Keynes, who created the Keynesian, or the new, economics in his book The General Theory of Employment, Interest and Money, published in 1936. Beneath their diagrams, mathematics, and inchoate jargon, the attitude of Keynesians toward booms and bust is simplicity, even naivete itself. If there is inflation, then the cause is supposed to be excessive spending on the part of the public.

2:44The alleged cure is for the government, the self-appointed stabilizer and regulator of of the Nation's Economy to step in and force people to spend less, sopping up their excess purchasing power through increased taxation. If there is a recession on the other hand, this has been caused by insufficient private spending, and the cure now is for the government to increase its own spending, preferably through deficits, thereby adding to the nation's aggregate spending stream. The idea that increased government spending, or easy money, is good for business, and that budget cuts, or harder money, is bad, permeates even the most conservative newspapers and magazines. These journals will also take for granted that it is the sacred task of the federal government to steer the economic system on the narrow road between the abysses of depression on the one hand and inflation on the other, for the free market economy is supposed to be ever liable to succumb to one of these evils. All current schools Note, for example, the viewpoint of Dr. Paul W. McCracken, the incoming chairman of President Nixon's Council of Economic Advisers.

3:56In an interview with the New York Times shortly after taking office, January 24th, 1969, Dr. McCracken asserted that one of the major economic problems facing the new administration is How you cool down this inflationary economy without at the same time tripping off unacceptably high levels of unemployment. In other words, if the only thing we want to do is cool off the inflation, it could be done. But our social tolerances on unemployment are narrow. And again, I think we have to feel our way along here. We don't really have much experience in trying to cool an economy in orderly fashion. We slammed on the brakes in 1957, Note the fundamental attitude of Dr. McCracken toward the economy, remarkable only in that it is shared by almost all economists of the present day.

4:51The economy is treated as a potentially workable but always troublesome and recalcitrant patient, with a continual tendency to hive off into greater inflation or unemployment. The function of the government is to be the wise old manager and physician, ever watchful, ever tinkering, to keep the economic patient in good working order. In any case, here the economic patient is clearly supposed to be the subject, and the government as physician the master. It was not so long ago that this kind of attitude and policy was called socialism, but we live in a world of euphemism. And now we call it by far less harsh labels such as moderation or enlightened free enterprise. We live and learn.

5:37What then are the causes of periodic depressions? Must we always remain agnostic about the causes of booms and busts? Is it really true that business cycles are rooted deep within the free market economy, Economy, and that therefore some form of government planning is needed if we wish to keep the economy within some kind of stable bounds. Do booms and then busts just simply happen, or does one phase of the cycle flow logically from the other? The current fashionable attitude toward the business cycle stems actually from Karl Marx. Marx saw that before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject, but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions.

6:40Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes they attribute to the cycle, agree on this vital point, that these business cycles originate somewhere deep within the free market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse until the All the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy, and that if anything can save the day, it must be some form of massive government intervention.

7:34There are, however, some critical problems in the assumption that the market economy is the culprit. Therefore, general economic theory teaches us that supply and demand always tend to be in equilibrium in the market, and that therefore prices of products as well as of the factors that contribute to production are always tending towards some equilibrium point. Even though changes of data, which are always taking place, prevent equilibrium from ever being reached, there is nothing in the general theory of the market system that would account for regular and recurring boom and bust phases of the business cycle. Modern economists solved this problem by simply keeping their general price and market theory and their business cycle theory in separate, tightly sealed compartments, with never the twain meeting, much less integrated with each other.

8:31Economists unfortunately have forgotten that there is only one economy, and therefore only There is only one integrated economic theory. Neither economic life nor the structure of theory can or should be in watertight compartments. Our knowledge of the economy is either one integrated whole or it is nothing. Yet most economists are content to apply totally separate and indeed mutually exclusive theories for general price analysis and for business cycles. They cannot be genuine economic scientists, so long as they are content to keep operating in this primitive way. But there are still graver problems with the currently fashionable approach.

9:18Economists also do not see one particularly critical problem because they do not bother to square their business cycle and general price theories. The Peculiar Breakdown of the Entrepreneurial Function at Times of Economic Crisis and Depression In the market economy, one of the most vital functions of the businessman is to be an entrepreneur, a man who invests in productive methods, who buys equipment and hires labor to produce something which he is not sure will reap him any return. In short, the entrepreneurial function is the function of forecasting the uncertain future. Before embarking on any investment or line of production, the entrepreneur or enterpriser must estimate present and future costs and future revenues, and therefore estimate whether and how much profits he will earn from the investment.

10:19If he forecasts well, and significantly better than his business competitors, he will reap profits from his investment. The better his forecasting, the higher profits he will earn. If on the other hand, he is a poor forecaster, and overestimates the demand for his product, he will suffer losses, and pretty soon be forced out of the business. The market economy, then, is a profit and loss economy, in which the acumen and ability of Business Entrepreneurs is gauged by the profits and losses they reap. The market economy, moreover, contains a built-in mechanism, a kind of natural selection, that ensures the survival and the flourishing of the superior forecaster and the weeding out of the inferior ones.

11:10For the more profits reaped by the better forecasters, the greater become their business Business Responsibilities, and the more they will have available to invest in the productive system. On the other hand, a few years of making losses will drive the poorer forecasters and entrepreneurs out of business altogether and push them into the ranks of salaried employees. If then the market economy has a built-in natural selection mechanism for good entrepreneurs, This means that generally we would expect not many business firms to be making losses, and in fact if we look around at the economy on an average day or year we will find that losses are not very widespread. But in that case the odd fact that needs explaining is this, how is it that periodically in times of the onset of depressions, and especially in steep depressions, the business world suddenly only experiences a massive cluster of severe losses.

12:11A moment arrives when business firms, previously highly astute entrepreneurs in their ability to make profits and avoid losses, suddenly and dismayingly find themselves, almost all of them, suffering severe and unaccountable losses. How come? Here's a momentous fact that any theory of depressions must explain. An explanation such as underconsumption, a drop in total consumer spending, is not sufficient, for one thing, because what needs to be explained is why businessmen, able to forecast all manner of previous economic changes and developments, prove themselves totally and catastrophically unable to forecast this alleged drop in consumer demand. Why this sudden failure in forecasting ability?

12:57An adequate theory of depressions, then, must account for the tendency of the economy to move through successive booms and busts, showing no sign of settling into any sort of smoothly moving or quietly progressive approximation of an equilibrium situation. In particular, a theory of depression must account for the mammoth cluster of errors which appear swiftly and suddenly at a moment of economic crisis and lingers through the and there is a third universal fact that a theory of the cycle must account for invariably the booms and busts are much more intense and severe in the capital goods industries the industries making machines and equipment the ones producing industrial raw materials or constructing industrial plants than in the industries making consumers goods here is another fact of business cycle life that must be explained are explained, and obviously can't be explained, by such theories of depression as the popular under-consumption doctrine, that consumers aren't spending enough on consumer goods.

14:08For if insufficient spending is the culprit, then how is it that retail sales are the last and least to fall in any depression, and that depression really hits such industries as has machine tools, capital equipment, construction, and raw materials. Conversely, it is these industries that really take off in the inflationary boom phases of the business cycle, and not those businesses serving the consumer. An adequate theory of the business cycle, then, must also explain the far greater intensity of booms and busts in the non-consumer goods, or producer's goods, industries. Fortunately, a correct theory of depression and of the of the Business Cycle does exist of the century, alongside the industrial system. This was the institution of banking, with its capacity to expand credit and the money supply, first in the form of paper money or bank notes, and later in the form of demand deposits or checking accounts that are instantly redeemable in cash at the banks. It was the operations of these commercial banks which,

15:44these economists saw, held the key to the mysterious recurrent cycles of expansion and and a contraction of boom and bust that had puzzled observers since the mid-18th century. The Ricardian analysis of the business cycle went something as follows. The natural monies emerging as such on the world-free market are useful commodities, generally gold and silver. If money were confined simply to these commodities, then the economy would work in Money aggregate as it does in particular markets, a smooth adjustment of supply and demand, and therefore no cycles of boom and bust. But the injection of bank credit adds another crucial and disruptive element, for the banks expand credit and therefore bank money in the form of notes or deposits, which are theoretically redeemable on demand in gold, but in practice clearly are not.

16:43For example, if a bank has 1000 ounces of gold in its vaults, and it issues instantly redeemable warehouse receipts for 2500 ounces of gold, then it clearly has issued 1500 ounces more than it can possibly redeem. But so long as there is no concerted run on the bank to cash in these receipts, its warehouse receipts function on the market as equivalent to gold, and therefore the bank has been able The banks, then, happily begin to expand credit. For the more they expand credit, the greater will be their profits. This results in the expansion of the money supply within a country, say, England. As the supply of paper and bank money in England increases, the money incomes and expenditures of Englishmen rise, and the increased money in England increases.

17:42bids up prices of English goods. The result is inflation and a boom within the country. But this inflationary boom, while it proceeds on its merry way, sows the seeds of its own demise. For as English money supply and incomes increase, Englishmen proceed to purchase more goods from abroad. Furthermore, as English prices goes up, English goods begin to lose their competitiveness with the products of other countries which have not inflated or have been inflating to a lesser degree. Englishmen begin to buy less at home and more abroad, while foreigners buy less in England and more at home. The result is a deficit in the English balance of payments, with English exports falling sharply behind imports.

18:32But if imports exceed exports, this means that money must flow out of England to foreign countries. What money will this be? Surely not English banknotes or deposits, for Frenchmen or Germans or Italians have little or no interest in keeping their funds locked up in English banks. These foreigners will therefore take their banknotes and deposits and present them to the English banks for redemption in gold, and gold will be the type of money that will will tend to flow persistently out of the country as the English inflation proceeds on its way, but this means that English bank credit money will be more and more pyramiding on top of a dwindling gold base in the English bank vaults. As the boom proceeds, our hypothetical bank will expand its warehouse receipts issued from say 2,500 ounces to 4,000 ounces while While its gold base dwindles to say 800, as this process intensifies, the banks will eventually become frightened, for the banks, after all, are obligated to redeem their liabilities

19:40in cash, and their cash is flowing out rapidly as their liabilities pile up. Hence, the banks will eventually lose their nerve, stop their credit expansion, and in order to save themselves, contract their bank loans outstanding. Even this retreat is precipitated by bankrupting runs on the banks, touched off by the public, who had also been getting increasingly nervous about the ever more shaky condition of the nation's banks. The bank contraction reverses the economic picture. Contraction and bust follow boom. The banks pull in their horns, and businesses suffer as the pressure mounts for debt repayment and contraction. The fall in the supply of bank money, in turn, leads to a general fall in English prices.

20:29As money supply and incomes fall and English prices collapse, English goods become relatively more attractive in terms of foreign products, and the balance of payments reverses itself with exports exceeding imports. As gold flows into the country, and as bank money contracts on top of an expanding gold and the gold base, the condition of the banks becomes much sounder. This, then, is the meaning of the depression phase of the business cycle. Note that it is a phase that comes out of, and inevitably comes out of, the preceding expansionary boom. It is the preceding inflation that makes the depression phase necessary. We can see, for example, that the depression is the process by which the market economy adjusts, Why, then, does the next cycle begin? Why do business cycles tend to be recurrent and continuous? Because when the banks have pretty well recovered, and are in a sounder condition, why do business cycles tend to be recurrent and continuous?

21:34of the Previous Boom. Why, then, does the next cycle begin? Why do business cycles tend to be recurrent and continuous? Because when the banks have pretty well recovered, and are in a sounder condition, they are then in a confident position to proceed to their natural path of bank credit expansion, and the next boom proceeds on its way, sowing for the next inevitable bust. But if banking is the cause of the business cycle, aren't the banks also a part of the private market economy? And can't we therefore say that the free market is still the culprit, if only in the banking segment of that free market? The answer is no, for the banks, for one thing, would never be able to expand credit in concert, were it not for the intervention and encouragement of government.

22:25For if the banks were truly competitive, any expansion of credit by one bank would quickly pile up the debts of that bank in its competitors, and its competitors would quickly call upon the expanding bank for redemption in cash. In short, a bank's rivals will call upon it for redemption in gold or cash in the same way as do foreigners, except that the process is much faster and would nip any incipient inflation in the bud before it got started. Banks can only expand comfortably in unison when a central bank exists, essentially a governmental bank enjoying a monopoly of government business and a privileged position imposed by government over the entire banking system.

23:11It is only when central banking got established that the banks were able to expand for any length of time and the familiar business cycle got underway in the modern world. The central bank acquires its control over the banking system by such governmental measures as making its own liabilities legal tender for all debts and receivable in taxes, taxes, granting the central bank monopoly of the issue of bank notes, as contrasted to deposits. In England, the Bank of England, the governmentally established central bank had a legal monopoly of bank notes in the London area, or through the outright forcing of banks to use the central bank as their client for keeping their reserves of cash, as in the United States and its Federal Reserve system. Not that the banks complain about This Intervention, for it is the establishment of central banking that makes long-term bank credit expansion possible, since the expansion of central bank notes provides added cash reserves for the entire banking system, and permits all the commercial banks to expand their credit together.

24:21Central banking works like a cozy compulsory bank cartel to expand the bank's liabilities, and the banks are now able to expand on a larger base of cash in the form of central banknotes as well as gold. So now we see at last that the business cycle is brought about not by any mysterious failings of the free market economy, but quite the opposite, by systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression adjustment comes into play. The Ricardian theory of the business cycle grasped the essentials of a correct cycle theory.

25:07The recurrent nature of the phases of the cycle, depression as adjustment to intervention in the market, rather than from the free market economy. But two problems were as yet unexplained. Why the sudden cluster of business error, the sudden failure of the entrepreneurial function? And why the vastly greater fluctuations in the producer's goods than in the consumer's goods industries? The Ricardian theory only explained movements in the price level in general business. There was no hint of explanation of the vastly different reactions in the capital and consumer goods industries. The correct and fully developed theory of the business cycle was finally discovered and set forth by the Austrian economist Ludwig von Mises.

25:58When he was a professor at the University of Vienna, Mises developed hints of his solution to the vital problem of the business cycle in his monumental Theory of Money and Credit, published in 1912 and still nearly 60 years later, the best book on the theory of money and banking. Mises developed his cycle theory during the 1920s and it was brought to the English-speaking world by Mises's leading follower, Friedrich A. von Hayek, who came from Vienna to teach at the London School of Economics in the in the early 1930s and who published, in German and in English, two books which applied and elaborated the Mises Cycle Theory, Monetary Theory and the Trade Cycle, and Prices and Production.

26:50Since Mises and Hayek were Austrians, and also, since they were in the tradition of the great 19th century Austrian economists, this theory has become known in the literature as the Austrian, or the monetary overinvestment theory of the business cycle. Building on the Ricardians, on general Austrian theory, and on his own creative genius, Mises developed the following theory of the business cycle. Without bank credit expansion, supply and demand tend to be equilibrated through the free-price system, and no cumulative booms or busts can then develop. But then, government, through its central bank, stimulates bank credit expansion, by expanding central bank liabilities, and therefore, the cash reserves of all the nation's commercial banks.

27:41The banks then proceed to expand credit, and hence the nation's money supply, in the form of cheque deposits. As the Ricardians saw, this expansion of bank money drives up the prices of goods, and hence causes inflation. But Mises showed it does something else and something even more sinister. Bank credit expansion, by pouring new loan funds into the business world, artificially lowers the rate of interest in the economy below its free market level. On the free and unhampered market, the interest rate is determined purely by the time preferences of all the individuals that make up the market economy, For the essence of a loan is that a present good, money which can be used at present, is being exchanged for a future good, an IOU which can only be used at some point in the future.

28:33Since people always prefer money right now to the present prospect of getting the same amount of money sometime in the future, the present good always commands a premium in the market over the future. The premium is the interest rate, and its height will vary according to the degree to which people prefer the present to the future, i.e. the degree of their time preferences. People's time preferences also determine the extent to which people will save and invest, as compared to how much they will consume. If people's time preferences should fall, i.e. if their degree of preference for present over future falls, If money falls, then people will tend to consume less now, and save and invest more, at the same time, and for the same reason, the rate of interest, the rate of time discount, will also fall. Economic growth comes about largely as the result of falling rates of time preference, which lead to an increase in the proportion of saving and investment to consumption, and

29:35also to a falling rate of interest. But what happens when the rate of interest falls, not because of lower time preferences and higher savings, but from government interference that promotes the expansion of bank credit? In other words, if the interest rate falls artificially due to intervention, rather than naturally as a result of changes in the valuations and Preferences of the Consuming Public. What happens is trouble, for businessmen seeing the rates of interest fall, react as they always would and must to such a change of market signals. They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable, now seem profitable, because of the fall of the interest charge.

30:30In short, businessmen react as they would react if savings had genuinely increased. They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction, as compared to their direct production of consumer goods. Businesses in short happily borrow the newly expanded bank money that is coming to them at cheaper rates. They use the money to invest in capital goods, and eventually this money gets paid out in and higher rents to land and higher wages to workers in the capital goods industries. This increased business demand bids up labor costs, but businesses think they can pay these higher costs because they have been fooled by the government and bank intervention in the loan market, and it's decisively important tampering with the interest rate signal of the marketplace.

31:20The problem comes as soon as the workers and landlords, largely the former, since most When the most gross business income is paid out in wages, begin to spend the new bank money that they have received in the form of higher wages. For the time preferences of the public have not really gotten lower. The public doesn't want to save more than it has, so the workers set about to consume most of their new income, in short, to reestablish the old consumer-saving proportions. This means that they redirect the spending back back to the consumer goods industries, and they don't save and invest enough to buy the newly produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression in the producers goods industries. Once the consumers reestablish their desired consumption investment proportions, it is thus revealed that business had invested too much in capital goods and had under-invested in consumer goods.

32:21Business had been seduced by the governmental tampering and artificial lowering of the rate of interest and acted as if more savings were available to invest than were really there. As soon as the new bank money filtered through the system and the consumers re-established their old proportions, it became clear that there were not enough savings to buy all the and that business had misinvested the limited savings available. Business had overinvested in capital goods and underinvested in consumer products. The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption investment preferences.

33:11The Depression is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom and re-establishes those proportions between consumption and investment that are truly desired by the consumers. The Depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed.

33:58Since the workers receive the increased money in the form of higher wages fairly rapidly, how is it that Boehm's can go on for years without having their unsound investments revealed, their errors due to tampering with market signals become evident, and the depression adjustment process begin its work? The answer is that Boehm's would be very short-lived If the bank credit expansion and subsequent pushing of the rate of interest below the free market level were a one-shot affair, but the point is that the credit expansion is not one-shot, it proceeds on and on, never giving consumers the chance to re-establish their preferred proportions of consumption and saving, never allowing the rise in costs in the capital goods industries to catch up to the inflationary rise in prices, like the As a repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated doses of the stimulant of bank credit.

35:06It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom with the reassertion of a greater proportionate emphasis on consumer goods production. Thus, the Misesian theory of the business cycle accounts for all of our puzzles. The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, The Far Greater Intensity of the Boom and Bust in the Producers' Goods Industries Mises then pinpoints the blame for the cycle on inflationary bank credit expansion propelled by the intervention of government and its central bank.

36:03What does Mises say should be done, say by government, once the Depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating as soon as possible. It is true that this will inevitably bring the inflationary boom abruptly to an end and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary adjustments will have to be. The sooner the depression readjustment is gotten over with, the better. This means also that the government must never try to prop up unsound business It must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease.

36:54The government must never try to prop up wage rates or prices of producers' goods. Doing so will prolong and delay indefinitely the completion of the depression adjustment process. It will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures. For this will further increase the social consumption investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending, but more saving, in order to validate some of the excess investments of the boom.

37:48Thus, what the government should do, according to the Misesian analysis of the Depression, is absolutely nothing. It should, from the point of view of economic health and ending the Depression as quickly as possible, maintain a strict hands-off laissez-faire policy. The Misesian prescription is thus the exact opposite of the Keynesian. It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget. It has today been completely forgotten, even among economists, that the Misesian explanation and analysis of the Depression gained great headway precisely during the Great Depression of the 1930s, the very Depression that has always held up to advocates of the free market economy as the greatest single and catastrophic failure of laissez-faire capitalism. It was no such thing.

38:551929 was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s, a policy deliberately adopted by the Western governments, and most importantly, by the Federal Reserve system in the United States. It was made possible by the failure of the Western world to return to a genuine gold standard after World War I, and thus allowing more room for inflationary policies by government. Everyone now thinks of President Coolidge as a believer in laissez-faire and an unhampered market economy. He was not, and tragically, nowhere less so than in the field of money and credit. Unfortunately, the sins and errors of the Coolidge intervention were laid to the door of a non-existent free market economy.

39:41If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the Depression, transforming it from a typically sharp but swiftly disappearing depression into a lingering and near-fatal malady, a malady cured only by the Holocaust of World War II. Hoover, not Franklin Roosevelt, was the founder of the policy of the New Deal, essentially the massive use of the state to do exactly what Misesian theory would most warn against, to prop up wage rates above their free market levels, prop up prices, inflate credit, and lend money to shaky business positions. Roosevelt only advanced, to a greater degree, what Hoover had pioneered. The result for the first time in American history was a nearly perpetual depression and nearly permanent mass unemployment.

40:32The Coolidge Crisis had become the unprecedentedly prolonged Hoover-Roosevelt Depression. Ludwig von Mises had predicted the depression during the heyday of the great boom of the 1920s, in the 1920s, a time, just like today, when economists and politicians armed with the new economics of perpetual inflation, and with new tools provided by the Federal Reserve system, proclaimed a perpetual new era of permanent prosperity, guaranteed by our wise economic doctors in Washington. Ludwig von Mises, alone armed with a correct theory of the business cycle, was one of the very few economists to predict the Great Depression, and hence the economic world was forced to listen to him with respect. F. A. Hayek spread the word in England, and the younger English economists were all, in the early 1930s, beginning to adopt the Misesian cycle theory for their analysis of the Depression, and also to adopt, of course, the strictly free-market policy prescription that flowed with this theory.

41:33Unfortunately, economists have now adopted the historical notion of Lord Keynes that no classical economists had a theory of the business cycle until Keynes came along in 1936. There was a theory of the Depression. It was the classical economics tradition. Its prescription was strict hard money and laissez-faire, and it was rapidly being adopted in England and even in the United States as the accepted theory of the business cycle. A particular irony is that the major Austrian proponent in the United States in the early and mid-1930s was none other than Professor Alvin Hanson, very soon to make his mark as the outstanding Keynesian disciple in this country.

42:18What swamped the growing acceptance of Misesian Cycle Theory was simply the Keynesian Revolution, the amazing sweep that Keynesian Theory made of the economic world shortly after the publication of the General Theory in 1936. It is not that Misesian Theory was refuted successfully, it was just forgotten in the rush to climb on the suddenly fashionable Keynesian bandwagon. Some of the leading adherents of the Mises theory, who clearly knew better, succumbed to the newly established winds of doctrine, and won leading American university posts as a consequence. But now the once arch-Keynesian London economist has recently proclaimed that Keynes is dead. After over a decade of facing trenchant theoretical critiques and refutation by stubborn economic facts, the Keynesians are now in general and massive retreat.

43:09Once again, the money supply and bank credit are being grudgingly acknowledged to play a leading role in the cycle. The time is ripe for a rediscovery, a renaissance of the Mises theory of the business cycle. It can come none too soon. If it ever does, the whole concept of a council of economic advisors would be swept away, and we would see a massive retreat of government from the economic sphere. But for all this to happen, the world of economics and the public at large must be made aware of the existence of an explanation of the business cycle that has lain neglected on the shelf for all too many tragic years.