Business Cycles, Not Our Fault


These are times when you just feel like yelling at the people who write the news, particular the business press. They are happy to report, word for word, what the Fed and Treasury Department, and their message is always the same: hey, it’s not our fault; in fact, we are fixing the problem!

We are told that the economy has tanked because foreigners invested too much in the US, that foreigners saved too much money, that we all lived beyond our means, that greedy capitalists fed our materialist instincts until we popped, or any combination of the above. Or maybe business cycles are just like weather, cold one season and hot the next. Regardless is the government that must come to the rescue with the usual combination of cockamamie schemes.

Discovering the Austrian business cycle theory, then, is a revelation, because through it, you learn how the whole business traces to loose money and credit generated by the Fed. The money is pumped into the capital-goods fashion of the day, in this case housing. The whole sector becomes overbuilt and unsustainable and it turns, tanking many other affected sectors. The only answer the problem is not more of the poison that caused the problem but a real liquidation.

This time around, the theory is more in circulation than ever before — thanks to the Mises Institute — but you still don’t see evidence of consciousness on the part of “establishment” journalists.

It turns out that this was also true at the onset of the Great Depression. The cause of the crash of 1929 and its effects was not unknown that generation either. There were people saying the right things. It’s just that the press and the establishment ignored them. Here’s the evidence: A Bubble that Broke the World, by Garet Garrett, published in 1932. Here he lays it all out.

“This is a delusion about credit. And whereas from the nature of credit it is to be expected that a certain line will divide the view between creditor and debtor, the irrational fact in this case is that for more than ten years debtors and creditors together have pursued the same deceptions. In many ways, as will appear, the folly of the lender has exceeded the extravagance of the borrower.”

He goes on to explain how the debt overhang of the first world war is the root cause; how society came to accept the idea that if people can’t immediately afford stuff, government should provide it; how government came to operate on a bankrupt system; how we came to believe that prosperity came from credit rather than savings; and how the Federal Reserve working with government is the root source of the problem.

Beautiful. Magnificently written, as only Garrett can. How could anyone have missed it? He wasn’t exactly obscure. He wrote for the Saturday Evening Post. Incredibly, he chronicled the New Deal blow by blow in the Saturday Evening Post, every rotten law, every goofy plan, every attack on liberty, property, and economic sanity. There was no mystery here. The proof: Salvos Against the New Deal, an assembly of his best work from this period.

In other words, the cause, the effects, the folly, the power grabs — it’s all here, and all eerily similar to what we are experiencing today. We call it the Great Depression. But had the politicians not intervened, it would have been known at the 1929 crash, and it might have been as memorable as many other crashes in American history. The difference this time was the application of “modern economic methods” to cure the thing, methods which only ended up prolonging human suffering.

Let’s talk of two other cases in which the error was pointed out. Lord Lionel Robbins wrote in 1934. His book called The Great Depression, much more technical and scholarly than Garrett’s own, presents the Austrian theory in a very precise way, and documents how the Fed and the Bank of England inflated the money supply and loosened credit in the latter half of the 1920s, leading to the bust. His is a cautious treatise in some way.

After all, he was blaming the central bank — not exactly a position that was politically wise — and we aren’t just talking about the equivalent of a blogger today. He was Lionel Robbins, the most influential economist in Britain until Lord Keynes stole the show with his whiz-bang policy ideas. And why? Robbins counseled letting the bad investments wash out of the system. Keynes thought you could use the state to rev the bad back to life.

By the way, this is the first edition, and so it is replete with citations to the Austrians such as Mises and Menger. A later second edition was gutted and replaced with Keynesian and classical citations, and this was before he later caved in to the Keynesian consensus and repudiated the book altogether. The pressure was on!

As another example, and really the definitive one, Ludwig von Mises himself was writing all throughout the late twenties and early thirties about the business cycle. He nails it all in essay after essay: the credit expansion, the malinvestment, the folly of counter-cyclical policy, the dangers of protectionism and reflation, and so much more. These essays could all be written today, and what is also impressive is Mises’s focus on theory. He never makes empirical claims that aren’t backed up by an attempt to explain the theoretical apparatus behind the analysis.

What’s tragic is that his work on business cycle theory — which inspired Hayek’s own — was not translated to English until the 1980s and, even then, not distributed in a form that elicited much attention. This is why The Causes of the Economic Crisis is such an important book. It collects all of Mises’s essays in a single book that is beautifully edited and bound. It shows who precisely was the great master of economics in the 20th century.

All of this leads up to Rothbard’s America’s Great Depression, the book that is often cited as the one to show that the episode was caused not by the market but by the central bank. It is getting all new attention today. But if you follow his citations, they lead right back to Garrett, Robbins, and Mises — three of the observers of the time who saw precisely what was happening. They had to be ignored by the New Dealers, for they utterly demolish the case for stabilization policy.

Jeffrey Tucker [send him mail] is editorial vice president of

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