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20171110 – America’s Great Depression



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The main idea of this book is that business cycle could be explained by analysis of government interventions that expand credit to unreasonable levels. It results in situation when business owners bound to make mistakes of investing out of sync with the future demand. When this overinvestment leads to decrease in profits they try to liquidate these investments causing panic, decrease in production and employment. However, if left alone, businesses quickly liquidate failed investments resulting in prices, especially of labor prices, going down and creating the new starting platform for efficient expansion. Correspondingly, the cause of the great depression were actions of Hoover administration that from Hoover down to nearly every lowly bureaucrat believed that they can and should engineer economy to avoid downfall. They did it by forcing businesses maintain high level of salaries and unproductive employment, expanding or at least maintaining the same high level of government expenses, creating public works program, inflating money supply, and cutting foreign trade. FDR actually just continued doing the same only on the ever-bigger scale.




The study of business cycles should be based on consistent economic theory. Only Misses’ theory meets this requirement.

Business cycles and business fluctuations

Here author discusses difference between cycles and fluctuations with fluctuations being a normal process of changes that constantly happen, while cycle is connected with general changes in money supply and therefore goes through clear phases of crises and depression.

The problem: the cluster of error

Unlike normal fluctuations, the cycle’s depression phase represents massive cluster of business errors happening in sync, so this synchronization requires explanation.

The explanation: boom and depression

Author’s explanation defines boom as cause of cycle because it normally follows by bust and depression. The reasons for boom is government actions when it uses banks to pump money into economy, creating skewed environment where business bound to make mistakes in evaluating demand and consequently misallocates resources. Incorrectly allocated resources would not provide normal return on investment and therefore had to be liquidated, which happens during the bust phase.

Secondary features of depression: deflationary credit contraction

Here author analyses credit contraction as the secondary feature of depression because liquidation of failed investment causes increase in liquidity demand consequently pushing prices down. If not interfered, the liquidation happens quickly and, after losses flushed out, economy start growing again.

Government depression policy: laissez-faire

This process of adjustment after the failed boom is often interrupted by government intervention that prolongs life of failed businesses and artificially supports high prices, preventing the start of recovery. Correspondingly author’s recommendation for government is not to interfere.

Preventing depressions

However, preventing depression in the first place could be done via government interference, mainly by preventing banks from inflating money supply. The ideal method would be to forbid fractional-reserve banking.

Problems in the Austrian theory of the trade c cycle

Here author reviews some critical ideas proposed against Mises theory of depression such as:

  • Assumption of full employment,
  • No clear difference between Overinvestment and Malinvestment,
  • Lack of clear difference between Active and Passive banks
  • Recurrence of Cycles
  • Gold changes within Cycle

Assumption of full employment


Here author points out 2 criticisms from Keynesians:

  • Rejection of separation between savings and investments
  • The nature of consumption

The liquidity “trap”

This is discussion of Keynes idea of depressions being caused by withdraw of liquidity from market, which Misses reject because of its dependency on elasticity of demand. The reason for rejection is that this elasticity is not infinite.

Wage rates and unemployment

This is a critic of Keynes idea of downward rigidity of wages based on the notion that in free market it is not possibly because labor sellers need earnings to survive and therefore would accept wage decrease.


This is a critic of idea that other non-Austrian explanations for depressions are also valid

General overproduction

This is critic of overproduction – the idea, which author believes is irrelevant because it just means that business must sell below cost and incur losses. Such loses would quickly stop any additional production and shift resources to a profitable use.


Similarly, underconsumption would immediately lead to fall in prices to the level when consumption would move to equilibrium

The acceleration principle

The point here is that the increase in consumer demand leads to disproportional increase in producer demand for secondary goods with consequent overcapacity and inevitable drop in the following years.

Dearth of “investment opportunities”

This is about decrease in population growth leading to stable consumption and production with no need for the new investment. As other ideas, this one fails to take into consideration the pricing system, which would lead to decrease of cost of capital resulting in increase in consumption.

Schumpeter’s business cycle theory

This is critic of the idea that one can postulate 0 interest rate in analyzing depressions. This allows unabridged increase in credit to industries with the cluster of innovation at the time with consequent bust when innovation ends.

Qualitative credit doctrines

These is a cluster of theories that agree with Austrians about boom and bust being parts of the same process leading to depression, with boom being responsible for bust. However, these theories are different on causal analysis and author reviews how exactly it happens for a couple of them:

  • Banking school that claims that problem is credit allocation to long-term loans
  • Some other schools that emphasize credit allocation to wrong asset types
  • Still some other schools blaming financial trading on margins and derivatives

Overoptimism and overpessimism

The final peace in this chapter is about animal spirits such as unjustified optimism or pessimist that causes people to behave irrationally.



It starts with the claim that use of historical data to test economic theory is a mistake because every situation is unique and way too interconnected with multitude of causal effects interacting. As example author refer to 1920s boom, which often mistakenly called inflationary, even though prices were stable. However, this stability was result of two forces acting in different direction: price decrease due to dramatic increase in productivity with price increase due to monetary inflation. Therefore, historic data could only be only partially relevant. The point author makes is that unhampered market would not have booms and busts because of diversity of industries and complexity of economy where mini boom in one place would be compensated by mini bust in another. The depression can really be caused only by government, which by interfering with money supply would synchronize these processes.

The definition of the money supply

Here author discusses money supply and what is included or not included into it.

Inflation of the money supply 1921-1929

This is a look at actual money supply in US economy in 1920s:

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Generating the inflation, I: reserve requirements; Generating the inflation, II: total reserves; Treasury currency; Bills discounted; Bills bought-acceptances; U.S. government securities;

These sub-chapters represent detailed review of positions in American money supply.

  1. THE DEVELOPMENT OF THE INFLATION: Foreign lending; Helping Britain;

The main point of this chapter is that development of inflation occurred due to some very specific factors: FEDs purchases of silver, discounted treasury bills with low acceptance rates, open market purchases of government securities, lending to foreign entities, with government actively interfering. Finally, significant role was played by help to the British, which did occur despite the enduring myth of isolationism.

The crisis approaches

In the spring of 1928 FED initially tried to halt boom by reducing reserves, but banks managed to compensate for this by shifting from demand to time deposits. However, it failed due to the policy of unlimited buying of acceptances and eventually cheap money prepared economy for the bust.


This is about believes of economists in stable prices and ability of monetary policy to maintain such prices that led to their inability to see growing monetary expansion and unhealthy boom it caused. One interesting point author makes here is that despite appearing stability of prices, the wages in capital goods industry were growing disproportionally, while in consumer goods industry they remained the same, indicating overinvestment that counterweighted price decreases that should follow huge gains in productivity. Author supports the idea that this great experiment in price stabilization was one of the main causes of depression.



This is detailed and quite convincing retell of “the great engineer” Hoover’s attitude to economics that, while not “socialistic” was still pretty much in line with general thought that economy could be run as machine from the top. Probably the main difference between him and FDR was Hoovers’ compliance with constitution, laws of the country, and his oath of office, while FDR demonstrated complete contempt for all these “unnecessary niceties”. As result, while both were trying to do the same, being driven by poor understanding of economy and humanity, Hoover put pressure on business making them “voluntary” act against their interests, when FDR just issued unconstitutional directives.

The development of Hoover’s interventionism: unemployment; The development of Hoover’s interventionism: labor relations

These two subchapters describe how Hoover started “reconstruction program”, the first massive interference into economy, created management/labor conference, promoted collective bargaining, and pressed businesses into minimizing unemployment and maintaining salaries above the market, resulting in economy’s inability to rich bottom quickly, flash out inefficiency, and start growing.


This is a very interesting chapter because it looks at Hoovers’ role as the first president who considered it the government responsibility to manage economy. Until that economic condition of the country was pretty much perceived as independent from government intervention similarly to the weather. Sometimes it was good, sometimes not so good, but there was nothing one could do about it. Hoover believed that with his engineering background he could do a lot more. So here is a brief list of his actions:

The White House conferences

These were conducted with business leaders on the wide scale and served to force these leaders to provide more investments and maintain high level of wages to keep demand up.

Inflating credit

The monetary policy of FED was initially inflationary leading to quick expansion of credit and initially saving banks.

Public works; The New Deal Farm Program

Similarly, to the credit expansion, Hoover interfered into economy by pushing increase of public works. Corresponding effort in agriculture led to creation of farm subsidies program, which often mistakenly considered as FDR’s New Deal program. Author goes into some details of formation and political activities of farm block, which is even now, 80 years later still goes strong, consuming public resources at good pace.

  1. 1930

At the beginning of 1930 majority of public believed that Hoover and government got crisis under control. To assure the continuing “success” Congress authorize $915 million for additional public works in construction.

More inflation; The Smoot-Hawley Tariff; Hoover in the second half of 1930; The public works agitation; The fiscal burdens of government;

This list pretty much represents further continuation of seemingly successful policy of massive government intervention expanded into strong protectionist measures, continuing expansion of public works, and extensive use of government power in support of organized labor with Wagner act. All together it led to big expansion of government expenses and author points out that it grew quite dramatically as % of total economic activity. Author rightfully designates government economic activity as depredation since it occurred via use of force to confiscate resources from productive parts of economy.

  1. 1931- “THE TRAGIC YEAR”

This was supposed to be a year of recovery instead it was a year when crisis development accelerated. Author describes its development in Europe and makes point that FED’s attempts to support untenable credit positions of European countries was a serious mistake.

The American monetary picture; The fiscal burden of government; Public works and wage rates; Maintaining wages rates; Immigration restrictions; Voluntary relief;

Every small subchapter here demonstrates an increased intervention of government into economy and author stresses that this intervention was mainly counterproductive, preventing economy from self-adjustment and restoration of normal activity. Even the voluntary efforts for relief, became supplemented by Emergency committee to control it, turning it into bureaucratic enterprise

Hoover in the last quarter of 1931;

This is description of Hoover’s frantic attempt to start recovery by increasing push for “volunteer” compliance of businesses with his ideas, which pretty much come down to staunch rejection of laisses faire approach, creation of multitude of government programs that later become the “New Deal”, and attempts to pump more government money into economy.

The spread of collectivist ideas in the business world;

The final part of this chapter is especially interesting by analyzing mental state of leading individuals in business world, in economics and in public discussion. It clearly demonstrates the massive acceptance of collectivistic ideas with bend towards government planning and top down control of economy. These were not just ides, but also actions such as cartelization of oil industry, activization of union movement often with support of big business, and similar events.


This is another list of Hoover administration activities in their attempt to stop developing depression by using government power both direct and disguised as persuasion. Author presents Hoover program and then goes into details of its implementation.

The tax increase: It was massive and included just about everything from estate taxes for rich to increase in postal rates for poor

Expenditures versus economy: Government expenditures decreased, but a lot less than decrease in GNP resulting in proportional increase of spending to economy.

Public works agitation: This is a brief description of discussion about continuing expansion of public works with one side stressing need to fight unemployment while another pointing out that it froze both capital in labor in unproductive uses, therefore preventing recovery.

The RFC: RFC was providing massive influx of government capital into economy providing loans without real evaluation of their future performance and as one could expect become a serious case of massive corruption.

Governmental relief; The inflation program; The inflation agitation; Mr. Hoover’s war on the stock market; The home loan bank system; The bankruptcy law; The fight against immigration: Each of above is an area of Government involvement that caused more harm than good. Author very briefly touches each of these areas, providing factual account of what had been done. Regardless of actual result one can easily conclude that it was far from doing nothing and not interfering into economy.

  1. THE CLOSE OF THE HOOVER TERM: The attack on property rights: the final currency failure; Wages, hours, and employment during the depression

An interesting thing here is that Hoover sincerely believed that he did a pretty good job, was proud of his multiple interferences, and confident that doing nothing would be a disaster. However, Hoover remained more or less within bounds of his constitutional authority and rejected plans of very popular “economic fascism” similar to what come to pass with FDR administration.

Conclusion: the lessons of Mr. Hoover’s record

The main conclusion that author states is that all this government interference, especially inflationary activities were cause of the depression. Author believes that business cycles are caused by government’s expanding credit to unreasonable level that creates misallocation of resources during the boom, making it necessary to liquidate such misallocation during the bust. Such believe leads to conclusion that Hoover’s actions, caused by his rejection of laisses faire, made the depression all but unavoidable and the next great expansionist of government FDR only added to Hoover’s action more of the same delaying recovery to the WWII. At the end author provides some statistical information demonstrating level of the disaster that was the Great Depression and here is one example:

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I do not think that core idea of this book: a business cycle caused mainly if not exclusively by government intervention, is completely correct. The history demonstrated that there were business cycles as long as there were businesses. I would rather put generic cause of cycles to the human propensity to join crowd and run in the same direction as everybody, so contagious optimism could easily cause a bit of boom, while contagious pessimism would lead to a bust. Nevertheless, I fully agree with author that deepness and tragedy of the Great Depression was the product of engineering arrogance of Hoover and overall elite of western societies that had their heads spinning from technological achievements of XIX century. These achievements caused people to develop false believe that they could engineer complex systems based on human individuals as well as they can engineer some mechanical system based on nuts and bolts. Actually, it is not limited to the Great Depression. All evils of XX century: socialism, communism, fascism, genocide, and such came from this source. Unfortunately the idea of engineering and controlling society from above is still alive in minds of many an elite and it will probably take some more fighting to put it to rest.

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