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Product Description
Rothbard opens wіtһ a theoretical treatment οf business sequence scheme, ѕһοwіחɡ һοw аח expansive monetary policy generates imbalances between investment аחԁ consumption. Hе proceeds tο examine tһе Fed’s policies οf tһе 1920s, demonstrating tһаt іt wаѕ quite inflationary even іf tһе effects ԁіԁ חοt ѕһοw up іח tһе price οf goods аחԁ services. Hе ѕһοwеԁ tһаt tһе stock market correction wаѕ merely one symptom οf tһе investment boom tһаt led inevitably tο a bust. Tһе Gre… More >>
America’s Fаחtаѕtіс Depression
August 23, 2010 at 9:32 am
this is one of the most enraging books I have ever read about whatever thing correlated 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 admit 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 on paper book from an author who is obviously misinformed by the well loved trash of classroom and correlated ivory tower university circles.
Rating: 1 / 5
August 23, 2010 at 9:43 am
This is a favorite among Libertarians, Classical Liberalists and Regean “Supply-Siders”. This book is built upon completely fake assumptions. How can the Fantastic Depression have been caused by government policy when ALL of the government intervention took place AFTER the GD had already come close to peaking. It is right the tariff act further hurt the economy, but was not the prime factor that accelerated the collapse. FDR never resorted to Keynsianism anyhow until WW2 which finally brought us out of the GD. …
Rating: 1 / 5
August 23, 2010 at 9:59 am
If you want to learn more about the Fantastic Depression (as I did) don’t buy this book. This book is not about the Fantastic Depression, it is only about some Economics scheme. And ONLY about that scheme. It is a absolute dry read. I would not recommend this book.
Rating: 1 / 5
August 23, 2010 at 12:18 pm
I picked up this book expecting to read about real people in harrowing circumstances all owing to the Fantastic Depression. Instead, I got a textbook on boom and bust economics that is to the top with fiscal theories and explanations.
I would say this book is not for you unless you have a background in economics or wish to start having one. This book is a dull and hard read for anyone not interested in the pure fiscal side of the period.
Rating: 2 / 5
August 23, 2010 at 3:17 pm
Murray Rothbard’s book, America’s Fantastic Depression, is really two books in one. One is a very terrible book. It purports to use fiscal tools to clarify how the Fantastic Depression came to be. The other is a potentially very excellent book. What is suggests is that Herbert Hoover, although well intended, engineered a terrible situation into a catastrophe. Overall, I do not recommend the book to the general public as having a excellent explanation of why events of the 1920s led to the Fantastic Depression, nor would I recommend it to the general public as an pattern of excellent fiscal thinking. But I do recommend it to my fellow economists as an pattern of how not to do economics.
The terrible book occupies the introductions to each of Rothbard’s five editions of the book (the last published posthumously, and with an introduction by Paul Johnson), and then the first six chapters. From those introductions, it is apparent that Rothbard was a follower of Ludwig von Mises’ Austrian school of fiscal “thinking,” a school that apparently believes, economics can be a fact-free science. That can be seen in Rothbard’s Introduction to the First Edition where he wrote (xxxix f.): “… I make no pretension of using the historical facts to “test” the scheme. On the contrary, I contend that fiscal theories cannot be ‘tested’ by historical or statistical fact. … The only test of a scheme is the correctness of the premises and the logical string of reasoning.” If that is indeed the Misesian-school’s thinking, I inquiry what kind of scheme and what kind of economics can be produced by its fact-free science. Unlike Athena and Zeus, truth cannot jump from von Mises’ head unvarnished by observation, and it cannot do so from anyone else’s head for that matter. After all, how did von Mises first get to the scheme he proposed, and Rothbard used, without really having experimental facts on the ground. In the end, truth needs way out to facts and observations, and to refutable hypotheses. It is the scientist’s task to tease the evidence, or lack thereof, from recalcitrant facts and observations for the hypothesis or scheme being proposed. Absent that, all one is left with is fact-free science, which is no science at all. It is austerely assertion papered over by an ideological just-so tale. In that regard, the Misesian-school appears to be no better than the Marxian school (although ideologically, the polar opposite). If Rothbard represented the Misesian-school accurately, I would dismiss that school’s deal with as being scheme without measurement, in the same way, as in my graduate days, that we dismissed measurement without scheme.
To show how misleading fact-free science can be, I recall a well-known tale about Albert Einstein and quantum mechanics. Einstein, using a thought experiment in 1935 (the so-called EPR paradox) had proposed a seemingly certain test about particles in quantum mechanics. The paradox was impossible to test with the equipment available at the time, and so stood for quite a while. Only in the 1970s and later, with the advent of high-energy cyclotrons, did the paradox be converted into testable and indeed was refuted.
Of course, Rothbard’s book is not entirely fact-free. He did use some historical facts to ‘test’ the scheme, or at a minimum, to demonstrate its validity. He did that despite his contention that fiscal theories cannot be “tested” by historical or statistical fact. I find the difference between what he said he would not do and what he did to be most puzzling.
Rothbard’s book, in its first part, contains much that was ill defined, seemingly inconsistently defined, or downright misleading. Also, there seems to have been too narrow a focus on component parts, coupled with a unwillingness to look at larger and possibly more pertinent aggregates. The book has other areas of confusion as well, but those are of less import, and I will skip them in the interest of brevity.
In Chapter 1 of the book, we come across the first of Rothbard’s perplexing and ill-defined terms. It is in the context of the hypothesis he sets as to the fiscal scheme behind what caused the Fantastic Depression. According to Rothbard, the hypothesis depends on von Mises’ view that bank credit expansion will lead to a series of investment errors that turn out to be “malinvestment in higher-orders of production.” One can question, what are “higher-order of production”? Rothbard definition was: investment in capital-goods “most remote from the consumer”(10). What does that mean? Can one consider investment in farmland, a form of capital, as investment in a higher-order of production, insofar as farmland can be pretty remote from the consumer? I skepticism that is what Rothbard had in mind. The next inquiry is, what is “malinvestment,” and how does it lead to a downturn in the economy? As to the inquiry’s first part, what is the definition of malinvestment, frankly, it was never clear to me, being based on the already ill-defined notion of “higher-orders of production.” As to the inquiry’s second part, Rothbard’s reasoning there seems to fail his “logical string of reasoning.” Rothbard’s reasoning was that the decline in demand for higher-orders of production is accompanied by an increase in demand for lower-orders of production (whatever that means) and that is what leads to an fiscal downturn. But that is not logical. When one component of demand is increasing while another is decreasing, why should demand in the aggregate decline? Only a decline in aggregate demand will lead to an overall decline in profits and employment. Otherwise, all we are talking about is a exchange in the composition of demand, not a exchange in its total. Rothbard’s focus on that component of demand he called, “malinvestment,” to the exclusion of other components does not logically clarify why the total should decline. If the Misesian hypothesis is that a single component’s decline reduces total demand, the burden of proof is on Rothbard, or members of the Misesian-school, to provide first, a tight definitions of terms and then visible evidence to support the hypothesis. Otherwise, all they have done is engage in just-so fables.
Another definition Rothbard used, one that I reflect is highly misleading, was his definition of “inflation.” When I first skimmed owing to the book, I thought Rothbard had used it as it has been historically used, to mean price inflation. So, I then wondered, what inflation was he talking about? That’s because the 1920s was a period of mild deflation in most prices, except for farm land prices, which declined significantly, and for stock prices, which increased significantly. Only upon reading the book carefully did I learn the distinctive meaning Rothbard attached to the term, “inflation.” It can be found on p. 12, n.8: ” ‘Inflation’ is here defined as an increase in the money supply not consisting of an increase in the money metal.” So, any increase in non-metallic money was for Rothbard, by definition, “inflation.” (Some of the reviewers, I experimental, do not seem to have noticed Rothbard’s odd definition of the term.) Rothbard’s terminology was and is downright perplexing. The term, inflation, first came into use in the US in the late 1830s when it meant what it means today. (The precise definition is in: Online Etymology Dictionary, © 2001 Douglas Harper: “Monetary sense of, enlargement of prices – originally by an increase in the amount of money in circulation.”) In contemporary terminology, it means an increase in the price of excellent in services. In the 1920s and 1930s, it seemed to have meant an increase in stock prices. (See Friendship Shlaes’ The Forgotten Man, p. 4.) No twentieth-century economist I know of has ever used the term as Rothbard did.
The meaning Rothbard assigned to the term “inflation” may have in part stemmed from the Misesian thought that bank credit expansion leads to business cycles. But I reflect the primary reason he used the term was his animus to fractional-reserve banking in general, and to central banks in fastidious. Specifically, Rothbard saw fractional-reserve banking as being “fraudulent” (25). He would have had the government outlaw fractional-reserve banking by imposing 100% gold reserves on deposits. I find it odd that Rothbard, who professed to be a democratic, saw no contradiction here between his recommending the use of the gray-hand of the government to override the people’s own choice-making and his own democratic doctrine. What I have to conclude is that he viewed depositors as incapable of making decisions in their own best interests. Of course, one can question, why stop with having government imposing its will in this area? Go the whole hog and be converted into a right Marxist. Have government impose its will in all areas by making all the decisions for the public. I, even if, take the opposite view. People have to be considered as capable of making their own decisions and as having responsibility for them. In the field of banking, depositors have to be considered as knowing what’s going on, and as being keen participants in fractional-reserve banking. That’s because they benefit immensely from fractional reserve banking, with the primary benefit being the reduction in the costs of holding and using money. As a contrafactual, suppose depositors don’t want to use fractional-reserve banking. They could always hold cash balances in a vault in their homes or offices or factories. For transactions needing checks, they could go to the bank for cashiers’ checks. All that, even if, is expensive and inconvenient, which is why depositors use banks whose reserves are just a fraction of deposits. I would also have to conclude here that, not only was Rothbard apparently an ideologue, he was an elitist. Because he thought he knew better, he wanted to make people toe the line for what is excellent for them. Again, that is not very different from Marxism wherein the leaders supposedly know just the right kind of goods and services to produce for the people (who, even if, never seem to concur).
Chapter 4, aristocratic, “The Inflationary Factors,” is the heart of the terrible part of the book. Rothbard opened the chapter by describing what he thought would happen in the absence of fractional-reserve banking. Specifically, he said (86): “For a hallmark of the inflationary boom is that prices are higher than they would have been in a free and unhampered market.” (He of course revealed there that he misunderstood the difference between the level, and the rate of increase of prices. Interpreting a free and unhampered market to mean a market with 100 percent gold reserves for deposits, prices would indeed be higher with fractional-reserve banking, but in an inflationary boom – meaning one where the money supply increases speedily and relation to gold reserves – prices would not only be higher, they would be increasing quicker than they otherwise would have.) But even before the advent of the US current central bank, the Federal Reserve, there never was a period in US history without fractional-reserve banking and with the market being really free and unhampered. Below I will compare the period 1899-1912, when the market was more free and less hampered, with the period of the 1920s. That is because the first period was prior to the Federal Reserve’s establishment, and the second was afterwards when the market was, supposedly, less free and more hampered.
The inflation (of the money supply) of the 1920s on which Rothbard dwelled can be found in Table 1 of chapter 4 (p. 92). To measure inflation of the money supply, Rothbard used a very broad definition of money that included life insurance net policy reserves. While I have seen many definitions of money, I have never seen one like that. Of course, one is free to use any definition one wants, but it has to be grounded in some visible relationship. But Rothbard’s deal with, that hypotheses and definitions “cannot be ‘tested’ by historical or statistical fact,” precluded his doing so. If we stick with the usual definitions of money for that period, either M2 or M2 + S&L deposits, we find that the money supply grew respectively by 45 to 43 percent in the 1920s. (Rothbard’s inclusion of life insurance net policy reserves and S&L capital rather than deposits, increases that number to about 63 percent.) Of course, one could question, what was the increase in the period 1899-1912, prior to the Federal Reserve’s establishment? The respective increases turn out to be, 149 and 132 percent. At a compound annual rate, the numbers for the 1920s are respectively, 4.5 and 4.8 percent, while for the period 1899-1912, they are, respectively, 7.3 and 6.7 percent. (For uniformity, I would have compared Rothbard’s definition that included life insurance but I did not have data on life insurance for the earlier period; also, again, for purposes of uniformity, the data I used were from Table A-1 pp. 704-711 of Friedman and Schwartz’s, A Monetary History of the United States, 1867-1960.) Clearly, there is nothing outlandishly large about the money supply growth of the 1920s to get very exercised about. Again Rothbard’s narrow focus on a fastidious datum for a small period turns out, on the surface, not to have any explanatory power.
In both periods, one contributing factor to money supply growth was that both banks and depositors chose to increase the ratio of deposits to reserve money each held (currency plus bank reserves, also called, high-powered money or the monetary base). The difference in the two periods is that reserve money grew more speedily in the first period than in the second period. In the first period, reserve money grew at a 4.8% annual compound rate while in the second period, it grew at a compound annual rate of slightly more than 1%. Not surprisingly, prices in the first period rose quicker in than in the 1920s. (Specifically, from 1899 to 1912 wholesale prices rose 32 percent while from 1921 owing to 1929 they fell 2.5%!) What we see here is that the 1920s, being less free and more hampered can, sometimes bring about a modest deflation compared to a period that was more free and less hampered. One can see what happens when fact-free science comes to face to face with pesky small facts.
If chapter 4 is the heart of the terrible book, Table 7 on p. 109 is the heart of chapter 4. It was from the data in that table, that Rothbard argued (108): “…the inflation [in money] was clearly precipitated deliberately by the Federal Reserve. The plea that the 1920s was austerely a ‘gold inflation’ that the Federal Reserve did not counter actively is finally exploded.” His reasoning was that “controlled reserves increased by $1.79 billion for the entire period and that exceeded the monetary gold stock’s increase of $1 billion.” The problematic position with the ‘controlled reserves’ in Table 7 is that Rothbard’s never provided a definition for controlled reserves. While he did provide some computations pertinent to controlled reserves on p. 113, when those computations are applied consistently throughout Table 7, the figures do not add to the amounts he termed there, controlled reserves.
Another way of looking at what Rothbard was describing can be found Chart 25 on p. 282 of Friedman and Schwartz’s Monetary History. The chart demonstrates the opposite of Rothbard’s aver. It makes it quite clear that what the Fed was attempting to do was to use Federal Reserve credit to offset changes in monetary gold stocks that were occurring at the time. Based on the modest growth of reserve money, we would have to say they were somewhat successful.
Another problematic position raised by Table 7 is its narrow focus on reserves held at the Federal Reserve by banks that are members of the Federal Reserve system. He did not tab for the vault cash of the members or the reserves of the non-members. By focusing just on those reserves, he gave a skewed accounting of the increase in bank reserves. By Rothbard’s accounting, reserves increased by 47.5 percent from June 1921 owing to June 1929. (See his Table 6, 102.) When all bank reserves are taken into tab, even if, the increase comes to 27.5%; and when all reserve money is taken into tab, the increase is just 8.4 percent. (See, respectively, Table A-2, 738f., and Table B-3, 802f., of the Monetary History.) Again Rothbard’s focus on a specific component, rather than on the total, presents results that can be viewed as misleading.
A slightly different explanation of what happened is that individuals had a greater preference for bank money than currency in the 1920s, and so they converted their currency into bank money. Comparably, the banks had a greater preference for reserves at the Federal Reserve then they did for vault cash, so they, in effect, transferred any new assets expected from the public into reserves at the Federal Reserve. The increase, than, in reserves held at the Federal Reserve was not so much an increase engendered by the Federal Reserve, but austerely the workings of banks and depositors preferring one form of money to another.
After chapter 6, we enter into Rothbard’s discussion of Hoover’s events. Although he did occasionally discuss events by the Federal Reserve in those chapters, his primary focus was on Hoover. This part of the book is potentially very excellent. It provided me with a excellent deal more insight into what could have made the Fantastic Depression, fantastic. Unfortunately, Rothbard, in accordance with his school’s thinking, did not do a full analysis of Hoover. More statistical work would have been necessary, and that is why this part remains only potentially very excellent.
Rothbard’s description of Hoover painted him as an interventionist, a Roosevelt-lite character. According to Rothbard, Hoover attempted to prevent prices and wages from falling. When demand declines, even if, both attempts are futile and just stave off the day of reckoning. Hoover may have been partially successful in preventing prices from falling far enough and quick enough. From 1929 to 1933, wholesale prices fell by about 25%. By comparison, in the previous recession in 1920, wholesale prices fell by 37% in the course of one year. Hoover’s success on keeping wages from declining is less clear (mainly because excellent wage indexes do not exist for that time). From 1929 to 1933, average hourly earnings in all industries fell by 25% while in the two years from 1920 to 1922 they fell by 15%. For both periods, the compound annual decline is amazingly close, about 7% per year. Hoover’s intentions may have been noble, but all he did was to engineer the economy so it could not adjust to the decline in demand
What about the Smoot-Hawley tariff, which many today blame for the Fantastic Depression? The ostensible reason for the tariff was to help farmers, but if US imports are reduced, it becomes harder for farmers to sell products overseas. (Foreign importers won’t have the foreign exchange available to buy the farm products.) Rothbard thought it contributed mightily to the Depression. His evidence was the opposition of nearly all the economists and the fact that the market broke after the tariff was signed into law (241f.). That even if does not constitute evidence. The market’s having sunk is by itself not evidence. The ancient saw of, correlation is not causation is at work here. The fact that many economists opposed the tariff is also not evidence. Indeed, Rothbard did not accept stable prices as being a beneficial goal of monetary policy despite many economists having recommended it as policy. Moreover, there was an earlier tariff, the Fordney-McCumber Tariff, which went into effect in 1922, and was just as onerous as Smoot-Hawley. Yet, it seems not to have caused any lasting real effects. Rothbard, without having done any of the gray lifting with regard to analyzing the costs of the Smoot-Hawley, then stated (241)” … it was at a precarious time of depression that the Hoover administration chose to hobble international trade, injure the American consumer, and cripple the American farmers’ export markets by raising tariffs higher than their already high levels.” This is economics by assertion. It proves nothing.
Rating: 1 / 5