Rothbard Revises the History of the Great Depression
[Introduction to Rothbard's America's Great Depression, December 1999]
The Wall Street collapse of September–October 1929 and the Great Depression which followed it were among the most important events of the 20th century. They made the Second World War possible, though not inevitable, and by undermining confidence in the efficacy of the market and the capitalist system, they helped to explain why the absurdly inefficient and murderous system of Soviet communism survived for so long. Indeed it could be argued that the ultimate emotional and intellectual consequences of the Great Depression were not finally erased from the mind of humanity until the end of 1980s, when the Soviet collectivist alternative to capitalism crumbled in hopeless ruin and the entire world accepted there was no substitute for the market.
Granted the importance of these events, then, the failure of historians to explain either their magnitude or duration is one of the great mysteries of modern historiography. The Wall Street plunge itself was not remarkable, at any rate to begin with. The United States economy had expanded rapidly since the last downturn in 1920, latterly with the inflationary assistance of the bankers and the federal government. So a correction was due, indeed overdue. The economy in fact ceased to expand in June, and it was inevitable that this change in the real economy would be reflected in the stock market.
The bull market effectively came to an end on September 3, 1929, immediately the shrewder operators returned from vacation and looked hard at the underlying figures. Later rises were merely hiccups in a steady downward trend. On Monday October 9, for the first time, the ticker tape could not keep pace with the news of falls and never caught up. Margin calls had begun to go out by telegram the Saturday before, and by the beginning of the week speculators began to realize they might lose their savings and even their homes. On Thursday, October 12, shares dropped vertically with no one buying and speculators were sold out as they failed to respond to margin calls. Then came Black Tuesday, October 19, and the first selling of sound stocks to raise desperately needed liquidity.
So far all was explicable and might easily have been predicted. This particular stock-market corrective was bound to be severe because of the unprecedented amount of speculation which Wall Street rules then permitted. In 1929 1,548,707 customers had accounts with America's 29 stock exchanges. In a population of 120 million, nearly 30 million families had an active association with the market, and a million investors could be called speculators. Moreover, of these nearly two-thirds, or 600,000, were trading on margin, that is on funds they either did not possess or could not easily produce.
The danger of this growth in margin trading was compounded by the mushrooming of investment trusts which marked the last phase of the bull market. Traditionally stocks were valued at about ten times earnings. With high margin trading, earnings on shares, only 1 or 2 percent, were far less than the 8 to 10 percent interest on loans used to buy them. This meant that any profits were in capital gains alone. Thus, Radio Corporation of America, which had never paid a dividend at all, went from 85 to 410 points in 1928. By 1929 some stocks were selling at 50 times earnings.
A market boom based entirely on capital gains is merely a form of pyramid selling. By the end of 1928 the new investment trusts were coming onto the market at the rate of one a day and virtually all were archetype inverted pyramids. They had "high leverage" — a new term in 1929 — through their own supposedly shrewd investments, and secured phenomenal stock-exchange growth on the basis of a very small plinth of real growth. United Founders Corporation, for instance, had been created by a bankrupt with an investment of $500, and by 1929 its nominal resources, which determined its share price, were listed as $686,165,000. Another investment trust had a market value of over a billion dollars but its chief asset was an electric company which in 1921 had been worth only $6 million. These crazy trusts, whose assets were almost entirely dubious paper, gave the boom an additional superstructure of pure speculation, and once the market broke the "high leverage" worked in reverse.
Hence awakening from the pipe dream was bound to be painful and it is not surprising that by the end of the day on October 24, eleven men well-known on Wall Street had committed suicide. The immediate panic subsided on November 13, at which point the index had fallen from 452 to 224. That was indeed a severe correction but it has to be remembered that in December 1928 the index had been 245, only 21 points higher. Business and stock-exchange downturns serve essential economic purposes. They have to be sharp. But they need not be long because they are self-adjusting. All they require on the part of the government, the business community, and the public is patience. The 1920 recession had adjusted itself within a year. There was no reason why the 1929 recession should have taken longer, for the American economy was fundamentally sound. If the recession had been allowed to adjust itself, as it would have done by the end of 1930 on any earlier analogy, confidence would have returned and the world slump need never have occurred.
Instead the stock market became an engine of doom, carrying to destruction the entire nation and, in its wake, the world. By July 8, 1932, New York Times industrials had fallen from 224 at the end of the initial panic to 58. US Steel, the world's biggest and most efficient steel maker, which had been 262 points before the market broke in 1929, was now only 22. General Motors, already one of the best-run and most successful manufacturing groups in the world, had fallen from 73 to 8. These calamitous falls were gradually reflected in the real economy. Industrial production, which had been 114 in August 1929, was 54 by March 1933, a fall of more than half, while manufactured durables fell by 77 percent, nearly four-fifths. Business construction fell from $8.7 billion in 1929 to only $1.4 billion in 1933.
Unemployment rose over the same period from a mere 3.2 percent to 24.9 percent in 1933 and 26.7 percent the following year. At one point 34 million men, women, and children were without any income at all, and this figure excluded farm families who were also desperately hit. City revenues collapsed, schools and universities shut or went bankrupt, and malnutrition leapt to 20 percent, something that had never happened before in United States history even in the harsh early days of settlement.
This pattern was repeated all over the industrial world. It was the worst slump in history, and the most protracted. Indeed there was no natural recovery. France, for instance, did not get back to its 1929 level of industrial production until the mid-1950s. The world economy, in so far as it was saved at all, was saved by war, or its preparations. The first major economy to revitalize itself was Germany's, which with the advent of Hitler's Nazi regime in January 1933 embarked on an immediate rearmament program. Within a year Germany had full employment. None of the others fared so well. Britain began to rearm in 1937 and thereafter unemployment fell gradually, though it was still at historically high levels when war broke out on September 3, 1939. That was the date on which Wall Street, anticipating lucrative arms sales and eventually US participation in the war, at last returned to 1929 prices.
It is a dismal story and I do not feel that any historian has satisfactorily explained it. Why so deep? Why so long? We do not really know, to this day. But the writer who, in my judgment, has come closest to providing a satisfactory analysis is Murray N. Rothbard in America's Great Depression. For half a century, the conventional, orthodox explanation, provided by John Maynard Keynes and his followers, was that capitalism was incapable of saving itself, and that government did too little to rescue an intellectually bankrupt market system from the consequences of its own folly. This analysis seemed less and less convincing as the years went by, especially as Keynesianism itself became discredited.
In the meantime, Rothbard had produced, in 1963, his own explanation, which turned the conventional one on its head. The severity of the Wall Street crash, he argued, was not due to the unrestrained license of a freebooting capitalist system but to government insistence on keeping a boom going artificially by pumping in inflationary credit. The slide in stocks continued, and the real economy went into free fall not because government interfered too little but because it interfered too much. Rothbard was the first to make the point, in this context, that the spirit of the times in the 1920s, and still more so in the 1930s, was for government to plan, to meddle, to order and to exhort. It was a hangover from the First World War, and President Hoover, who had risen to worldwide prominence in the war by managing relief schemes, and had then held high economic office throughout the '20s before moving into the White House itself in 1929, was a born planner, meddler, orderer, and exhorter.
Hoover's was the only department of the US federal government which had expanded steadily in numbers and power during the 1920s, and he had constantly urged Presidents Harding and Coolidge to take a more active role in managing the economy. Coolidge, a genuine minimalist in government, had complained: "For six years that man has given me unsolicited advice — all of it bad." When Hoover finally took over the White House, be followed his own advice, and made it an engine of interference, first pumping more credit into an already overheated economy then, when the bubble burst, doing everything in his power to organize government rescue operations.
We now see, thanks to Rothbard's insights, that the Hoover-Roosevelt period was really a continuum, that most of the "innovations" of the New Deal were in fact expansions or intensifications of Hoover solutions — or pseudosolutions — and that Franklin Delano Roosevelt's administration differed from Herbert Hoover's in only two important respects: it was infinitely more successful in managing its public relations, and it spent rather more taxpayers' money. And, in Rothbard's argument, the net effect of the Hoover-Roosevelt continuum of policy was to make the slump more severe and to prolong it virtually to the end of the 1930s. The Great Depression was a failure not of capitalism but of the hyperactive state.
I will not spoil the reader's pleasure by entering more deeply into Rothbard's arguments. His book is an intellectual tour de force, in that it consists, from start to finish, of a sustained thesis, presented with relentless logic, abundant illustration, and great eloquence. I know of few books which bring the world of economic history so vividly to life, and which contain so many cogent lessons, still valid in our own day. It is also a rich mine of interesting and arcane knowledge, and I urge readers to explore its footnotes, which contain many delicious quotations from the great and the foolish of those days, three-quarters of a century ago. It is not surprising that the book is going into yet another edition. It has stood the test of time with success, even with panache, and I feel honored to be invited to introduce it to a new generation of readers.