"The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of "enlightened" economists. And in any other depression, past or future, the story will be the same."
“The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another.
“It is easy to understand why people viewed the gold standard as the symbol of this greatest and most beneficial of all historical changes. All those intent upon sabotaging the evolution toward welfare, peace, freedom, and democracy loathed the gold standard, and not only on account of its economic significance. In their eyes the gold standard was the labarum [(Latin) derived from the Roman, or Imperial, standard or symbol for which men live or die], the symbol, of all those doctrines and policies they wanted to destroy. In the struggle against the gold standard much more was at stake than commodity prices and foreign exchange rates.
“The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible. Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavours to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them credit expansion is the panacea for all economic ills. It could lower or even entirely abolish interest rates, raise wages and prices for the benefit of all except the parasitic capitalists and the exploiting employers, free the state from the necessity of balancing its budget—in short, make all decent people prosperous and happy. Only the gold standard, that devilish contrivance of the wicked and stupid “orthodox” economists, prevents mankind from attaining everlasting prosperity.”
– Ludwig von Mises, ‘Human Action’.
The commentary is now taking a short winter break and will be back in January.
We wish all clients, friends and readers a very Merry Christmas and a happy, peaceful and prosperous New Year !
Sometimes, albeit very occasionally, you come across a book that utterly changes the way you look at the world. One such book: Murray Rothbard’s extraordinarily thought-provoking “America’s Great Depression” (The Ludwig von Mises Institute, Fifth Edition, 2008). Rothbard, who died in January 1995, was something of a ‘Renaissance man’: scholar, economist, historian and philosopher. He was also a leading member of what has come to be known as the Austrian school of economics – which amongst other things maintains a healthy cynicism about the value of mathematical modelling in markets, and which puts a premium on ‘sound money’ over more speculative and ultimately dangerous credit creation. Not least in its suspicion of the role of banks, it is the perfect read for our time. You can read more about Rothbard via the excellent Mises website here: http://mises.org/about/3249.
If your schooling was anything like ours, “America’s Great Depression” will turn on its head your opinion of the economic catastrophe of the 1930s – a period whose echoes resound throughout the global financial crisis that began in 2007 and which has yet to be resolved, if the share prices of the major US banks, for example, are any guide. In essence, the message we received at school was that Herbert Hoover oversaw a stupendous Crash in the US stock market; the economy entered a profound slump; and it was only the interventionist vigour of President Franklin D. Roosevelt which pulled it back out. But Rothbard’s conclusions are diametrically opposed. President Hoover, by Rothbard’s account, threw all kinds of government resources at the problem, long before Roosevelt’s own alphabet soup of state agencies. Rothbard’s thoughts about the banking system, in particular, and about the role of government in addressing booms and busts, have enormous relevance for today’s investment markets.
Rothbard’s death in 1995 meant that he was unable to share with us his views about the orgy of credit provision and the unrestrained mortgage lending that in large part triggered the global banking crisis. Let’s not even mention the economic insanity that accompanied Covid, most notoriously lockdowns. But it is unlikely that he would have approved. And he had extremely strong opinions about the very nature of fractional reserve banking: the system by which banks keep a tiny fraction of their deposits in order to lend out the remainder for profit. As he comments in this masterful work:
“Banks are “inherently bankrupt” because they issue far more warehouse receipts to cash (nowadays in the form of “deposits” redeemable in cash on demand) than they have cash available. Hence, they are always vulnerable to bank runs. These runs are not like any other business failures, because they simply consist of depositors claiming their own rightful property, which the banks do not have. “Inherent bankruptcy,” then, is an essential feature of any fractional reserve banking system.”
Rothbard goes on to quote Frank D. Graham from “Partial Reserve Money and the 100% Proposal” (American Economic Review, September 1936):
“The attempt of the banks to realize the inconsistent aims of lending cash, or merely multiplied claims to cash, and still to represent that cash is available on demand is even more preposterous than.. eating one’s cake and counting on it for future consumption.. The alleged convertibility is a delusion dependent upon the right’s not being unduly exercised.”
Suffice to say that Rothbard, and members of the Austrian school, hold to the primacy of gold as a fundamental store of value that restricts the animal spirits of bankers to indulge in uncontrolled credit creation.
As Rothbard sees it, the business cycle is straightforward. Bank credit expansion causes an inflationary boom, which is marked by an expansion in the money supply and by what he calls malinvestment, both by bankers and entrepreneurs. The crisis comes about when credit expansion halts abruptly and those malinvestments become all too evident. What he then calls the “depression recovery” starts the necessary adjustment process “by which the economy returns to the most efficient ways of satisfying consumer desires.”
Note that Rothbard conjoins “depression” and “recovery”: they are one and the same thing. You cannot have economic recovery without a cleansing depression:
“Wasteful projects.. must either be abandoned or used as best they can be. Inefficient firms, buoyed up by the artificial boom, must be liquidated or have their debts scaled down or be turned over to their creditors. Prices of producers’ goods must fall, particularly in the higher orders of production – this includes capital goods, lands, and wage rates.. Not only prices of particular machines must fall, but also the prices of whole aggregates of capital, e.g. stock market and real estate values. In fact, these values must fall more than the earnings from the assets..”
“Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate.” This notorious quote from US Treasury Andrew Mellon after the Crash once struck us as grotesque, unfeeling, and overly simplistic. Now, having read Rothbard, we are not so sure. Mellon suggested that the economic severity of the depression would “purge the rottenness out of the system.”
This sounds like painful medicine, which of course it is. But as the scale of government support for the banking system in our own time continues to swell monstrously, one might well ask whether the presumed interventionist cure is worse than the disease. Rothbard, as a classic free marketeer, indicates that the economic contraction process causes no positive malinvestments (unlike the boom that preceded it), so it will not lead to such a painful period of depression and adjustment. “If businessmen are misled into thinking that less capital is available for investment than is really the case, no lasting damage in the form of wasted investments will ensue.”
Where the Rothbard thesis is most striking, however, is in relation to the role of government. His first and clearest injunction to return the economy to “normal” prosperity: don’t interfere with the market’s adjustment process;
“The more the government intervenes to delay the market’s adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure.”
Rothbard goes on to list the various ways that government might hamper this market adjustment process. Ironically, the list also and exactly constitutes the preferred “anti-depression” measures of government policy ! The list of flawed palliatives runs as follows:
What is striking today is how many of these measures are being actively pursued by the governments of developed economies, not least our own.
Rothbard concludes his study of the Great Depression by pointing out just how extensive the Hoover administration measures were in an ultimately vain attempt to combat the slump.
“For the first time, laissez-faire was boldly thrown overboard and every governmental weapon thrown into the breach.. By every “progressive” tenet of our day, he should have ended his term a conquering hero; instead he left America in utter and complete ruin – a ruin unprecedented in length and intensity.”
Why did this come about ? Rothbard holds, perhaps controversially, that only governmental inflation can generate a true boom and bust cycle, and that any depression will be prolonged and intensified by inflationist intervention on the part of presumably well-meaning politicians. “America’s Great Depression” showcases Rothbard’s firm belief that President Hoover’s aggressive interventionist measures ended up aggravating the economic slowdown. In his words,
“The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of “enlightened” economists. And in any other depression, past or future, the story will be the same.”
Governments and their central banks, in other words, are the primary causes of recessions and depressions – and of wild inflations. Unsound fiat must ultimately be replaced by sound money. The prices of gold and silver would now appear to be reaching exactly the same conclusion.
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: firstname.lastname@example.org.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
|This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
|The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
|This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
|This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
|This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".