Federal Reserve Bank chairman Ben Bernanke is touted as an expert on the Great Depression. Many would say we are fortunate to have him heading our central bank at this time when our economy is suffering through its worst crisis since that dreadful epoch 80 years ago. Yet others believe Bernanke is far from an expert on anything economic given his choice of policies since the current crisis began. One thing is for sure, Bernanke’s study of the Great Depression did not include reading the works of Murray Rothbard. For if he had, he certainly would not be pursuing his current policies as leader of the Fed.
Probably the most authoritative work on the Great Depression of Rothbard’s storied career was, America’s Great Depression. Written in 1949, the text is a solid analysis of those policies and personalities that brought on the financial and economic collapse of America in the 1930s. Rothbard’s work dispels the myths taught in public schools that Hoover was a free marketer and the Great Depression was caused by the shortcomings of capitalism. Informative for understanding what caused the 1929 recession and for what turned it into the Great Depression, today the book stands as a prophetic manuscript for where we are headed economically.
Readers of the book will be appalled to realize that there are significant similarities between the decade preceding the crash of 1929 and the decade preceding our current financial and economic crisis. For one thing, in both time periods the Federal Reserve had well-respected chairman at the helm, Benjamin Strong and Alan Greenspan. These banking helmsmen were respected because they were both viewed as the great caretakers of America’s economy. Their policies were revered for the economic booms that they produced. When things got choppy, administrations of both decades could count on the financial maestros at the Fed to right the ship back on a course to prosperity.
Of course, both maestros used inflationary policies to achieve their ends. Inflationary used here refers to inflating the money supply. Strong used banker’s acceptances to inflate the money supply and continually put off downturns. He also loaned money to brokerage houses, no less onerous than lending to banks, thereby producing the bubble that’s eventual popping is regarded as the beginning of the depression. Greenspan, on the other hand, was the master of the low interest rate in keeping the boom going. His lowering of the fed funds rate to practically zero percent for two years after the 2001 recession is regarded as the initial catalyst for the crisis we now face. He also monetized over $6 trillion worth of federal debt to keep the “prosperity” rolling. In all circumstances, both Strong and Greenspan pulled off the illusion that prosperity through inflation has no costs.
Indeed, at both times the illusion seemed like reality. The stock market soared, many companies produced more than was needed in the 1920s and many Americans bought more house than they could afford in the 2000s. Despite a growing money supply, a general rise in prices (inflation) did not materialize in the 1920s. Rothbard attributes this to the offsetting effect of the high productivity of the decade. In essence, too much money was not chasing too few goods as the 20s was a time of great production.
In contrast and more ominously, the inflationary effects of Greenspan’s policies were concealed by government manipulation of the consumer price index (CPI). The most basic staples of life, food and energy, are no longer a part of the inflation index. Additionally, the way government statisticians calculated the number changed over time. For instance, the cost of buying a home increased significantly through the decade due to high demand, yet the CPI was adjusted by bureaucrats to counterbalance the effect this data would have on inflation statistics by increasing the weight of the costs of the depressed rental market upwards in the calculation. Thus, the inflationary effects of the policies of both Strong and Greenspan were not evident at the time of their inflating, the economy appeared to be growing, and so everyone, politicians, business leaders, and economists were happy.
And the illusions of prosperity were perpetuated because no one in the know ever objected to what was going on. Presidents, legislators, and economists were silent during both periods about any concern they may have had about the direction of the U.S. economy. In fact, Hoover and Bush, both liked to say that the economy had “sound fundamentals.” Yes, as long as the Fed chiefs increased the supply of money and the government statistics were favorable all was well in Mudville. Thus, in 1929, like in 2008, policymakers were blindsided by their respective crises.
Even Ben Bernanke, the so called expert on the Great Depression, didn’t realize Greenspan was repeating history by egregiously inflating the money supply in the early 2000s. Even Bernanke didn’t recognize the crisis after it hit. Makes you wonder what he studied to learn about the Great Depression? Clearly, it was not the work of Murray Rothbard.
The entire text of America’s Great Depression has been graciously placed online as a PDF file by the Ludwig von Mises Institute. It can be accessed at: America’s Great Depression