America's Great Depression

"America's Great Depression", by Murray Rothbard
http://mises.org/rothbard/agd.pdf

The book is not a historical narrative, it is an economic analysis of the business cycle in general, and the Great Depression in particular. The business cycle is perplexing to economists. While they can usually point to a handful of causes of depressions in particular industries (a late freeze that wipes out a harvest of strawberries, for instance), they find it difficult to explain why an entire economy would flourish, only to collapse into recession. Why does it affect the entire economy? Why is it always preceded by a boom? Why does it always result in a bust? Why is it so difficult for businesses to predict? Is it a fatal flaw in the market?

Rothbard's answer is simple, but the explanation is complex. In short, the business cycle is created by credit expansion and monetary inflation. When governments or banks issue credit at artificially low interest rates a boom of activity is created by the influx of money; however, when the dollars have been spent, and now must make a profit, they find that the consumers do not have enough wealth saved up to pay off the loans, either directly or by consuming the products that businesses invested in. Sound familiar?

Written 40 years ago, this book is truer today than it was then, adding to the veracity of Mises Theory of the Business Cycle.

For those of you expecting an echo chamber for either Lord Keynes or Milton Friedman, you will not find it here. The Austrian School of Economics is one of the few, if not the only, economic school that finds the bust to be a necessary correction, and the boom that preceeded it a repugnant malinvestment. Unlike supply-side economists that believe a boom can be sustained indefinitely by pumping credit into the production sector, and unlike demand-side economists that believe a boom can be sustained indefinitely by pumping credit into the consumption sector, Rothbard and the Austrian School of Economics believe that booms can never be sustained and should be avoided. Booms are created by credit expansion, and the greater the expansion, the greater the bust that MUST follow it. The faster you allow the bust to run its course, the faster you can put sensible economic policies in place that produce real, sustainable economic growth.