When Professor Salerno asked me to speak about Murray Rothbard's Great Depression,
it came as a treat as one of my favourite economic history books.
And I have to admit to you that one of the reasons it's my favourite
is not just the ideas which are, of course, most important of all,
but also a literary style.
And one shouldn't minimise the importance of literary style
when one looks at the Great Opposition, including Keynes, as a journalist.
And I just quote the second last paragraph which was read to me recently by Alex Pollock to demonstrate this.
Mr. Hoover and the challenge of a great depression met the challenge of a great depression by acting quickly and decisively,
putting into effect the greatest program of offence and defense against depression ever attempted in America.
President Hoover was a bold and ambitious leader in this awakening.
By every progressive tenet of a day, he should have ended his term as a conquering hero.
Instead, he left America in utter and complete ruin, a ruin unprecedented in length and intensity.
And I think that passage meets anything in terms of journalistic style and confiding canes.
But maybe the passage should be qualified to some extent that in all fairness,
Rothbard should have taken aim at Hoover's predecessor
and especially his central banker
in that same passage, but of course that
fault is made up a hundred times in the book
where the central banker
is very much part of the story.
I found when I was invited by
Professor Salerno, to talk on this panel, maybe by Proustian Reflex, I opened up not Rothbard's book but the book Milton Friedman's and Anna Schwartz's monetary history of the United States and the book opened on a page where the subtitle is The High Tide of the Federal Reserve 1921-29 and as Patrick Newman mentioned in an
Today, you have to ask how come the Milton Friedman and Anna Schwartz call this period
the high tide of the Federal Reserve at the same time as Rothbard describes it as an episode
of deep monetary chaos. Of course, Rothbard is not the only great economist to take the
opposite view to Friedman and Schwartz. As we've heard this morning, one can find much
are all part of the same viewpoint in Hayek and Lionel Robbins.
But the idea that Benjamin Strong fed by pursuing price level stability
in the midst of a technological revolution when prices should have been falling
fueled tremendous credit inflation and asset price inflation.
But Rothbard adds some crucial links to the chain of argument against Benjamin Strong fed
and ultimately against the thesis of Friedman and Schwarz.
And let's for dramatic effect call these links indictments against the Benjamin Strong Fed.
And I list here three or four indictments which he makes, in fact four in total.
First, Rothbard draws attention
to the rampant interest rate manipulation
by the Benjamin Strong Fed.
Remember in the pre-1913 US monetary system,
essentially a gold system,
there was no fixing of short-term interest rates.
So these fluctuated typically between zero
and 100% per annum overnight.
So in effect, the short-term interest rates
had no bearing on long-term interest rates.
Long-term rates had an existence largely separate
from what was happening in the day-to-day
Money Market and they could be influenced and determined largely by
decentralized information gathering. As soon as you move to a system which we the
United States did in the early 1920s of the Fed pegging the short-term
interest rate and influencing expectations as to where these interest
rates are going to go, we move into a world where no longer long-term rates
have that independent existence and then become subject to considerable
Manipulation and Rothbard details and I wasn't actually aware of this so much in
my first reads but clearly the two manipulations two sources of manipulation
between he mentions one from the White House at various points trying to get
the Fed to keep interest rates down and also from the father one of the fathers
of Federal Reserve System, Paul Warburg, who he claims was very interested in keeping the
rates low for reasons of business interest, of keeping rates low on German credits and
his business interest at the time, of financial transactions and marketing of German commercial
The second indictment which Rothbard makes of Benjamin Strong we've sort of covered already to some extent today although I and Professor Salerno in particular in discussing the wider monetary aggregates but I would also mention here the the behaviour of the monetary base which Rothbard goes into fairly extensively and demonstrates
is that if you allow for the movement of deposits away from site deposits to time deposits on which reserves were lower then in fact the underlying growth in reserves or monetary base was way higher than what you would expect for a stable, very long-term monetary stability.
The second point related to this indictment is that in the pre-1914 system, or a monetary-based system,
the growth of monetary-based would have been very stable, x percent per annum or whatever, month by month.
But Benjamin's strong Fed, by coming in and trying to stabilise short-term interest rates,
actually led to considerable fluctuations in monetary-based.
So it wasn't just the fact that the monetary-based growth was too fast,
but also that it was allowed to fluctuate too much
and that was part of the interest rate manipulation.
The third indictment on Benjamin Strong is in his professionalism.
In Friedman and Schwartz, Benjamin Strong is projected as the hero
if he hadn't died in late 1928, could have prevented the severe recession and depression.
But in Rothbard there's no such mistaken identity. In Rothbard you find Benjamin Strong presented
as the Morgan Lieutenant who during World War I steered the Fed into discounting munitions
bills issued by the Entente powers against the efforts of Warburg and in the interest
of JP Morgan. He's the anglophile who allows himself to be swayed by the Bank of England
Chief in 1927 and earlier into cutting rates in the middle of a credit boom. And if he'd
actually been concerned about the stability of a global economy, he should have been much
I'm much more concerned about the credit boom which was taking place in Germany
and should have been raising interest rates, not cutting them.
And that comes on to my indictment number four,
which is in this book of Benjamin Strong.
And that is ultimately the role which the Benjamin Strong Fed
played in the German credit boom and bust,
which ultimately brought about the downfall of the Weimar Republic
and was one of the principal, if not biggest, factors in the Great Depression.
Rothbard shows directly how Fed rate manipulation was practiced, as I mentioned earlier,
to boost lending to Germany and business related to that trade.
And Rothbard's not the only historian to make much of this German storyline.
You'll find it prominently in Kindleberg's world in depression.
But the unique contribution and indictment here made by Rothbard is his key connection not found in Kindleberger
between Fed-made monetary disequilibrium and the German story.
And I think it's very difficult today to exaggerate the importance of that German story.
I mean, Germany in the 1920s had become the second largest economy in the world again
and as a result of the credit bubble rolling over from the United States to Germany
Germany and Germany, the German credit bubble in fact was one of the biggest aspects of the US credit bubble and the subsequent bursting, we weren't talking about Greece going into bankruptcy, we were talking about the second largest economy in the world going into bankruptcy as a result of the monetary manipulations and the credit bubble which happened at that time in the United States.
In modern India, we would have talked about Germany as being part of a dollar zone.
From 1924, the Reich Mark had become fixed against the dollar.
As such, interest rates in the United States, if it had been free from manipulation, should have reflected that boom.
Much of this wisdom, of course, could only be gained way after the event.
But I do regard in re-reading Rothbard, that this focus on Germany is an absolutely key
part of the story he made and certainly one which has influenced me tremendously in my
thinking. Thank you.