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Invaluable even after 40 years.
on March 11, 2002
Economist Alan Reynolds wrote: "The terror of the Great Crash has been the failure to explain it." I wonder if he ever read this great book, which is now in its fifth edition. Murray Rothbard's exploration of this devastating economic calamity is both fascinating and pertinent.
Rothbard refutes key misconceptions about the market economy and the Hoover administration's interventionist policies. Was the Great Crash due to capitalism gone wild? Was President Hoover the proponent of laissez-faire that some continue to insist? Did his interventionist actions assuage the depression? _America's Great Depression_ will always be important because of the Great Depression's legacy. Many continue to believe that the free market economy is inevitably inclined to collapse. Also, the interventionist policies of Presidents Hoover and Roosevelt accelerated the growth of the welfare state.
Economists have always observed the relationship between money supplies and business cycles. Rothbard goes a few steps farther, applying the Austrian school's theory of the business cycle to the Federal Reserve's monetary policies during the 1920s. Rothbard spends the first part of the book detailing the credibility of the Austrian theory and dismantling other theories. He shows how artificial increases in the money supply creates harmful imbalances in the economy. With this premise, Rothbard explains that the Federal Reserve's inflationary abuse of the money supply in the "Roaring Twenties" set the economy up for an unsustainable growth spurt that ended in disaster in 1929. (The scary thing is that prices remained fairly stable and hid the effects of inflation with ruinous results.)
After talking money supplies and business cycles for a while, Rothbard turns his attention to President Hoover's actions to correct the problem. Despite good intentions, government involvement aggravated the Depression. The most damaging and glaring mistake of the Hoover administration was the Smoot-Hawley Tariff, which basically smashed the world's economy. But what else was done? How did different policies delay the economy's recovery? There's a lot to be learned here. In the end, the lesson Rothbard hopes to teach is that the best option for government in fixing a depression is "laissez-faire."
Since the book focuses only on the early part of the Depression (up to 1933), it's unfortunate that Rothbard didn't criticize President Roosevelt's interventionist policies, which eviscerated the economy while it struggled to recover. Rothbard would have had a field day examining the effects of the NRA, the AAA, the WPA, the CWA, the Wagner Act, and everything else the New Deal implemented that I can't remember off the top of my head.
Since this book was originally published in the 60s (1963, I think), many people probably sneered at it. After all, in a time when Keynsianism was trendy, who was willing to blame the government for the Great Depression? Praise to Rothbard for this important application of Austrian theory and his exposure of the government's clumsiness.