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  • Writer's pictureAnthony J. Combs

America's Great Depression - Book Highlights


I have been meaning to read this book for a few years now, but other obligations always took precedent. With the Federal Reserve in the midst of quantitative tightening ("QT") and the economy on the brink of another potential financial crisis, I figured it would be as pertinent a time as ever to finally read Murray Rothbard's America's Great Depression.


This book takes a look at the Great Depression with an "Austrian" lens and is divided into three sections:


(1) Business Cycle Theory

(2) The Inflationary Boom: 1921 - 1929

(3) The Great Depression: 1929 - 1932


The fist part deals with economic theory and specifically Austrian Business Cycle Theory (ABCT). The theory is simply described as when an economy undergoes an artificial expansion of credit which causes malinvestment throughout the economy and eventually leads to a bust or recession. Check out this video below by Tom Woods, which provides a fantastic summary of the theory. Jump to about 28:45 for the start of Tom's summary of ABCT. I would also recommend watching the whole video as it is a fantastic education on the economic history of the 1921 Depression and is a great lead in to the subject of Murray Rothbard's America's Great Depression.

In his book, Rothbard spends a lot of time describing how ABCT works and addressing different criticisms thrown at the theory. This is a pretty decent walk-through of the theory, although I think it has been done better elsewhere. This is mainly due to a lot of pages being devoted to dismiss out-dated and irrelevant criticisms. Overall, it is a great refresher of the important points of the ABCT before jumping into the meat and potatoes of the book.


Part two is probably the most important of this book as Rothbard goes into excruciating detail about the inflation of the 1920s. There is a lot of great data and charts to help supplement the understanding of how inflationary the 1920s really were. The money supply increased 7.7% per year on average and primarily in the money substitutes. This inflation in the money supply was caused by two factors: increasing total reserves and decreasing effective reserve ratio.


In the 1920s, the reserve ratio on demand deposits was roughly 10% and the reserve ratio on time deposits was 3%. This disparity in the reserve ratio encouraged banks to shift customer funds towards time deposit accounts as this would enable the bank to generate more loans and hold less reserves. This shift from demand deposits to time deposits reduced the effective reserve ratio. "While demand deposits increased 30.8 percent from 1921 to 1929, time deposits increased by no less than 72.3 percent!"


When Rothbard tackles the change in the total reserves, he takes the time to segregate the different factors affecting total reserves into two categories: (1) those controlled by the Federal Reserve, and (2) those uncontrolled by the Federal Reserve. The major factors contributing to the large increase in total reserves over the time period are related to Bills Discounted and Bill Bought. Essentially, member banks borrowed large sums from the Federal Reserve's discount window (which rates were set too low and encouraged excessive borrowing) and buying banker's acceptances (a promised future payment) at a below market rates. Bills Discounted and Bills Bought are both considered controlled reserves, therefore Rothbard concludes that the Federal Reserve was responsible for most of the monetary inflation in the 1920s.


As usual Rothbard spends a lot of time looking at the important people involved in the policy decisions during the 1920s, such as prominent politicians and industry leaders. Rothbard uses many of these figure's own words for the reader to better understand the intentions and self-interests of those involved. Important government and Federal Reserve decisions are shown to have been for the benefit of a select few.


Part three of the book details crisis and the response by the Federal government and the Federal Reserve. The book spends a great deal of time to show how President Herbet Hoover was no laissez-fare President and his policies actually worsened the crisis into a depression. The following video provides a fantastic synopsis of the book:

This is a timely book to read as the U.S. economy begins to teeter again due to the erroneous monetary policy deployed since the 2008 financial crisis. The same problems of the 1920s have repeated themselves in the 2000s and are now repeating themselves again since the 2008 financial crisis.


I highly recommend reading this book for those interested in economic history and Austrian economics. America's Great Depression can be read for free at this link or can be bought at this link.



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