America's Great Depression

America's Great Depression - By Murray Rothbard

I have been reading the above for the last couple of weeks, and although it's been a pretty dry and difficult read at times, it will probably become one of my top ten favorite books, and represent a massive turning point in my general perspective on government and economics.

The reason this book has had such an influence on my perspective is two-fold.

First, for introducing me to Mises Theory of the Business Cycle, which basically states that government inflation (or bank inflation), which results in interest rates below the normal equilibrium, encourages overinvestment in capital resources. The increased investment fuels a boom of construction, development, and speculation; but without hard currency to back it up, the investments in total always lose money, which results in a recession.

Second, the events that Rothbard are describing are so earily similar to the events of today, and truly, the events of every recession (and the boom that preceeded it); that it is impossible not to marvel that this book was written 40 years ago about an event that took place 80 years ago.

From the artificially low interest rates (Fannie Mae & Freddie Mac), to the speculation in land and property (the housing boom of the 2000's), to the wasteful government programs trying to prop up food prices (ethanol), to the attempts to block oil exploration AND imports (energy independence, without the necessary drilling to make it possible), to the movements to block immigration in order to prop up wages ("Build the fence!"), to the massive government works programs to keep people employed (Alaska's bridge to nowhere), to the calls to socialize all industry in general, and the oil industry in particular (the recent congressional meetings with oil execs), to the massive outcry against speculation and short-selling (which is an exact duplication of what we hear from today's politicians), to the calls for the government to take responsibility for yet another formerly private enterprise (banks, unemployment benefits, utilities, health care).

What I find so fascinating is that in every recession, there seems to have been sound economists that were pointing out exactly what had happened, why it was happening, and how to fix it, and there are always some variety of "New" economists that grasp at straws to find some convoluted new theory that tries to retain the idea that an increased government role in the economy can ensure perpetual wealth and prevent recessions.

What is so unfortunate is that the proposed "fixes" of the mainstream, always aggravate the recession. Pumping more money into the economy and lowering interest rates always results in businesses holding investments instead of liquidating them, which means that new money goes into the same bad investments that the old money did. Public works, unemployment benefits, and employment laws all restrict the flow of labor from non-productive enterprises to more productive enterprises, directing the resources of the nation towards non-performing industries, and driving up the cost of labor in performing industries.

The real solutions are incredibly cold-hearted, and therefore, haven't been implemented since the 19th century when American leaders were still disposed towards freedom and limited government. Decrease government influence (whichever is greater, government taxation or government spending). Deregulate the economy to reduce the cost of doing business. Decrease unemployment benefits that prevent labor from rejoining the marketplace. End corporate welfare that props up unsound investments.

Long-term, the banking industry should be reformed in order to reduce the degree to which banks can inflate the monetary supply (potentially requiring a 100% reserve on all demand deposits). While many would regard this as a heavy-handed government interference, it can also be regarded as an essential protection of private property; considering banks are essentially allowed to lie to the public by providing monthly statements regarding how much money they have in their account, when in fact, that money has all been lent out to businesses, developers, and speculaters. Reduce the degree to which the Federal Reserve can inflate the monetary supply (probably by getting rid of it). Resort to a hard-currency which requires the government to balance the budget every year.

Whether one believes this will result in a better or a worse economy depends on how one defines those terms. I believe it would be better in that it would be a) more free and thereby more moral, b) growth would be more sustainable, c) it would prevent government largesse, and d) it would prevent future meddling in international affairs. Many think it would be worse in that the government would not be providing as broad a safety net as it does today, and it makes the potential for creating a perfect society impossible, because no one believes that the public can create a perfect society through their millions of self-interested decisions, but many still hold that the government can make a perfect, or at least a more perfect society, through central planning and regulation.