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Source link: http://archive.mises.org/10591/rothbard-was-right-and-friedman-was-wrong-about-the-great-depression/

Rothbard Was Right — and Friedman Was Wrong — about the Great Depression

September 4, 2009 by

Rothbard and a handful of Misesian economists were virtually alone in maintaining that Hoover’s interventionist policies, particularly as they impacted the industrial labor market, were mainly responsible for transforming what should have been a short and sharp recession into the economic catastrophe of epic proportions that we now know as the “Great Depression.”

Now comes a National Bureau of Economic Research (NBER) working paper written by a prominent macroeconomist with impeccable academic credentials — and accepted for publication by the influential Journal of Economic Theory — which challenges the Friedman-Schwartz view and lends ample evidence to the Rothbardian position on the genesis of the Great Depression. In writing his article, “Who — or What — Started the Great Depression,” UCLA economist Lee E. Ohanian spent four years poring over wage data and culling information from sources related to Hoover and his administration. FULL ARTICLE


Stephen Grossman September 4, 2009 at 9:38 am

I’m currently reading Rothbard’s, America’s Great Depression for information on the 1920s interventions which caused the boom part of the Socialist Inflation Cycle. I want to reply to a letter in the local rag in which a Democratic politician claimed NO 1920s interventions. Can anyone help with a list of the most boom-causing interventions? I know that it must include the govts inflation of money (Treasury?) and credit (Fed?) but I’m unsure of specifics and of any other important causes.

Chris Boeres September 4, 2009 at 9:40 am

Comment on Lee E. Ohanian work as represented in the 9-04-2009 article “Rothbard Vindicated”, did he address possibility that the Fed’s action to increase money supply may have the same net effect as a reduction of wage rates, where the dilution by monetization reduces effective buying power of those wages. As wages become more and more an international phenomenon, will nominal wages nation by nation be pressured toward equilibrium by knee jerk reactionary monitory policy of the various nations? Thanks Joseph Salerno for a thoughtful read.

Piotrek September 4, 2009 at 10:05 am

If Hoover started the Depression then the interventionist policies of FDR must have prolonged it, and the complete abolition of market mechanisms during the WWII must have sent the economy into a death spiral, so that the 50s were the worst period in Amercian history.


Ben Ranson September 4, 2009 at 10:15 am

It appears to me that Mr. Ohanian’s article combines good historical research and a good thesis with mathematical mumbo-jumbo. Sadly, as far as I can tell, the mathematical mumbo-jumbo is the portion of the article that earned it inclusion in the Journal of Economic Theory.

Jack September 4, 2009 at 10:16 am

Government spending was reduced by 2/3 and regulation eased after the war, and by ’46 the economy was on sound footing.

J.R. September 4, 2009 at 10:21 am

“Similarly, given Hoover’s program, the Depression would have been much less severe if monetary policy had responded to keep the price level from falling, which raised real wages.”

Is this related to Hayek’s idea of monetary policy targeting a stable NGDP?

Anyone have any good sources to read concerning Hayek and NGDP targeting?

Bob Veigel September 4, 2009 at 10:28 am

Interesting article, and there is no doubt Hoover did make some poor moves. But to say he alone made the depression many times worse is to overlook what FDR did, and shows Ohanian’s political bias. If FDR had really been interested in correcting the mistakes of Hoover, and he had ample evidence of the damage Hoover had done, he would never had made his very poor choices, unless he was a commited socialist, which he was. Sad that politics has become as nasty and destructive as it has, and that it continues to become even worse.

Richie September 4, 2009 at 10:35 am

Thanks Piotrek!

Inquisitor September 4, 2009 at 10:39 am

Thanks for what?

Slim934 September 4, 2009 at 10:45 am


Mr. Salerno, have you considered sending this fellow a copy of Rothbard’s “America’s Great Depression”?

I think it would be hilarious to send him a tome which better explains the case AND came out nearly 50 years before his thesis.

EIS September 4, 2009 at 11:26 am

Of course, Rothbard won’t be given credit for this “groundbreaking discovery,” at least not in the mainstream.

filc September 4, 2009 at 12:44 pm


I’m assuming you were either adolescent or young during the end of WW2. You seem to beleive in the popular theory that WW2 saved us from the depression. A simple search of this website regarding WWII will give you plenty of counter evidence. Unlike the rest of this society this site doesn’t live in fantay land with make beleive historical facts.

I have conveniently provided an article for you below. You can start there.

J.R. September 4, 2009 at 1:26 pm


Good show!

You have identified a wonderfully clear empirical demonstration of the fallacy of Keynesian economics – we didn’t have a great depression in 1946 – in fact, the economy got better despite the great scaling back of massive government intervention following the end of WWII.

For more, you could explore “The great Depression of 1946″ from the Review of Austrian Economics – here is a link to the paper: http://mises.org/journals/rae/pdf/R52_1.pdf

best wishes

Matt September 4, 2009 at 2:07 pm

Here’s the table from AGD that sums it up:


As an aside, this table isn’t on the AGD contents page:


M. de B. September 4, 2009 at 2:07 pm

I don’t follow you. Why would GDP fall because of the maintenance of wage rates for certain companies? I would think the primary effect would be to reduce the profitability of those companies. The question is what causes a decline in extremely wide aggregates of spending like GDP.

Of course, the Hoover-Roosevelt policies were disastrous. But it was specifically the lack of gold money and private banking and the presence of fractional-reserve banking that did permit the money supply to expand, first, and then to contract. Why be surprised that the contraction would lower wide aggregates of spending such as GDP?

To me it’s primarily a question of central banking: first, the artificial “boom”; then, in the case of the 1930′s, the artificial contraction. Meanwhile, idiotic “policies” and programs terrified businesses, hindered employment, etc.

Matt September 4, 2009 at 2:16 pm


Oddly enough some Keynesians were claiming that the economy would plunge back into recession after WWII becuase of the reduction in government spending. Here’s Samuelson on the matter:

“there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.”

Of course, no such collapsed occured.

K Ackermann September 4, 2009 at 3:26 pm

And we see it playing out today. I keep waiting for products the government purchases on my behalf to show up in my mailbox.

Or at least my account balance from all those banks that took my cash.

The wild distortion of market signals today are not limited to the government either.

When the banks started tranching debt, even if they got the risk models correct, had a far-reaching effect that I’m still not convinced is acknowledged enough.

When debt is turned into a commodity by mining from everywhere and putting it in a box with coupons sticking out all over the place, inwestors don’t not only didn’t want to open the box, they never questioned where it was all coming from. They just wanted more boxes.

The factories creating these boxes needed to mine more and more debt to fill them up. The pricing mechanism that regulates supply and demand was removed from box-o-debt commodity.

Furious activity was happening in other commodity markets where the debt was being harvested, and in order to continue supplying boxes, it was important to overcome the pricing signals and increase demand. This is something that is impossible to do in a market where transactions are settled instantly, but with debt, that’s another story. Just keep mining into riskier places, but defer the risk for a while, and that way you can continue to fill boxes of debt that are decoupled from all the pricing signals.

I thought debt played a roll in the Great Depression.

I would have named it the Bad Depression.

Also, how do you model alternatives for an entire economy? Assuming Hoover’s actions were politically motivated, then there was some chance of something happening that he wanted to avoid. What were those things, and what chance did they have? I hope those were accounted for in the alternative model.

We know “Let them eat cake” could introduce a discontinuity in the model.

jc butte September 4, 2009 at 6:33 pm

What specific policies did Hoover enact that maintained industrial wages?

joebhed September 4, 2009 at 7:28 pm

central government money planner here

the real cause of the Great Depression was that wages were too high?

Jack September 4, 2009 at 7:42 pm


Yes, and intuition would lend support to this thesis, as the labor market being out of equilibrium will prevent resources from being directed to their most productive use.

Bob Roddis September 5, 2009 at 9:35 pm

Note the Keynesianism in Ohanian’s analysis:

“Similarly, given Hoover’s program, the Depression would have been much less severe if monetary policy had responded to keep the price level from falling, which raised real wages.”

This is the essence of the Keynesian fraud. Ohanian seems to be saying that because wages were so artificially high, that the Fed should have diluted the money supply to artificially raise prices thereby making the artificially high wages no long so high. Hayek himself described this in 1977 as the essential mechanism of Keynesianism, that is, using monetary dilution to trick labor into accepting lower real wages without realizing it:


Elsewhere, Bob Murphy has shown that the NY Fed had lowered interest rates to historical lows during 1931 with a rate of 1.5%:

“This changed after the stock-market crash. On November 1, just a few days following Black Monday and Black Tuesday — when the market dropped almost 13 percent and then almost 12 percent back to back — the New York Fed began cutting its rate. It had been charging banks 6 percent going into the Crash, and then a few days later it slashed by a full percentage point.

Then, over the next few years, the New York Fed periodically cut rates down to a record low of 1 ½ percent by May 1931. It held the rate there until October 1931, when it began hiking to stem a gold outflow caused by Great Britain’s abandonment of the gold standard the month before.”



newson September 6, 2009 at 8:57 pm

the cause of the Great Depression was that real wages were too high.

Stephen grossman September 7, 2009 at 9:39 am

Hoover maintained wages by making businessmen an offer they couldnt refuse.

Starfury March 8, 2010 at 6:56 am

“A successful theory of the Depression must explain not only why the labor market failed to clear, but why monetary forces apparently had such large and protracted e ffects. This paper proposes such a theory,”

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