WEBVTT NOTE Economic Depressions: Their Cause and Cure 1 00:00:00.000 --> 00:00:20.040 Economic Depressions, Their Cause and Cure, by Murray N. Rothbard, narrated by Harold 2 00:00:20.040 --> 00:00:22.080 L. Fritchie. 3 00:00:22.080 --> 00:00:27.080 This essay was originally published as a mini-book by the Constitutional Alliance of Lansing, 4 00:00:27.080 --> 00:00:38.000 We live in a world of euphemism. Undertakers have become morticians, press agents are now 5 00:00:38.000 --> 00:00:45.100 public relations counselors, and janitors have all been transformed into superintendents. 6 00:00:45.100 --> 00:00:50.640 In every walk of life, plain facts have been wrapped in cloudy camouflage. No less has 7 00:00:50.640 --> 00:00:56.640 this been true of economics. In the old days, we used to suffer nearly periodic economic 8 00:00:56.640 --> 00:01:02.200 Crises, the sudden onset of which was called a panic and the lingering trough period after 9 00:01:02.200 --> 00:01:05.360 the panic was called depression. 10 00:01:05.360 --> 00:01:09.840 The most famous depression in modern times, of course, was the one that began in a typical 11 00:01:09.840 --> 00:01:16.880 financial panic in 1929 and lasted until the advent of World War II. 12 00:01:16.880 --> 00:01:23.100 After the disaster of 1929, economists and politicians resolved that this must never 13 00:01:23.100 --> 00:01:25.200 happen again. 14 00:01:25.200 --> 00:01:31.920 The easiest way of succeeding at this resolve was simply to define depressions out of existence. 15 00:01:31.920 --> 00:01:36.620 From that point on, America was to suffer no further depressions, for when the next 16 00:01:36.620 --> 00:01:43.400 sharp depression came along in 1937-38, the economists simply refused to use the dread 17 00:01:43.400 --> 00:01:49.520 name and came up with a new, much softer sounding word, recession. 18 00:01:49.520 --> 00:01:55.560 From that point on we have been through quite a few recessions, but not a single depression. 19 00:01:55.560 --> 00:02:00.440 But pretty soon the word recession also became too harsh for the delicate sensibilities of 20 00:02:00.440 --> 00:02:02.560 the American public. 21 00:02:02.560 --> 00:02:09.120 It now seems that we had our last recession in 1957-58, for since then we have only had 22 00:02:09.120 --> 00:02:14.420 downturns or even better slowdowns or sidewise movements. 23 00:02:14.420 --> 00:02:16.120 So be of good cheer. 24 00:02:16.120 --> 00:02:21.760 From now on, depressions and even recessions have been outlawed by the semantic fiat of 25 00:02:21.760 --> 00:02:22.760 economists. 26 00:02:22.760 --> 00:02:27.640 From now on, the worst that can possibly happen to us are slowdowns. 27 00:02:27.640 --> 00:02:30.940 Such are the wonders of the new economics. 28 00:02:30.940 --> 00:02:35.440 For 30 years, our nation's economists have adopted the view of the business cycle held 29 00:02:35.440 --> 00:02:40.960 by the late British economist John Maynard Keynes, who created the Keynesian, or the 30 00:02:40.960 --> 00:02:48.880 New Economics in his book, The General Theory of Employment, Interest and Money, published in 1936. 31 00:02:50.080 --> 00:02:56.880 Beneath their diagrams, mathematics and inchoate jargon, the attitude of Keynesians towards booms 32 00:02:56.880 --> 00:03:04.640 and busts is simplicity, even naivete itself. If there is inflation, then the cause is supposed 33 00:03:04.640 --> 00:03:10.560 to be excessive spending on the part of the public. The alleged cure is for the government, 34 00:03:10.560 --> 00:03:22.560 The self-appointed stabilizer and regulator of the nation's economy to step in and force people to spend less, sopping up their excess purchasing power through increased taxation. 35 00:03:22.560 --> 00:03:37.560 If there is recession, on the other hand, this has been caused by insufficient private spending, and the cure now is for the government to increase its own spending, preferably through deficits, thereby adding to the nation's aggregate spending stream. 36 00:03:37.560 --> 00:03:49.560 The idea that increased government spending or easy money is good for business and that budget cuts or harder money is bad permeates even the most conservative newspapers and magazines. 37 00:03:49.560 --> 00:04:02.560 These journals will also take for granted that it is a sacred task of the Federal Government to steer the economic system on the narrow road between the abyss of depression on one hand and inflation on the other, 38 00:04:02.560 --> 00:04:08.560 for the free market economy is supposed to be ever liable to succumb to one of these evils. 39 00:04:08.560 --> 00:04:12.560 All current schools of economists have the same attitude. 40 00:04:12.560 --> 00:04:16.560 Note, for example, the viewpoint of Dr. Paul W. McCracken, 41 00:04:16.560 --> 00:04:21.560 the incoming chairman of President Nixon's Council of Economic Advisers. 42 00:04:21.560 --> 00:04:28.560 In an interview with the New York Times shortly after taking office, January 24, 1969, 43 00:04:28.560 --> 00:04:34.240 Dr. McCracken asserted that one of the major economic problems facing the new administration 44 00:04:34.240 --> 00:04:40.520 is how you cool down this inflationary economy without, at the same time, tripping off unacceptably 45 00:04:40.520 --> 00:04:43.440 high levels of unemployment. 46 00:04:43.440 --> 00:04:47.920 In other words, if the only thing we want to do is cool off the inflation, it could 47 00:04:47.920 --> 00:04:48.920 be done. 48 00:04:48.920 --> 00:04:53.560 But our social tolerances on unemployment are narrow, and again, I think we have to 49 00:04:53.560 --> 00:04:55.860 feel our way along here. 50 00:04:55.860 --> 00:05:01.180 We don't really have much experience in trying to cool an economy in orderly fashion. 51 00:05:01.180 --> 00:05:08.220 We slammed on the brakes in 1957, but, of course, we got substantial slack in the economy. 52 00:05:08.220 --> 00:05:13.660 Note the fundamental attitude of Dr. McCracken toward the economy, remarkable only in that 53 00:05:13.660 --> 00:05:18.300 it is shared by almost all economists of the present day. 54 00:05:18.300 --> 00:05:24.100 The economy is treated as a potentially workable but always troublesome and recalcitrant patient 55 00:05:24.100 --> 00:05:29.880 with a continual tendency to hive off into greater inflation or unemployment. 56 00:05:29.880 --> 00:05:35.220 The function of the government is to be the wise old manager and physician, ever watchful, 57 00:05:35.220 --> 00:05:39.940 ever tinkering to keep the economic patient in good working order. 58 00:05:39.940 --> 00:05:45.180 In any case, here the economic patient is clearly supposed to be the subject, and the 59 00:05:45.180 --> 00:05:48.740 government as physician, the master. 60 00:05:48.740 --> 00:05:53.660 It was not so long ago that this kind of attitude and policy was called socialism, but we live 61 00:05:53.660 --> 00:05:59.380 We live in a world of euphemism, and now we call it by far less harsh labels such as moderation 62 00:05:59.380 --> 00:06:02.900 or enlightened free enterprise. 63 00:06:02.900 --> 00:06:04.940 We live and learn. 64 00:06:04.940 --> 00:06:08.380 What then are the causes of periodic depressions? 65 00:06:08.380 --> 00:06:13.320 Must we always remain agnostic about the causes of booms and busts? 66 00:06:13.320 --> 00:06:17.460 Is it really true that business cycles are rooted deep within the free market economy 67 00:06:17.460 --> 00:06:22.000 and that therefore some form of government planning is needed if we wish to keep the 68 00:06:22.000 --> 00:06:25.480 The economy within some kind of stable bounds? 69 00:06:25.480 --> 00:06:30.720 Do booms and then busts just simply happen, or does one phase of the cycle flow logically 70 00:06:30.720 --> 00:06:32.660 from the other? 71 00:06:32.660 --> 00:06:37.800 The currently fashionable attitude towards the business cycle stems, actually, from Karl 72 00:06:37.800 --> 00:06:39.520 Marx. 73 00:06:39.520 --> 00:06:45.040 Marx saw that before the Industrial Revolution, in approximately the late 18th century, there 74 00:06:45.040 --> 00:06:48.940 were no regularly occurring booms and depressions. 75 00:06:48.940 --> 00:06:54.180 There would be a sudden economic crisis whenever some king made war or confiscated the property 76 00:06:54.180 --> 00:07:00.380 of his subject, but there was no sign of the peculiarly modern phenomena of general and 77 00:07:00.380 --> 00:07:06.180 fairly regular swings in business fortunes of expansions and contractions. 78 00:07:06.180 --> 00:07:11.700 Since these cycles also appeared on the scene at about the same time as modern industry, 79 00:07:11.700 --> 00:07:16.180 Marx concluded that business cycles were an inherent feature of the capitalist market 80 00:07:16.180 --> 00:07:18.100 economy. 81 00:07:18.100 --> 00:07:22.740 All the various current schools of economic thought, regardless of their other differences 82 00:07:22.740 --> 00:07:28.820 and the different causes that they attribute to the cycle, agree on this vital point, that 83 00:07:28.820 --> 00:07:34.300 these business cycles originate somewhere deep within the free market economy. 84 00:07:34.300 --> 00:07:37.140 The market economy is to blame. 85 00:07:37.140 --> 00:07:41.580 Karl Marx believed that the periodic depressions would get worse and worse until the masses 86 00:07:41.580 --> 00:07:46.820 would be moved to revolt and destroy the system, while the modern economist believes that the 87 00:07:46.820 --> 00:07:51.700 The government can successfully stabilize depressions and the cycle. 88 00:07:51.700 --> 00:07:56.220 But all parties agree that the fault lies deep within the market economy and that if 89 00:07:56.220 --> 00:08:02.460 anything can save the day, it must be some form of massive government intervention. 90 00:08:02.460 --> 00:08:06.180 There are, however, some critical problems in the assumption that the market economy 91 00:08:06.180 --> 00:08:07.900 is the culprit. 92 00:08:07.900 --> 00:08:13.420 For general economic theory teaches us that supply and demand always tend to be in equilibrium 93 00:08:13.420 --> 00:08:18.100 in the Market and that therefore prices of products as well as the factors that contribute 94 00:08:18.100 --> 00:08:23.180 to production are always tending towards some equilibrium point. 95 00:08:23.180 --> 00:08:27.620 Even though changes of data, which are always taking place, prevent equilibrium from ever 96 00:08:27.620 --> 00:08:32.420 being reached, there is nothing in the general theory of the market system that would account 97 00:08:32.420 --> 00:08:37.800 for regular and recurring boom and bust phases of the business cycle. 98 00:08:37.800 --> 00:08:42.900 Modern economists solve this problem by simply keeping their general price and market theory 99 00:08:42.900 --> 00:08:47.780 and their Business Cycle Theory in separate, tightly sealed compartments with never the 100 00:08:47.780 --> 00:08:51.400 twain meeting much less integrated with each other. 101 00:08:51.400 --> 00:08:56.780 Economists, unfortunately, have forgotten that there is only one economy and therefore 102 00:08:56.780 --> 00:09:00.420 only one integrated economic theory. 103 00:09:00.420 --> 00:09:06.460 Neither economic life nor the structure of theory can or should be in watertight compartments. 104 00:09:06.460 --> 00:09:11.180 Our knowledge of the economy is either one integrated whole or it is nothing, yet most 105 00:09:11.180 --> 00:09:16.980 Most economists are content to apply totally separate and indeed mutually exclusive theories 106 00:09:16.980 --> 00:09:21.420 for general price analysis and for business cycles. 107 00:09:21.420 --> 00:09:26.140 They cannot be genuine economic scientists so long as they are content to keep operating 108 00:09:26.140 --> 00:09:28.620 in this primitive way. 109 00:09:28.620 --> 00:09:33.980 But there are still graver problems with the currently fashionable approach. 110 00:09:33.980 --> 00:09:38.840 Economists also do not see one particularly critical problem because they do not bother 111 00:09:38.840 --> 00:09:43.600 to Square Their Business Cycle and General Price Theories, The Peculiar Breakdown of 112 00:09:43.600 --> 00:09:48.780 the Entrepreneurial Function at Times of Economic Crisis and Depression. 113 00:09:48.780 --> 00:09:54.240 In the market economy, one of the most vital functions of the businessman is to be an entrepreneur, 114 00:09:54.240 --> 00:09:59.400 a man who invests in productive methods, who buys equipment and hires labor to produce 115 00:09:59.400 --> 00:10:03.480 something which he is not sure will reap him any return. 116 00:10:03.480 --> 00:10:10.240 In short, the entrepreneurial function is the function of forecasting the uncertain future. 117 00:10:10.240 --> 00:10:16.400 Before embarking on any investment line or line of production, the entrepreneur or enterpriser 118 00:10:16.400 --> 00:10:22.060 must estimate present and future costs and future revenues, and therefore estimate whether 119 00:10:22.060 --> 00:10:26.200 and how much profits he will earn from the investment. 120 00:10:26.200 --> 00:10:30.680 If he forecasts well and significantly better than his business competitors, he will reap 121 00:10:30.680 --> 00:10:33.020 profits from his investment. 122 00:10:33.020 --> 00:10:37.220 The better his forecasting, the higher the profits he will earn. 123 00:10:37.220 --> 00:10:42.800 If on the other hand he is a poor forecaster and overestimates the demand for his product, 124 00:10:42.800 --> 00:10:47.660 he will suffer losses and pretty soon be forced out of the business. 125 00:10:47.660 --> 00:10:52.700 The market economy then is a profit and loss economy in which the acumen and ability of 126 00:10:52.700 --> 00:10:57.940 business entrepreneurs is gauged by the profits and losses they reap. 127 00:10:57.940 --> 00:11:03.540 The market economy, moreover, contains a built-in mechanism, a kind of natural selection that 128 00:11:03.540 --> 00:11:08.780 ensures the survival and the flourishing of the superior forecaster and the weeding out 129 00:11:08.780 --> 00:11:10.280 of the inferior one. 130 00:11:10.280 --> 00:11:14.820 For the more profits reaped by the better forecasters, the greater become their business 131 00:11:14.820 --> 00:11:20.600 responsibilities and the more they will have available to invest in the productive system. 132 00:11:20.600 --> 00:11:25.880 On the other hand, a few years of making losses will drive the poorer forecasters and entrepreneurs 133 00:11:25.880 --> 00:11:37.640 If then the market economy has a built-in natural selection mechanism for good entrepreneurs, 134 00:11:37.640 --> 00:11:42.680 this means that generally we would expect not many business firms to be making losses. 135 00:11:42.680 --> 00:11:47.700 And in fact, if we look around at the economy on an average day or year, we will find that 136 00:11:47.700 --> 00:11:50.220 losses are not very widespread. 137 00:11:50.220 --> 00:11:54.300 But in that case, the odd fact that needs explaining is this. 138 00:11:54.300 --> 00:11:59.560 How is it that, periodically, in times of the onset of recessions and especially in 139 00:11:59.560 --> 00:12:06.840 steep depressions, the business world suddenly experiences a massive cluster of severe losses? 140 00:12:06.840 --> 00:12:11.980 A moment arrives when business firms, previously highly astute entrepreneurs in their ability 141 00:12:11.980 --> 00:12:18.000 to make profits and avoid losses, suddenly and dismayingly find themselves, almost all 142 00:12:18.000 --> 00:12:22.040 of them, suffering severe and unaccountable losses. 143 00:12:22.040 --> 00:12:23.800 How come? 144 00:12:23.800 --> 00:12:28.200 Here is a momentous fact that any theory of depressions must explain. 145 00:12:28.200 --> 00:12:34.440 An explanation such as underconsumption, a drop in total consumer spending, is not sufficient. 146 00:12:34.440 --> 00:12:39.780 For one thing, because what needs to be explained is why businessmen, able to forecast all manner 147 00:12:39.780 --> 00:12:45.340 of previous economic changes and developments, prove themselves totally and catastrophically 148 00:12:45.340 --> 00:12:49.820 unable to forecast this alleged drop in consumer demand. 149 00:12:49.820 --> 00:12:53.680 Why this sudden failure in forecasting ability? 150 00:12:53.680 --> 00:12:58.120 An adequate theory of depressions then must account for the tendency of the economy to 151 00:12:58.120 --> 00:13:03.800 move through successive booms and busts, showing no sign of settling into any sort of smoothly 152 00:13:03.800 --> 00:13:09.800 moving or quietly progressive approximation of an equilibrium situation. 153 00:13:09.800 --> 00:13:14.520 In particular, a theory of depression must account for the mammoth cluster of errors 154 00:13:14.520 --> 00:13:19.640 which appears swiftly and suddenly at a moment of economic crisis and lingers through the 155 00:13:19.640 --> 00:13:28.320 And there is a third universal fact that a theory of the cycle must account for. 156 00:13:28.320 --> 00:13:34.280 Invariably the booms and busts are much more intense and severe in the capital goods industries. 157 00:13:34.280 --> 00:13:39.360 The industries making machines and equipment, the ones producing industrial raw materials 158 00:13:39.360 --> 00:13:45.360 are constructing industrial plants than in the industries making consumer goods. 159 00:13:45.360 --> 00:13:49.840 There is another fact of business cycle life that must be explained and obviously can't 160 00:13:49.840 --> 00:13:54.640 be explained by such theories of depression as the popular under-consumption doctrine 161 00:13:54.640 --> 00:13:57.960 that consumers aren't spending enough on consumer goods. 162 00:13:57.960 --> 00:14:03.060 For if insufficient spending is the culprit, then how is it that retail sales are the last 163 00:14:03.060 --> 00:14:07.900 and the least to fall in any depression, and that depression really hits such industries 164 00:14:07.900 --> 00:14:13.400 as machine tools, capital equipment, construction and raw materials? 165 00:14:13.400 --> 00:14:19.080 Conversely, it is these industries that really take off in the inflationary boom phase of 166 00:14:19.080 --> 00:14:23.800 the business cycle, and not those businesses serving the consumer. 167 00:14:23.800 --> 00:14:28.840 An adequate theory of the business cycle, then, must also explain the far greater intensity 168 00:14:28.840 --> 00:14:33.880 of booms and busts in the non-consumer goods or producer goods industries. 169 00:14:33.880 --> 00:14:39.400 Fortunately, a correct theory of depression and of the business cycle does exist, even 170 00:14:39.400 --> 00:14:44.000 It is universally neglected in present-day economics. 171 00:14:44.000 --> 00:14:47.880 It too has a long tradition in economic thought. 172 00:14:47.880 --> 00:14:53.140 This theory began with the 18th century Scottish philosopher and economist David Hume and with 173 00:14:53.140 --> 00:14:58.760 the eminent early 19th century English classical economist David Ricardo. 174 00:14:58.760 --> 00:15:04.880 Essentially, these theorists saw that another crucial institution had developed in the mid-18th 175 00:15:04.880 --> 00:15:08.080 century alongside the industrial system. 176 00:15:08.080 --> 00:15:12.960 This was the institution of banking, with its capacity to expand credit and the money 177 00:15:12.960 --> 00:15:17.800 supply, first in the form of paper money or banknotes, and later in the form of demand 178 00:15:17.800 --> 00:15:23.280 deposits or checking accounts that are instantly redeemable in cash at the banks. 179 00:15:23.280 --> 00:15:27.960 It was the operations of these commercial banks which, these economists saw, held the 180 00:15:27.960 --> 00:15:34.280 key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, 181 00:15:34.280 --> 00:15:38.280 at Puzzled Observer since the mid-18th century. 182 00:15:38.280 --> 00:15:43.100 The Ricardian analysis of the business cycle when something as follows. 183 00:15:43.100 --> 00:15:47.960 The natural monies emerging as such on the world's free markets are useful commodities, 184 00:15:47.960 --> 00:15:50.620 generally gold and silver. 185 00:15:50.620 --> 00:15:55.780 If money were confined simply to these commodities, then the economy would work in the aggregate 186 00:15:55.780 --> 00:15:58.360 as it does in particular markets. 187 00:15:58.360 --> 00:16:04.260 A smooth adjustment of supply and demand and therefore no cycles of boom and bust. 188 00:16:04.260 --> 00:16:09.100 But the injection of bank credit adds another crucial and disruptive element, for the banks 189 00:16:09.100 --> 00:16:14.900 expand credit and therefore bank money in the form of notes or deposits which are theoretically 190 00:16:14.900 --> 00:16:20.120 redeemable on demand in gold, but in practice clearly are not. 191 00:16:20.120 --> 00:16:25.520 For example, if a bank has 1,000 ounces of gold in its vaults and it issues instantly 192 00:16:25.520 --> 00:16:32.820 redeemable warehouse receipts for 2,500 ounces of gold, then it clearly has issued 1,500 193 00:16:32.820 --> 00:16:37.820 Money Supply of the country by 1,500 gold ounces, more than it can possibly redeem. 194 00:16:37.820 --> 00:16:43.820 But so long as there is no concerted run on the bank to cash in these receipts, its warehouse 195 00:16:43.820 --> 00:16:48.820 receipts function on the market as equivalent to gold, and therefore the bank has been able 196 00:16:48.820 --> 00:16:53.820 to expand the money supply of the country by 1,500 gold ounces. 197 00:16:53.820 --> 00:16:59.820 The banks then happily begin to expand credit, for the more they expand credit the greater 198 00:16:59.820 --> 00:17:01.820 will be their profits. 199 00:17:01.820 --> 00:17:14.820 As the supply of paper and bank money in England increases, the money incomes and expenditures of Englishmen rise, and the increased money bids up prices of English goods. 200 00:17:14.820 --> 00:17:24.820 The result is inflation and a boom within the country. But this inflationary boom, while it proceeds on its merry way, sows the seeds of its own demise. 201 00:17:24.820 --> 00:17:25.820 and Demise 202 00:17:25.820 --> 00:17:31.180 For as English money supply and incomes increase, Englishmen proceed to purchase more goods 203 00:17:31.180 --> 00:17:38.340 from abroad. Furthermore, as English prices go up, English goods begin to lose their competitiveness 204 00:17:38.340 --> 00:17:42.700 with the products of other countries which have not inflated or have been inflating to 205 00:17:42.700 --> 00:17:48.940 a lesser degree. Englishmen begin to buy less at home and more abroad while foreigners buy 206 00:17:48.940 --> 00:17:51.740 by Less in England and More at Home. 207 00:17:51.740 --> 00:17:57.620 The result is a deficit in the English balance of payments with English exports falling sharply 208 00:17:57.620 --> 00:18:03.420 behind imports, but if imports exceed exports this means that money must flow out of England 209 00:18:03.420 --> 00:18:07.340 to foreign countries, and what money will this be? 210 00:18:07.340 --> 00:18:12.060 Surely not English banknotes or deposits for Frenchmen or Germans or Italians have little 211 00:18:12.060 --> 00:18:16.740 or no interest in keeping their funds locked up in English banks. 212 00:18:16.740 --> 00:18:20.780 These foreigners will therefore take their banknotes and deposits and present them to 213 00:18:20.780 --> 00:18:23.480 the English banks for redemption in gold. 214 00:18:23.480 --> 00:18:27.740 And gold will be the type of money that will tend to flow persistently out of the country 215 00:18:27.740 --> 00:18:30.900 as the English inflation proceeds on its way. 216 00:18:30.900 --> 00:18:36.620 But this means that English bank credit money will be, more and more, pyramiding on top of 217 00:18:36.620 --> 00:18:40.740 a dwindling gold base in the English bank vaults. 218 00:18:40.740 --> 00:18:45.540 As the boom proceeds, our hypothetical bank will expand its warehouse receipts issued 219 00:18:45.540 --> 00:18:53.040 from say 2,500 ounces to 4,000 ounces while its gold base dwindles to say 800. 220 00:18:53.040 --> 00:18:58.320 As this process intensifies, the banks will eventually become frightened, for the banks 221 00:18:58.320 --> 00:19:04.360 after all are obligated to redeem their liabilities in cash and their cash is flowing out rapidly 222 00:19:04.360 --> 00:19:06.820 as their liabilities pile up. 223 00:19:06.820 --> 00:19:12.060 Hence, the banks will eventually lose their nerve, stop their credit expansion, and in 224 00:19:12.060 --> 00:19:16.460 in order to save themselves, contract their bank loans outstanding. 225 00:19:16.460 --> 00:19:22.560 Often, this retreat is precipitated by bankrupting runs on the banks touched off by the public 226 00:19:22.560 --> 00:19:26.980 who had also been getting increasingly nervous about the ever more shaky condition of the 227 00:19:26.980 --> 00:19:29.260 nation's banks. 228 00:19:29.260 --> 00:19:33.140 The bank contraction reverses the economic picture. 229 00:19:33.140 --> 00:19:35.340 Contraction and bust follow boom. 230 00:19:35.340 --> 00:19:40.200 The banks pull in their horns and businesses suffer as the pressure mounts for debt repayment 231 00:19:40.200 --> 00:19:42.140 and Contraction. 232 00:19:42.140 --> 00:19:48.400 The fall in the supply of bank money in turn leads to a general fall in English prices. 233 00:19:48.400 --> 00:19:54.200 As money supply and incomes fall and English prices collapse, English goods become relatively 234 00:19:54.200 --> 00:19:59.240 more attractive in terms of foreign products and the balance of payments reverses itself 235 00:19:59.240 --> 00:20:02.480 with exports exceeding imports. 236 00:20:02.480 --> 00:20:07.280 As gold flows into the country and as bank money contracts on top of an expanding gold 237 00:20:07.280 --> 00:20:11.840 Base, the condition of the banks becomes much sounder. 238 00:20:11.840 --> 00:20:16.480 This then is the meaning of the depression phase of the business cycle. 239 00:20:16.480 --> 00:20:21.320 Note that it is a phase that comes out of, and inevitably comes out of, the preceding 240 00:20:21.320 --> 00:20:23.120 expansionary boom. 241 00:20:23.120 --> 00:20:29.120 It is the preceding inflation that makes the depression phase necessary. 242 00:20:29.120 --> 00:20:33.840 We can see, for example, that the depression is the process by which the market economy 243 00:20:33.840 --> 00:20:40.720 adjusts, throws off the excesses and distortions of the previous inflationary boom, and reestablishes 244 00:20:40.720 --> 00:20:43.560 a sound economic condition. 245 00:20:43.560 --> 00:20:49.000 The depression is the unpleasant but necessary reaction to the distortions and excesses of 246 00:20:49.000 --> 00:20:51.320 the previous boom. 247 00:20:51.320 --> 00:20:54.440 Why then does the next cycle begin? 248 00:20:54.440 --> 00:20:59.640 Why do business cycles tend to be recurrent and continuous? 249 00:20:59.640 --> 00:21:14.640 When the banks have pretty well recovered and are in a sounder condition, they are then in a confident position to proceed to their natural path of bank credit expansion and the next boom proceeds on its way, sowing the seeds for the next inevitable bust. 250 00:21:14.640 --> 00:21:20.640 But if banking is the cause of the business cycle, aren't the banks also a part of the private market economy? 251 00:21:20.640 --> 00:21:27.640 And can't we therefore say that the free market is still the culprit, if only in the banking segment of that free market? 252 00:21:27.640 --> 00:21:37.640 The answer is no, for the banks for one thing would never be able to expand credit in concert were it not for the intervention and encouragement of government. 253 00:21:37.640 --> 00:21:45.640 For if the banks were truly competitive, any expansion of credit by one bank would quickly pile up the debts of that bank and its competitors, 254 00:21:45.640 --> 00:21:50.640 and its competitors would quickly call upon the expanding bank for redemption in cash. 255 00:21:50.640 --> 00:21:56.560 In short, a bank's rivals will call upon it for redemption in gold or cash in the same 256 00:21:56.560 --> 00:22:01.540 way as do foreigners, except that the process is much faster and would nip any incipient 257 00:22:01.540 --> 00:22:05.260 inflation in the bud before it got started. 258 00:22:05.260 --> 00:22:10.800 Banks can only expand comfortably in unison when a central bank exists, essentially a 259 00:22:10.800 --> 00:22:16.420 government bank enjoying a monopoly of government business and a privileged position imposed 260 00:22:16.420 --> 00:22:20.060 by government over the entire banking system. 261 00:22:20.060 --> 00:22:24.780 It is only when central banking got established that the banks were able to expand for any 262 00:22:24.780 --> 00:22:30.400 length of time and the familiar business cycle got underway in the modern world. 263 00:22:30.400 --> 00:22:35.220 The central bank acquires its control over the banking system by such governmental measures 264 00:22:35.220 --> 00:22:41.420 as making its own liabilities legal tender for all debts and receivable in taxes, granting 265 00:22:41.420 --> 00:22:47.020 the central bank monopoly of the issue of bank notes as contrasted to deposits. 266 00:22:47.020 --> 00:22:52.020 In England, the Bank of England, the governmentally established central bank, had a legal monopoly 267 00:22:52.020 --> 00:22:57.560 of banknotes in the London area, or through the outright forcing of the banks to use the 268 00:22:57.560 --> 00:23:02.600 central bank as their client for keeping their reserves of cash, as in the United States 269 00:23:02.600 --> 00:23:05.460 in its Federal Reserve system. 270 00:23:05.460 --> 00:23:10.560 Not that the banks complain about this intervention, for it is the establishment of central banking 271 00:23:10.560 --> 00:23:15.660 that makes long-term bank credit expansion possible, since the expansion of central bank 272 00:23:15.660 --> 00:23:21.280 Notes provides added cash reserves for the entire banking system and permits all the 273 00:23:21.280 --> 00:23:27.640 commercial banks to expand their credit together. Central banking works like a cozy compulsory 274 00:23:27.640 --> 00:23:33.020 bank cartel to expand the bank's liabilities and the banks are now able to expand on a 275 00:23:33.020 --> 00:23:38.960 larger base of cash in the form of central bank notes as well as gold. So now we see 276 00:23:38.960 --> 00:23:43.640 at last that the business cycle is brought about not by any mysterious failings of the 277 00:23:43.640 --> 00:23:49.640 of the Free Market Economy, but quite the opposite, by systematic intervention by government 278 00:23:49.640 --> 00:23:52.640 in the market process. 279 00:23:52.640 --> 00:23:56.860 Government intervention brings about bank expansion and inflation, and when the inflation 280 00:23:56.860 --> 00:24:02.100 comes to an end, the subsequent depression and adjustment comes into play. 281 00:24:02.100 --> 00:24:07.800 The Ricardian Theory of the Business Cycle grasps the essentials of a correct cycle theory. 282 00:24:07.800 --> 00:24:13.040 The recurrent nature of the phases of the cycle, depression as adjustment, intervention 283 00:24:13.040 --> 00:24:17.000 in the Market rather than from the free market economy. 284 00:24:17.000 --> 00:24:20.320 But two problems were as yet unexplained. 285 00:24:20.320 --> 00:24:24.760 Why the sudden cluster of business error, the sudden failure of the entrepreneurial 286 00:24:24.760 --> 00:24:30.360 function and why the vastly greater fluctuations in the producer's goods than in the consumer's 287 00:24:30.360 --> 00:24:32.600 goods industries. 288 00:24:32.600 --> 00:24:37.640 The Ricardian theory only explained movements in the price level in general business. 289 00:24:37.640 --> 00:24:42.480 There was no hint of explanation of the vastly different reactions in the capital and consumer's 290 00:24:42.480 --> 00:24:55.480 The correct and fully developed theory of the business cycle was finally discovered and set forth by the Austrian economist Ludwig von Mises when he was a professor at the University of Vienna. 291 00:24:55.480 --> 00:25:10.480 Mises developed hints of his solution to the vital problem of the business cycle in his monumental Theory of Money and Credit, published in 1912 and still nearly 60 years later, the best book on the theory of money and banking. 292 00:25:10.480 --> 00:25:36.480 Mises developed his cycle theory during the 1920s, and it was brought to the English-speaking world by Mises' leading follower, Friedrich A. von Hayek, who came from Vienna to teach at the London School of Economics in the early 1930s, and who published, in German and in English, two books which applied and elaborated the Mises cycle theory, Monetary Theory and the Trade Cycle, and Prices and Production. 293 00:25:36.480 --> 00:25:53.480 Since Mises and Hayek were Austrians, and also since they were in the tradition of the great 19th century Austrian economists, this theory has become known in the literature as the Austrian, or the monetary overinvestment theory of the business cycle. 294 00:25:53.480 --> 00:26:02.480 Building on the Ricardians on general Austrian theory and on his own creative genius, Mises developed the following theory of the business cycle. 295 00:26:02.480 --> 00:26:12.480 Without bank credit expansion, supply and demand tend to be equilibrated through the free-price system and no cumulative booms or busts can then develop. 296 00:26:12.480 --> 00:26:24.480 But then government, through its central bank, stimulates bank credit expansion by expanding central banks' liabilities and therefore the cash reserves of all the nation's commercial banks. 297 00:26:24.480 --> 00:26:31.480 The banks then proceed to expand credit and hence the nation's money supply in the form of check deposits. 298 00:26:31.480 --> 00:26:44.480 As the Ricardians saw, this expansion of bank money drives up the prices of goods and hence causes inflation, but, Mises showed, it does something else and something even more sinister. 299 00:26:44.480 --> 00:26:55.480 Bank credit expansion by pouring new loan funds into the business world artificially lowers the rate of interest in the economy below its free market level. 300 00:26:55.480 --> 00:27:16.480 On the free and unhampered market, the interest rate is determined purely by the time preferences of all the individuals that make up the market economy, for the essence of a loan is that a present good, money which can be used at present, is being exchanged for a future good, an IOU which can only be used at some point in the future. 301 00:27:16.480 --> 00:27:21.240 Since people always prefer money right now to the prospect of getting the same amount 302 00:27:21.240 --> 00:27:26.600 of money sometime in the future, the present good always commands a premium in the market 303 00:27:26.600 --> 00:27:28.580 over the future. 304 00:27:28.580 --> 00:27:33.080 This premium is the interest rate, and its height will vary according to the degree to 305 00:27:33.080 --> 00:27:39.840 which people prefer the present to the future, that is, the degree of their time preferences. 306 00:27:39.840 --> 00:27:44.800 People's time preferences also determine the extent to which people will save and invest 307 00:27:44.800 --> 00:27:48.040 as compared to how much they will consume. 308 00:27:48.040 --> 00:27:52.420 If people's time preferences should fall, that is, if their degree of preference for 309 00:27:52.420 --> 00:27:59.240 present over future falls, then people will tend to consume less now and save and invest 310 00:27:59.240 --> 00:28:00.980 more. 311 00:28:00.980 --> 00:28:06.480 At the same time and for the same reason, the rate of interest, the rate of time discount, 312 00:28:06.480 --> 00:28:08.960 will also fall. 313 00:28:08.960 --> 00:28:13.560 Economic growth comes about largely as a result of falling rates of time preference, which 314 00:28:13.560 --> 00:28:18.420 which lead to an increase in the proportion of savings and investment to consumption and 315 00:28:18.420 --> 00:28:21.640 also to a falling rate of interest. 316 00:28:21.640 --> 00:28:26.160 But what happens when the rate of interest falls not because of lower time preferences 317 00:28:26.160 --> 00:28:32.540 and higher savings, but from government interference that promotes the expansion of bank credit? 318 00:28:32.540 --> 00:28:37.640 In other words, if the rate of interest falls artificially due to intervention rather than 319 00:28:37.640 --> 00:28:42.420 and naturally as a result of changes in the valuations and preferences of the consuming 320 00:28:42.420 --> 00:28:43.960 public. 321 00:28:43.960 --> 00:28:46.100 What happens is trouble. 322 00:28:46.100 --> 00:28:50.960 For businessmen, seeing the rate of interest fall, react as they always would and must 323 00:28:50.960 --> 00:28:53.940 to such a change of market signals. 324 00:28:53.940 --> 00:28:56.980 They invest more in capital and producer goods. 325 00:28:56.980 --> 00:29:03.380 Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable, 326 00:29:03.380 --> 00:29:14.060 In short, businessmen react as they would react if savings had genuinely increased. 327 00:29:14.060 --> 00:29:20.700 They expand their investment in durable equipment, in capital goods, in industrial raw material, 328 00:29:20.700 --> 00:29:26.180 in construction as compared to their direct production of consumer goods. 329 00:29:26.180 --> 00:29:30.260 Businesses in short happily borrow the newly expanded bank money that is coming to them 330 00:29:30.260 --> 00:29:31.820 at cheaper rates. 331 00:29:31.820 --> 00:29:36.660 They use the money to invest in capital goods and eventually this money gets paid out in 332 00:29:36.660 --> 00:29:42.100 higher rents to land and higher wages to workers in the capital goods industries. 333 00:29:42.100 --> 00:29:47.220 The increased business demand bids up labor costs, but businesses think they can pay these 334 00:29:47.220 --> 00:29:51.620 higher costs because they have been fooled by the government and bank intervention in 335 00:29:51.620 --> 00:29:56.380 the loan market and its decisively important tampering with the interest rate signal of 336 00:29:56.380 --> 00:29:58.480 the marketplace. 337 00:29:58.480 --> 00:30:03.820 The problem comes as soon as the workers and landlords, largely the former since most gross 338 00:30:03.820 --> 00:30:08.740 business income is paid out in wages, begin to spend the new bank money that they have 339 00:30:08.740 --> 00:30:13.380 received in the form of higher wages, for the time preferences of the public have not 340 00:30:13.380 --> 00:30:14.980 really gotten lower. 341 00:30:14.980 --> 00:30:19.700 The public doesn't want to save more than it has, so the workers set about to consume 342 00:30:19.700 --> 00:30:26.940 most of their new income, in short, to reestablish the old consumer savings proportions. 343 00:30:26.940 --> 00:30:31.640 This means that they redirect the spending back to the consumer goods industries and 344 00:30:31.640 --> 00:30:37.380 they don't save and invest enough to buy the newly produced machines, capital equipment, 345 00:30:37.380 --> 00:30:40.660 industrial raw materials and so forth. 346 00:30:40.660 --> 00:30:45.380 This all reveals itself as a sudden, sharp and continuing depression in the producer's 347 00:30:45.380 --> 00:30:47.380 goods industries. 348 00:30:47.380 --> 00:30:52.440 Once the consumers reestablish their desired consumption investment proportions, it is 349 00:30:52.440 --> 00:30:57.560 Mises thus revealed that business had invested too much in capital goods and had under-invested 350 00:30:57.560 --> 00:31:00.160 in consumer goods. 351 00:31:00.160 --> 00:31:04.000 Business had been seduced by the government tampering and artificial lowering of the rate 352 00:31:04.000 --> 00:31:10.400 of interest and acted as if more savings were available to invest than were really there. 353 00:31:10.400 --> 00:31:14.560 As soon as the new bank money filtered through the system and the consumers re-established 354 00:31:14.560 --> 00:31:19.320 their old proportions, it became clear that there was not enough savings to buy all the 355 00:31:19.320 --> 00:31:25.080 of Producers' Goods and that business had misinvested the limited savings available. 356 00:31:25.080 --> 00:31:30.840 Business had over-invested in capital goods and under-invested in consumer products. 357 00:31:30.840 --> 00:31:37.160 The inflationary boom thus leads to distortions of the pricing and production system. 358 00:31:37.160 --> 00:31:41.800 Prices of labor and raw materials in the capital goods industries had been bid up during the 359 00:31:41.800 --> 00:31:47.720 boom too high to be profitable once the consumers reassert their old consumption investment 360 00:31:47.720 --> 00:31:54.620 The Depression is then seen as the necessary and healthy phase by which the market economy 361 00:31:54.620 --> 00:32:00.760 sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes 362 00:32:00.760 --> 00:32:07.000 those proportions between consumption and investment that are truly desired by the consumers. 363 00:32:07.000 --> 00:32:12.160 The Depression is the painful but necessary process by which the free market sloughs off 364 00:32:12.160 --> 00:32:17.680 the excess and errors of the boom, and reestablishes the market economy in its function of efficiency, 365 00:32:17.680 --> 00:32:21.680 Efficient Service to the Mass of Consumers 366 00:32:21.680 --> 00:32:26.440 Since prices of factors of production have been bid too high in the boom, this means 367 00:32:26.440 --> 00:32:32.240 that prices of labor and goods in these capital goods industries must be allowed to fall until 368 00:32:32.240 --> 00:32:35.800 proper market relations are resumed. 369 00:32:35.800 --> 00:32:40.900 Since the workers receive the increased money in the form of higher wages fairly rapidly, 370 00:32:40.900 --> 00:32:46.440 how is it that booms can go on for years without having their unsound investments revealed, 371 00:32:46.440 --> 00:32:50.960 Where errors due to tampering with market signals become evident, and the depression 372 00:32:50.960 --> 00:32:54.520 adjustment process begin its work? 373 00:32:54.520 --> 00:32:59.720 The answer is that booms would be very short-lived if the bank credit expansion and subsequent 374 00:32:59.720 --> 00:33:05.000 pushing of the interest rates below the free market level were a one-shot affair. 375 00:33:05.000 --> 00:33:09.000 But the point is that the credit expansion is not one-shot. 376 00:33:09.000 --> 00:33:13.940 It proceeds on and on, never giving consumers the chance to re-establish their preferred 377 00:33:13.940 --> 00:33:19.500 Proportions of Consumption and Saving, never allowing the rise in costs in the capital 378 00:33:19.500 --> 00:33:24.460 goods industries to catch up to the inflationary rise in prices. 379 00:33:24.460 --> 00:33:29.680 Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable 380 00:33:29.680 --> 00:33:35.280 comeuppance by repeated doses of the stimulant bank credit. 381 00:33:35.280 --> 00:33:40.240 It is only when bank credit expansion must finally stop, either because the banks are 382 00:33:40.240 --> 00:33:44.640 are getting into shaky condition or because the public begins to balk at the continuing 383 00:33:44.640 --> 00:33:49.440 inflation that retribution finally catches up with the boom. 384 00:33:49.440 --> 00:33:55.240 As soon as credit expansion stops, then the piper must be paid and the inevitable readjustments 385 00:33:55.240 --> 00:34:00.160 liquidate the unsound over-investments of the boom with the reassertion of a greater 386 00:34:00.160 --> 00:34:04.080 proportionate emphasis on consumer goods production. 387 00:34:04.080 --> 00:34:09.580 Thus, the Misesian theory of the business cycle accounts for all of our puzzles. 388 00:34:09.580 --> 00:34:15.460 The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, 389 00:34:15.460 --> 00:34:21.260 and the far greater intensity of the boom and bust in the producers' goods industries. 390 00:34:21.260 --> 00:34:26.680 Mises then pinpoints the blame for the cycle on inflationary bank credit expansion propelled 391 00:34:26.680 --> 00:34:30.440 by the intervention of government and its central bank. 392 00:34:30.440 --> 00:34:35.900 What does Mises say should be done, say by government, once the depression arrives? 393 00:34:35.900 --> 00:34:39.820 What is the governmental role in the cure of depression? 394 00:34:39.820 --> 00:34:44.780 In the first place, government must cease inflating as soon as possible. 395 00:34:44.780 --> 00:34:49.620 It is true that this will inevitably bring the inflationary boom abruptly to an end and 396 00:34:49.620 --> 00:34:53.240 commence the inevitable recession or depression. 397 00:34:53.240 --> 00:34:57.980 But the longer the government waits for this, the worse the necessary readjustments will 398 00:34:57.980 --> 00:34:59.940 have to be. 399 00:34:59.940 --> 00:35:04.560 The sooner the depression readjustment has gotten over with, the better. 400 00:35:04.560 --> 00:35:10.040 This means also that the government must never try to prop up unsound business situations. 401 00:35:10.040 --> 00:35:15.020 It must never bail out or lend money to business firms in trouble. 402 00:35:15.020 --> 00:35:20.160 Doing this will simply prolong the agony and convert a sharp and quick depression phase 403 00:35:20.160 --> 00:35:23.640 into a lingering and chronic disease. 404 00:35:23.640 --> 00:35:29.100 The government must never try to prop up wage rates or prices of producer goods. 405 00:35:29.100 --> 00:35:33.820 Doing so will prolong and delay indefinitely the completion of the depression adjustment 406 00:35:33.820 --> 00:35:35.360 process. 407 00:35:35.360 --> 00:35:40.580 It will cause indefinite and prolonged depression and mass unemployment in the vital capital 408 00:35:40.580 --> 00:35:42.780 goods industries. 409 00:35:42.780 --> 00:35:47.300 The government must not try to inflate again in order to get out of the depression, for 410 00:35:47.300 --> 00:35:53.380 even if this reinflation succeeds, it will only sow greater trouble later on. 411 00:35:53.380 --> 00:35:57.860 The government must do nothing to encourage consumption and it must not increase its own 412 00:35:57.860 --> 00:36:03.200 and Expenditures, for this will further increase the social consumption investment ratio. 413 00:36:03.200 --> 00:36:07.380 In fact, cutting the government budget will improve the ratio. 414 00:36:07.380 --> 00:36:12.900 What the economy needs is not more consumption spending, but more saving, in order to validate 415 00:36:12.900 --> 00:36:16.060 some of the excessive investments of the boom. 416 00:36:16.060 --> 00:36:21.740 Thus, what the government should do according to the Misesian analysis of the Depression 417 00:36:21.740 --> 00:36:24.260 is absolutely nothing. 418 00:36:24.260 --> 00:36:28.700 should, from the point of view of economic health and ending the Depression as quickly 419 00:36:28.700 --> 00:36:34.860 as possible, maintain a strict hands-off laissez-faire policy. 420 00:36:34.860 --> 00:36:39.160 Anything it does will delay and obstruct the adjustment process of the market. 421 00:36:39.160 --> 00:36:44.000 The less it does, the more rapidly will the market adjustment process do its work and 422 00:36:44.000 --> 00:36:47.520 sound economic recovery ensue. 423 00:36:47.520 --> 00:36:51.640 The Misesian prescription is thus the exact opposite of the Keynesian. 424 00:36:51.640 --> 00:36:57.560 It is for the government to keep absolute hands off the economy and to confine itself to stopping 425 00:36:57.560 --> 00:37:01.360 its own inflation and to cutting its own budget. 426 00:37:01.360 --> 00:37:07.160 It has today been completely forgotten, even among economists, that the Misesian explanation 427 00:37:07.160 --> 00:37:12.240 and analysis of the Depression gained great headway precisely during the Great Depression 428 00:37:12.240 --> 00:37:17.600 of the 1930s, the very Depression that has always held up to advocates of the free market 429 00:37:17.600 --> 00:37:23.580 Economy as the greatest single and catastrophic failure of laissez-faire capitalism. 430 00:37:23.580 --> 00:37:25.360 It was no such thing. 431 00:37:25.360 --> 00:37:31.340 1929 was made inevitable by the vast bank credit expansion throughout the Western world 432 00:37:31.340 --> 00:37:37.520 during the 1920s, a policy deliberately adopted by the Western governments and most importantly 433 00:37:37.520 --> 00:37:41.560 by the Federal Reserve system in the United States. 434 00:37:41.560 --> 00:37:46.140 It was made possible by the failure of the Western world to return to a genuine gold 435 00:37:46.140 --> 00:37:51.020 Everyone now thinks of President Coolidge as a believer in laissez-faire and an unhampered 436 00:37:51.020 --> 00:37:52.660 market economy. 437 00:37:52.660 --> 00:37:58.620 He was not, and tragically, nowhere less so than in the field of money and credit. 438 00:37:58.620 --> 00:38:03.300 Unfortunately, the sins and errors of the Coolidge intervention were laid to the door 439 00:38:03.300 --> 00:38:06.820 of a non-existent free market economy. 440 00:38:06.820 --> 00:38:13.140 If Coolidge made 1929 inevitable, he would not have been able to do so in 1929. 441 00:38:13.140 --> 00:38:20.460 If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the Depression, 442 00:38:20.460 --> 00:38:25.380 transforming it from a typically sharp but swiftly disappearing Depression into a lingering 443 00:38:25.380 --> 00:38:31.540 and near-fatal malady, a malady cured only by the Holocaust of World War II. 444 00:38:31.540 --> 00:38:37.200 Hoover, not Franklin Roosevelt, was the founder of the policy of the New Deal, essentially 445 00:38:37.200 --> 00:38:41.640 is clearly the massive use of the state to do exactly what Misesian theory would most 446 00:38:41.640 --> 00:38:48.520 warn against, to prop up wage rates above their free market levels, prop up prices, 447 00:38:48.520 --> 00:38:53.600 inflate credit, and lend money to shaky business positions. 448 00:38:53.600 --> 00:38:58.320 Roosevelt only advanced to a greater degree what Hoover had pioneered. 449 00:38:58.320 --> 00:39:03.000 The result for the first time in American history was a nearly perpetual depression 450 00:39:03.000 --> 00:39:06.640 and nearly permanent mass unemployment. 451 00:39:06.640 --> 00:39:12.880 The Coolidge Crisis had become the unprecedentedly prolonged Hoover-Roosevelt Depression. 452 00:39:12.880 --> 00:39:17.280 Ludwig von Mises had predicted the Depression during the heyday of the great boom of the 453 00:39:17.280 --> 00:39:24.080 1920s, a time, just like today, when economists and politicians, armed with a new economics 454 00:39:24.080 --> 00:39:30.080 of perpetual inflation and with new tools provided by the Federal Reserve System, proclaimed 455 00:39:30.080 --> 00:39:36.240 a perpetual new era of permanent prosperity guaranteed by our wise economic doctors in 456 00:39:36.240 --> 00:39:37.800 Washington. 457 00:39:37.800 --> 00:39:42.880 Ludwig von Mises, alone armed with the correct theory of the business cycle, was one of the 458 00:39:42.880 --> 00:39:48.200 few economists to predict the Great Depression, and hence the economic world was forced to 459 00:39:48.200 --> 00:39:50.320 listen to him with respect. 460 00:39:50.320 --> 00:39:56.000 F. A. Hayek spread the word in England, and the younger English economists were all, in 461 00:39:56.000 --> 00:40:02.380 the early 1930s, beginning to adopt the Misesian cycle theory for their analysis of the depression, 462 00:40:02.380 --> 00:40:07.120 and also to adopt, of course, the strictly free-market policy prescription that flowed 463 00:40:07.120 --> 00:40:09.220 with this theory. 464 00:40:09.220 --> 00:40:15.140 Unfortunately, economists have now adopted the historical notion of Lord Keynes, that 465 00:40:15.140 --> 00:40:19.740 no classical economist had a theory of the business cycle until Keynes came along in 466 00:40:19.740 --> 00:40:22.340 1936. 467 00:40:22.340 --> 00:40:24.320 There was a theory of the Depression. 468 00:40:24.320 --> 00:40:27.260 It was the classical economic tradition. 469 00:40:27.260 --> 00:40:32.100 Its prescription was strict, hard money and laissez-faire, and it was rapidly being adopted 470 00:40:32.100 --> 00:40:38.060 in England and even in the United States as the accepted theory of the business cycle. 471 00:40:38.060 --> 00:40:43.380 A particular irony is that the major Austrian proponent in the United States in the early 472 00:40:43.380 --> 00:40:49.680 and mid-1930s was none other than Professor Alvin Hansen, very soon to make his mark as 473 00:40:49.680 --> 00:40:53.860 the outstanding Keynesian disciple in this country. 474 00:40:53.860 --> 00:40:59.540 What swamped the growing acceptance of Misesian cycle theory was simply the Keynesian Revolution, 475 00:40:59.540 --> 00:41:04.740 The amazing sweep that Keynesian theory made of the economic world shortly after the publication 476 00:41:04.740 --> 00:41:08.300 of the General Theory in 1936. 477 00:41:08.300 --> 00:41:13.100 It is not that Misesian theory was refuted successfully, it was just forgotten in the 478 00:41:13.100 --> 00:41:18.100 rush to climb on the suddenly fashionable Keynesian bandwagon. 479 00:41:18.100 --> 00:41:22.580 Some of the leading adherents of the Mises theory, who clearly knew better, succumbed 480 00:41:22.580 --> 00:41:27.400 to the newly established winds of doctrine and won leading American university posts 481 00:41:27.400 --> 00:41:29.680 as a consequence. 482 00:41:29.680 --> 00:41:37.320 But now, the once arch-Keynesian London economist has recently proclaimed that Keynes is dead. 483 00:41:37.320 --> 00:41:43.000 After over a decade of facing trenchant theoretical critiques and refutation by stubborn economic 484 00:41:43.000 --> 00:41:48.080 facts, the Keynesians are now in general and massive retreat. 485 00:41:48.080 --> 00:41:52.180 Once again, the money supply and bank credit are being grudgingly acknowledged to play 486 00:41:52.180 --> 00:41:55.200 a leading role in the cycle. 487 00:41:55.200 --> 00:42:01.840 The time is ripe for a rediscovery, a renaissance of the Mises theory of the business cycle. 488 00:42:01.840 --> 00:42:03.800 It can come none too soon. 489 00:42:03.800 --> 00:42:09.080 If it ever does, the whole concept of a council of economic advisors would be swept away and 490 00:42:09.080 --> 00:42:14.080 we would see a massive retreat of government from the economic sphere. 491 00:42:14.080 --> 00:42:18.880 But for all this to happen, the world of economics and the public at large must be made aware 492 00:42:18.880 --> 00:42:23.360 of the existence of an explanation of the business cycle that has lain neglected on 493 00:42:23.360 --> 00:42:30.360 The Ludwig von Mises Institute hopes you have enjoyed this audio book. 494 00:42:34.800 --> 00:42:40.800 For a world of free market literature, media and discussion, visit Mises.org. 495 00:42:53.360 --> 00:42:58.360 The Theory of Money and Credit