When Murray Rothbard’s America’s Great Depression first appeared in print in 1963, the economics profession was still completely dominated by the Keynesian Revolution that began in the 1930s. Rothbard, instead, employed the “Austrian” approach to money and the business cycle to explain the causes for the Great Depression, and to analyze the misguided and counterproductive policies that were followed in the early 1930s, which, in fact, only intensified and prolonged the economic downturn.

Too many of the economists in the early 1960s, Rothbard’s “Austrian” approach seemed out-of-step with the then generally accepted textbook, macroeconomic approach that focused on a highly “aggregate” analysis of economic changes and fluctuations on general output and employment as a whole. There was also the widely held presumption that governments could easily maintain economy-wide growth and stability through the use of a variety of monetary and fiscal policy tools.

Mises, Hayek and the Austrian Theory of Money and the Business Cycle

However, in the early and middle years of the 1930s, the Austrian explanation of the Great Depression was at the forefront of the theoretical and policy debates of the time. Ludwig von Mises (1881–1973), first developed this “Austrian” theory of the causes of inflations and depressions in his book, The Theory of Money and Credit(1912; 2nd revised ed., 1924) and then in his monograph, Monetary Stabilization and Cyclical Policy (1928).

But its international recognition and role in the business cycle debates and controversies in the 1930s were particularly due to Friedrich A. Hayek’s (1899–1992) version of the theory as presented in his works, Prices, and Production (1932) Monetary Theory and the Trade Cycle (1933), and Profits, Interest and Investment (1939). A professor of economics at the London School of Economics throughout the 1930s and 1940s, Hayek was, at the time, considered by many to be the main competitor against John Maynard Keynes’s “New Economics” that emerged out of Keynes’s 1936 book, The General Theory of Employment, Interest, and Money.

Ludwig von Mises had restated and refined his version of the Austrian theory of the business cycle in his 1949 treatise, Human Action in a way that attempted to respond to many of the criticism made against the theory in the 1930s. But by the end of the 1940s and into the early 1950s, the Austrian theory was soon submerged in the Keynesian tidal wave of macroeconomic aggregates and averages that swept away all alternative understandings of inflations and depressions.

Rothbard’s America’s Great Depression and the Revival of Austrian Economics

This is what especially marks off the significance of Murray Rothbard’s America’s Great Depression: We can now see that it represented the revival of the “Austrian” monetary tradition in the post-World War II period. It is true that the Austrian theory was restated by Rothbard a year earlier, in 1962, in a notable and clearly written chapter in his own major treatise, Man, Economy, and State, and within the wider context of a reformulation of the Austrian theory of capital and interest.  But in America’s Great Depression, Rothbard summarized the Austrian theory of money and the business cycle, and contrasted it to the older quantity theory of money formulated by Yale University economist, Irving Fisher, as well as to Keynes’s macro-theory, and that of Schumpeter’s theory of entrepreneurially driven cycles of market innovation.

Rothbard then proceeded to offer a crisp and highly readable interpretive narrative of how the monetary policy of the American central bank, the Federal Reserve, in the 1920s had brought about an imbalance between savings and investment through its manipulation of the supply of money and credit in the banking system as part of the illusive pursuit of price level stabilization. Rothbard went on to explain how the fiscal and interventionist policies of the Hoover Administration in the early 1930s only succeeded in preventing the necessary microeconomic relative price and wage adjustments, and resource and labor reallocations that would have restored balance and stability in the U.S. economy in a relatively short period of time.