The great Walter Grinder provides an overview of then‐​recent books on America’s Great Depression.

The times are bad. We hear from both Left and Right that times will get even worse. Historian Geoffrey Barraclough, his views strongly influenced by the strange Kondratieff 50‐​cycle theory, predicts a second Great Crash which will completely alter the socio‐​economic mechanism and likely usher in an era of fascism. F. A. Hayek recently lamented that within a decade inflation and subsequent price controls will put an end to the international market system that has developed over the past two centuries. The noted input‐​output economist Wassily Leontief cheers the direction towards which the current economic malaise is taking us, towards central planning and “rational” control of the economy. Mr. Midas, Franz Pick, predicts a gold price of $500 per ounce and a closing of the stock exchange.

Predictions are always precarious. There is, however, a growing body of opinion, the whole of which has its roots in divergent streams of thought, that clearly sees a forthcoming disaster of the kind and at least the same magnitude as that of the Great Depression of the 1930s.

THE GREAT DEPRESSSION / L. Robbins / $12.50

Drawing analogies between different periods of history is perhaps just as dangerous as attempting to predict the future. Yet, we must continue to search for parallels in the past; for even though the causative forces of the social processes are never identical, there are certain basic socio‐​economic determinants which if pursued consistently must logically produce similar results. If we do not try to understand ourselves in relation to the past, then we can know neither how nor why we got to the present, and hence, we can never genuinely understand where it is that we really are. Neither would we be able to face the future with any reasonable hope of achieving any of our goals.

It is hardly suprising that, now, many people, in their attempts to find answers to our current economic malaise, are looking to the Great Depression to draw their analogies. Is it possible for us to learn anything significant about 1975 and beyond by looking back to the twenties and the thirties? It seems that perhaps we can—if we go on our tour of the period with knowledgeable guides who will help us to separate out the truly important evidence and conclusions from the merely trivial flow of fact and circumstance. It is for this reason that these four books have been chosen to aid us in our investigation of several of the more salient features of the period. Each of the books is, of course, complete unto itself and eminently worthy of study on that basis. When, however, they are studied as an integrated whole, they give one a uniquely clear perspective and understanding of the period and subject under consideration. It is this reviewer’s strong suggestion that they indeed be carefully studied as such a whole.

We shall notice several things as we proceed. First, economic crises do not just happen. They are not inherent in the free‐​market process. Second, there is a general theory of the business cycle that explains all such economic crises. The Austrian, or “monetary over‐​investment,” theory of the cycle correctly and convincingly explained the Great Crash and Depression of the 1930s, and it is also the only theory that clarifies our current inflationary‐​recession problems. Third, we shall touch on two anti‐​Austrian myths: (1) that the Depression was caused by a so‐​called Great Contraction, and (2) that the Austrian theory does not adequately explain a general collapse of economic activity, the so‐​called secondary depression. Fourth, it should become clear that if something is not done soon to deal with our current inflation problem, we conceivably could be faced with a hyper‐​inflation similar to the German experience of the early 1920s.

When a libertarian is called upon to defend the free‐​market system, he sooner or later is confronted with the argument that the market is inherently unstable—that if left to its own devices, the market would thrash madly back and forth between ever accelerating booms and busts. The proof most often offered is the Great Depression, which began in 1929, deepened precipitiously in 1931–32, and was ended only by the mobilized inflationism of the Second World War. The 1930s, it is alleged, proved to be the last and most convincing failure of free enterprise, the market system, and the order of the Western world—capitalism.

If a defender of the market system is to be successful, it would seem that he must be able to deal with this question effectively. In order to do so, the defender must come to grips with the true nature of business cycles in general and with the Great Depression in particular. He must also distinguish between the free market, on the one hand, and the system of world capitalism on the other. After 1914, the two have seldom been synonymous. One must, then, guardedly keep this distinction in mind as he proceeds.

All of our authors make it clear that the Great Depression had its roots firmly planted in the Great War. The wartime command economy is the antithesis of the free market. The military‐​industrial‐​financial complex that grew out of the war joined together business and State in such a fashion as to regulate competition practically out of existence. Defenders of the free market might have a difficult time wrestling with rationalizations for such business‐​State partnerships, but, as especially Rothbard shows, many of the regulated industries failed to feel nearly so uncomfortable about the arrangement. A pattern of neo‐​mercantile, vested‐​interest relationships was established during the war, and, as Robbins describes in detail, it continually hindered the rebirth of the international free market during the following decade. The wartime command economy also served as a model and source of inspiration to the various central planners who attempted later to “cure” the Western economies during the Depression.

In addition to being the creator of anti‐​competitive business‐​government relationships, the war also was the single most important cause of the ultimate bane of the market system—inflation. As the authors clearly show in Banking and the Business Cycle, it was the policies and effects of massive wartime inflation, rather than the actual state of beligerency, that ultimately led to the decline of the genuine international gold standard. For a full century the gold standard had stood as the facilitator and symbol of true free trade. International trade has remained in a state of crisis or near crisis ever since the standard’s collapse. The wartime inflation also led to the initiation of large‐​scale public debt for the first time since the Napoleonic Wars. This debt led both to a greater general tax burden and to massive government manipulation in the bond markets. The various governments’ involvement in the Western money markets in turn led to even further solidification of the crucial banking‐​state nexus.

The Great War set the pattern for the twentieth century in numerous ways. It was a deadly, counter‐​revolutionary blow against the relatively free market system of the nineteenth century. After a century of an expanding market economy and free‐​market institutions, the war reimposed on the world economy a leaden overlay of mercantilism. There was no way that the expanded market system could operate efficiently within these mercantilistic constraints. It was the war that set the ideological tone under which the policies of the next two decades were to be implemented. But perhaps most important, it was the war that ushered in the universal Age of Inflation which has plagued the market mechanism ever since. One really must read the Robbins book in detail in order to grasp the full flavor of the causal relationship between the war and the decline of the international market process.

Appealing as the thought might be, we cannot lay the blame for the Great Depression directly on the war. The war both weakened the market process and created the ideological framework of interventionism, but it is the central banks and the central bankers to whom we must turn our attention if we want to find the true culprits for 1929 and its aftermath.

Before we proceed, we must for a moment turn our attention to the nature of the business cycle. The sequential booms and busts of the dreaded business cycle are not inherent in the natural functioning of the market process. They are caused by exogenous (government‐​banking partnership) tampering with the market. Specifically, they are caused by the central banks’ increases in bank credit, an inflation of the effective money supply. In my opinion, only the Austrian theoreticians (Mises, Hayek, and their followers) have consistently followed the implications of this insight. In so doing they alone have been able to explain the full macroeconomic ramifications of such a policy of inflationism.

Each of the three books on the Depression considered here devotes a section to explaining in some detail the Austrian theory of the cycle. Each does it somewhat differently, and therefore each stresses different aspects of the presentation. This is really quite helpful to one who is studying the three together, which would be my advice. Robbins is the consummate stylist. Rothbard is always immediately to the point. Phillips, McManus, and Nelson prefer to weave the theory and history together, rather than present them separately, which is largely the procedure of the others.

Since there is not enough space here to detail the theory, and since the authors perform that task so admirably, I will not repeat it. I must, however, underscore the central insight of the Austrian theory. The Austrians, while clearly cognizant of the relationship between increases in the money supply and changes in prices, do not make the focus of their attention and concern the mythical construct of the “price level.” They know that if the money supply is increased, then prices will be higher than they would have been otherwise. And as important as this rather obvious insight is, it is hardly the central concern of the Austrians.

What Mises and Hayek—and all of our authors—saw was that increases in bank credit ‚disproportionately affect the price system. These monetary increases distort the price system in a manner such that it leads entrepreneurs into decisions to invest in projects which under the conditions of the free market would not have been undertaken. These investments are what Austrians call malinvestments. They are investments which cannot be sustained by free‐​market supply and demand. They can be sustained (and then only in the short run) only by further government intervention, only by further infusions of bank credit into the banking system.

Because of these exogenously caused malinvestments, there emerges an imbalance in the capital structure of the economy. Specifically, there will be an overinvestment in production processes further removed in terms of time from the ultimate consumer, and there will be an underinvestment in production processes closer in time to the consumer. Our authors, Phillips, McManus, and Nelson in particular, show us that: sooner or later, depending on the actual monetary policy that is pursued, the balance in the economy will have to be restored. The malinvestments will have to be liquidated, and resources will have to move from sectors of overinvestment to sectors of underinvestment. The period of readjustment is what commonly is called recession. The recession must take place. If it is hindered in any way, the distortions and imbalances will build up, and if the hindrances continue to block the readjustment process, the recession will ultimately deepen and tumble into a depression.

The Great Depression is almost a paradigm example of the Austrian theory of the cycle. As we see clearly documented in the Robbins, in the Rothbard, and in the Phillips, McManus, and Nelson, the twenties were years of massive credit expansion and consequent over‐​investment in capital‐​goods industries. The frenzied boom came to a halt as the inflated financial‐​debt structure was finally punctured and came tumbling down. Unemployment and idle resources were greatest in the producers’ goods industries. The period of readjustment began. Rothbard’s presentation of the intricate events of these years is truly superb, and America’s Great Depression is absoluetly must reading if one really wishes to understand the full story of the 1920s and early 1930s.

There was one apparent contradiction in the flow of events of the 1920s, which has caused confusion among some noted analysts of the period. Consumer prices did not rise during the 1920s. How is it, it is asked, that we can have inflation if prices do not rise? We must remember that inflation is an increase in the money supply, not a rise in prices, which is but a usual effect of inflation. If, however, productivity is increasing as fast or faster than the money supply, then prices will, of course, remain “level” or fall. The fact is that during the 1920s the U.S. economy was still living on the fruits of the nineteenth century capital accumulation, and therefore, production and real wages were still rising rapidly.

During the 1920s a concerted policy was followed by the Federal Reserve, which attempted to hold the “price level” stable, in other words, to keep prices from falling. The effect of the policy on the structure of production was exactly the same as if the money supply had been increased during a period of naturally “level” prices. The result was a disasterous imbalance in the economy and the blalance had to be restored, sooner or later.

The myth has been prepetuated by various economists, influenced first by Irving Fisher and then by Milton Friedman, that the halting of the increase in the money supply at the end of the 1920s caused the Depression. Of course, the inflationary boom must stop sometime, or the risk of a total destruction of the economy and the currency must ultimately follow, a course covered in great detail by Bresciani‐​Turroni in his magnificent The Economics of Inflation. To blame the cessation of bank credit for the Depression is akin to blaming the surgeon who must operate on his patient for the patient’s misfortune of having gangrene. At some point it is recognized by all that the limb must be amputated in order to save the rest of the patient’s body. Happily, this analogy breaks down in one crucial respect. Unlike the amputee who can never again hope to grow another healthy limb, the economy, after a period of liquidation (readjustment) can be counted on to soon regain total health.

To continue any infusion of bank credit into a system entering a period of recession would be analagous to the doctor’s feeding his gangrenous patient doses of morphine to kill the short‐​run pain. While the pain killer performs its euphoric duty, the poison continues to spread fatally throughout the rest of the body’s system.

A policy which focuses on the so‐​called price ievel, however, must remain an almost meaningless exercise in terms of fruitful results. Such a policy will quite likely take attention away from the distortion effects (relative price imbalances) within the price system itself. It is, of course, these very distortions which remain the crucial macroeconomic problem. Chapter VIII, “Banking Policy and the Price Level,” in Phillips, McManus, and Nelson’s too‐​long‐​out‐​of‐​circulation masterpiece is one of the best presentations and critiques of the Federal Reserve’s policy during the 1920s.

It has also been contended by a number of economists, foremost among them being Gottfried Haberler and the late Wilhem Roepke, that the Austrian theory does not encompass a proper explanation of a general collapse in economic activity. They seem to admit that it explains the sequential “primary” booms and downturns, but they then contend that the Austrian theory is at a loss to cope analytically with such a total downturn as that of the 1930s, what Roepke called the “secondary depression.” But surely the facts are just the opposite, the Austrian theory says that there must be a period of readjustment. Prices in the capital‐​goods industries which were pushed inordinately high during the upswing must fall, and there must be a movement of resources from overinvested to underinvested areas. This is the “primary” cyclical downturn. However—and the Austrians are very clear on this point—if the “primary” recession is not permitted to run its course, the dislocations will continue to build up to such a degree that a more general disaster is bound to follow.

Rothbard spends the better part of his comprehensive study of the American situation detailing the numerous ways that the government stood in the way of the readjustment process. One of the most important of these was President Hoover’s attempt to keep wage rates high in order to help make it possible to spend the country’s way out of the Depression. It was, however, these very wages (wages in highly organized capital‐​goods industries) that had to fall if a balanced and fully productive economy was to be restored. This and other policies, such as higher tariffs, advances of liquidity to faltering businesses, public works, et cetera, combined to ensure that the Depression would deepen and expand its scope.

It is true that in the Austrian theory price flexibility plays a crucial role, but then price flexibility is a necessary condition for the smooth functioning of the equilibrating mechanism of the price system. Once the boom has reached its limits, prices must be able to adjust in order that the recession end swiftly. Price flexibility in effect serves as a sluice gate or a safety valve which, when functioning correctly, will ensure that the system will not fall into a more general depression. If, as happened during the 1930s, labor unions are given power enough to make it impossible for money wages to fall, then the sluice gate will be unable to open and the flood waters will gain enough strength ultimately to collapse the dam—to usher in a deep and general depression.

Labor unions throughout the Western nations have by now accumulated enough political‐​economic power to keep money wages and, therefore, many prices from falling, as so often they must if the price system is to do its job. Therefore, given the present institutional framework, many key prices can only continue to go higher and higher as each round of inflation works it way through the economy. However, this fact can often be misleading. Just as we cannot blame wars per se for the subsequent inflationary booms of the following decades, neither can we find the unions culpable for the Age of Inflation.

It is true that unions exert great political influence and consequently have a strong economic bargaining position. But, and it can not be too forcefully restated, inflation is an increase of the money supply. Only increases in the money supply allow prices across‐​the‐​board to continue to rise. There is in the final analysis no cost‐​push inflation. There is ultimately only demand‐​pull inflation. Only those who have the power to increase the money supply can be held responsible for inflation. It is the government central banks and central bankers, who, spineless though they may be, are responsible for increases in bank credit‐​not the unions. In fact, one of the best ways to break the excess power of the unions is to pursue a tight money policy, for then they would be able to hold wage rates above the market level only at the high cost of their own members’ unemployment. However, it is still true that in order to restore price flexibility to the market system all of the Depression pro‐​labor legislation from the Norris‐​LaGuardia and Wagner acts on must be repealed. We can properly attack government‐​supported labor unions for causing price inflexibility, but there is no way that we can reasonably blame them for inflation. The two concepts, while related, are clear and distinct. Right‐​wing economists have for too long allowed themselves to intermingle the two concepts, which has caused confusion not only among themselves but more importantly among their readers.

If prices continue to surge upward, at some point a substantial deterioration of the currency will begin. Once started, such a process feeds on itself, eating away not only at the value of the currency but also at the efficacy of the market process itself. And then a major dilemma faces the “managers” of the economy: Either they must cease the monetary infusions and permit the recession to run its course, or they go ahead with one of two interventionistic alternatives.

Since prices are not now permitted to fall, the quick and successful recession is precluded by definition. The first of the interventionist alternatives, of course, is allowing a continuing inflationist process, leading to the ultimate collapse of the currency. It seems that this alternative is an unlikely event in our near future, although it is very possible in the long run. For this reason alone it is important for one to familiarize oneself with Bresciani-Turroni’s great classic study of the notorious German inflation of the early 1920s. It is important to recognize that every aspect of the German economy was enervated by the inflation, and the entire social fabric of a whole people was completely torn apart. Bresciani’s presentation is remarkably and ominously detailed, and his theoretical basis is uncommonly sound.

The second interventionist alternative—that most likely to be employed during this decade—is the imposition of comprehensive price controls. If the controls are effectively enforced, the market will cease to be guided by prices and will become dominated by arbitrary, centralized decisions and decrees. The market will no longer function, and the economy will become a command economy of one variety or another. The following diminution in economic welfare and consequent civil liberties, one can be sure, will be swift and widespread.

Have we learned anything significant from our brief glimpse at the post–World War I–Great Depression era? The reader will surely find far more when he plumbs the depths of these great works himself; however, it seems safe to say that we have come across several important lessons. We have seen that inflationary booms must end in recession, even in the very best of worlds. We have seen that the 1929–1932 Depression was so deep only because the period of price readjustment was counteracted and shackled from the very beginning.

Has this insight shed any light on where we are now and where we are headed in our own future, both near and remote? We know that the post‐​World War II boom has been far lengthier and far more intense than was that following World War I. Therefore, I think we can reasonably conclude that the necessary malinvestments are more pervasive and much more internalized than they were during the 1920s. We know that the financial‐​debt structure is in a far more precarious state than it was in the 1920s. Perhaps most important of all, we know that the price system is far less flexible than it was a generation ago.

Considering all of the foregoing, it seems we must conclude that the prospects for a sane and prosperous long‐​run economic future are anything but sanguine. It would seem that both Barraclough and Hayek unfortunately have strong cases for their extremely pessimistic conclusions.

Nevertheless, even though hard and perhaps viscious times lie ahead of us, there is one bright spot in the gloom. If libertarians carefully study these four great works (I would suggest beginning with Robbins’ masterpiece of style and logic), they will become knowledgeable about the Austrian theory of the cycle and how the cycle has worked its way through actual historical circumstances. If they study these works (and those of Hayek, such as Monetary Theory and the Trade Cycle and Prices and Production) carefully, libertarians will be uniquely able to give a meaningful explanation of the causes and consequences of the cycle, and thus of the current macroeconomic malaise. More important, they will be able to show what must be done in order to ensure that such socio‐​economic madness will never happen again. These insights should then play an integral role in any libertarian plans for organizing and mobilizing public opinion.

The lessons we should learn from these four masterworks and the lessons we must try to drive energetically into the marketplace of ideas can be summed up as follows: The monetary spigot must be turned off once and for all. Central banking must be eliminated as quickly as possible. Any pro‐​labor or pro‐​business legislation that hinders price flexibility must be repealed. The long arm of the State must be completely and effectively proscribed from any and all economic affairs. Then and then only will we have a balanced, harmonious, and genuinely productive economic system. This short but very poignant lesson is one that only libertarians can consistently present to what is sure to become an increasingly dispairing and confused world. Reviewed by Walter E. Grinder.