America s Great Depression. Fifth Edition

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2 America s Great Depression Fifth Edition

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4 America s Great Depression Fifth Edition Murray N. Rothbard MISES INSTITUTE

5 Copyright 1963, 1972 by Murray N. Rothbard Introduction to the Third Edition Copyright 1975 by Murray N. Rothbard Introduction to the Fourth Edition Copyright 1983 by Murray N. Rothbard Introduction to the Fifth Edition Copyright 2000 by The Ludwig von Mises Institute Copyright 2000 by The Ludwig von Mises Institute All rights reserved. Printed in the United States of America. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of reprints in the context of reviews. For information write The Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama ISBN No.:

6 TO JOEY, the indispensable framework

7 The Ludwig von Mises Institute dedicates this volume to all of its generous donors, and in particular wishes to thank these Patrons: Dr. Gary G. Schlarbaum George N. Gallagher (In Memoriam), Mary Jacob, Hugh E. Ledbetter Mark M. Adamo, Lloyd Alaback, Robert Blumen, Philip G. Brumder, Anthony Deden (Sage Capital Management, Inc.), Mr. and Mrs. Willard Fischer, Larry R. Gies, Mr. and Mrs. W.R. Hogan, Jr., Mr. and Mrs. William W. Massey, Jr., Ellice McDonald, Jr., MBE, Rosa Hayward McDonald, MBE, Richard McInnis, Mr. and Mrs. Roger Milliken (Milliken and Company), James M. Rodney, Sheldon Rose, Mr. and Mrs. Edward Schoppe, Jr., Mr. and Mrs. Robert E. Urie, Dr. Thomas L. Wenck Algernon Land Co., L.L.C., J. Terry Anderson (Anderson Chemical Company), G. Douglas Collins, Jr., George Crispin, Lee A. Everhart, Douglas E. French, John William Galbraith, Walker S. Green, Mr. and Mrs. Max Hocutt, Donald L. Ifland, Joe R. Lee, Arthur L. Loeb, William R. Machgan, Dorothea H. Marica, Bernard Morton, Daniel W. Muirhead, James O Neill, Charles H. Reeves (Reeves Family Foundation), Donald Mosby Rembert, Stephen K. Salisbury, Mr. and Mrs. Allan Sawatzky, Joseph P. Schirrick, Mr. and Mrs. Thomas W. Singleton (Nehemiah Foundation), Robert W. Smiley, Jr. (The Benefit Capital Companies), Byron L. Stoeser, Joseph J. Syslo, James E. Tempesta, M.D., top dog, Alex T. Van Rensselaer, Lawrence Van Someren, Sr., Mr. and Mrs. Quinten E. Ward, David Westrate, Anne Williamson, Keith S. Wood Robert Bero, Robert J. Birnbach, Richard Bleiberg, John Hamilton Bolstad, Mr. and Mrs. Justin G. Bradburn, Jr., David and Elizabeth Butler, John W. Carpenter, Dr. John P. Cochran, John Cooke, Henry V. Curll, James V. De Santo (DTL Inc.), Chris A. Doose, Mr. and Mrs. Ted C. Earle, Jay Elliott, Eric Englund, Dr. Larry J. Eshelman, Lawrence N. Field, Elton B. Fox (The Fox Foundation), Capt. and Mrs. Maino des Granges, Christopher J. Hackett, John A. Halter, John R. Harper, Frank W. Heemstra, Douglas M. Joy, Michael G. Keller, D.O., Robert N. Kennedy, Richard J. Kossmann, M.D., David Kramer, Steven R. Krause, Gary R. Letsinger, Diana Lewis, J. Edward Martin, Norbert McLuckie, Samuel Mellos, Joseph Edward Paul Melville, Robert Mish, Dr. Dorothy Donnelley Moller, Jerry W. Moore, Keith E. Moore, D.M.D., Reed W. Mower, Brantley I. Newsom, Professor and Mrs. Stanley E. Porter, James A. Reichert, Thomas S. Ross, Conrad Schneiker, Roy Schroeder, William V. Stephens, Charles Toops, II (Mo-Ark Guide Service), Robert H. Walker (Walker Die Casting Company), Mr. and Mrs. Victor Zadikov, Jeannette Zummo

8 Introduction v

9 vi America s Great Depression Acknowledgments While the problem of 1929 has long been of interest to myself as well as most Americans, my attention was first specifically drawn to a study of the Great Depression when Mr. Leonard E. Read, President of the Foundation for Economic Education, asked me, some years ago, to prepare a brief paper on the subject. I am very grateful to Mr. Read for being, in this way, the sparkplug for the present book. Having written the article, I allowed the subject to remain dormant for several years, amid the press of other work. At that point, on the warm encouragement of Mr. Richard C. Cornuelle, now of the Foundation for Voluntary Welfare, I proceeded on the task of expansion to the present work, an expansion so far-reaching as to leave few traces of the original sketch. I owe a particular debt to the Earhart Foundation, without whose aid this study could never have been written. My supreme debt is to Professor Ludwig von Mises, whose monumental theory of business cycles I have used to explain the causes of the otherwise mysterious 1929 depression. Of all Professor Mises s notable contributions to economic science, his business cycle theory is certainly one of the most significant. It is no exaggeration to say that any study of business cycles not based upon his theoretical foundation is bound to be a fruitless undertaking. The responsibility for this work, of course, is entirely my own. vi

10 Introduction vii

11 viii America s Great Depression Contents Introduction to the Fifth Edition...xi Introduction to the Fourth Edition...xvii Introduction to the Third Edition...xxv Introduction to the Second Edition...xxxi Introduction to the First Edition...xxxv PART I: BUSINESS CYCLE THEORY 1 THE POSITIVE THEORY OF THE CYCLE...3 Business cycles and business fluctuations...4 The problem: the cluster of error...8 The explanation: boom and depression...9 Secondary features of depression: deflationary credit contraction...14 Government depression policy: laissez-faire...19 Preventing depressions...23 Problems in the Austrian theory of the trade cycle KEYNESIAN CRITICISMS OF THE THEORY...37 The liquidity trap...39 Wage rates and unemployment SOME ALTERNATIVE EXPLANATIONS OF DEPRESSION: A CRITIQUE...55 General overproduction...56 Underconsumption...57 The acceleration principle...60 viii

12 Introduction ix Dearth of investment opportunities...68 Schumpeter s business cycle theory...72 Qualitative credit doctrines...75 Overoptimism and overpessimism...80 PART II: THE INFLATIONARY BOOM: THE INFLATIONARY FACTORS...85 The definition of the money supply...87 Inflation of the money supply, Generating the inflation, I: reserve requirements...95 Generating the inflation, II: total reserves Treasury currency Bills discounted Bills bought acceptances U.S. government securities THE DEVELOPMENT OF THE INFLATION Foreign lending Helping Britain The crisis approaches THEORY AND INFLATION: ECONOMISTS AND THE LURE OF A STABLE PRICE LEVEL PART III: THE GREAT DEPRESSION: PRELUDE TO DEPRESSION: MR. HOOVER AND LAISSEZ-FAIRE The development of Hoover s interventionism: unemployment The development of Hoover s interventionism: labor relations THE DEPRESSION BEGINS: PRESIDENT HOOVER TAKES COMMAND The White House conferences Inflating credit Public works The New Deal Farm Program...217

13 Contents x More inflation The Smoot Hawley Tariff Hoover in the second half of The public works agitation The fiscal burdens of government THE TRAGIC YEAR The American monetary picture The fiscal burden of government Public works and wage rates Maintaining wage rates Immigration restrictions Voluntary relief Hoover in the last quarter of The spread of collectivist ideas in the business world THE HOOVER NEW DEAL OF The tax increase Expenditures versus economy Public works agitation The RFC Governmental relief The inflation program The inflation agitation Mr. Hoover s war on the stock market The home loan bank system The bankruptcy law The fight against immigration THE CLOSE OF THE HOOVER TERM The attack on property rights: the final currency failure Wages, hours, and employment during the depression Conclusion: the lessons of Mr. Hoover s record APPENDIX: GOVERNMENT AND THE NATIONAL PRODUCT, INDEX...349

14 xi America s Great Depression TABLES TABLE 1: Total Money Supply of the United States, TABLE 2: Total Dollars and Total Gold Reserves...94 TABLE 3: Member Bank Demand Deposits...98 TABLE 4: Demand and Time Deposits...99 TABLE 5: Time Deposits TABLE 6: Member Bank Reserves and Deposits TABLE 7: Changes in Reserves and Causal Factors TABLE 8: Per Month Changes in Reserves and Causal Factors TABLE 9: Factors Determining Bank Reserves July October TABLE I: National Product TABLE II: Income Originating in Government TABLE III: Private Product TABLE IV: Government Expenditures TABLE V: Expenditures of Government Enterprises TABLE VI: Expenditures of Government and Government Enterprises TABLE VII: Receipts of Government and Government Enterprises TABLE VIII: Government and the Private Product...347

15 xii America s Great Depression Introduction to the Fifth Edition The Wall Street collapse of September October 1929 and the Great Depression which followed it were among the most important events of the twentieth century. They made the Second World War possible, though not inevitable, and by undermining confidence in the efficacy of the market and the capitalist system, they helped to explain why the absurdly inefficient and murderous system of Soviet communism survived for so long. Indeed, it could be argued that the ultimate emotional and intellectual consequences of the Great Depression were not finally erased from the mind of humanity until the end of the 1980s, when the Soviet collectivist alternative to capitalism crumbled in hopeless ruin and the entire world accepted there was no substitute for the market. Granted the importance of these events, then, the failure of historians to explain either their magnitude or duration is one of the great mysteries of modern historiography. The Wall Street plunge itself was not remarkable, at any rate to begin with. The United States economy had expanded rapidly since the last downturn in 1920, latterly with the inflationary assistance of the bankers and the federal government. So a correction was due, indeed overdue. The economy, in fact, ceased to expand in June, and it was inevitable that this change in the real economy would be reflected in the stock market. The bull market effectively came to an end on September 3, 1929, immediately the shrewder operators returned from vacation and looked hard at the underlying figures. Later rises were merely xii

16 Introduction xiii hiccups in a steady downward trend. On Monday October 21, for the first time, the ticker tape could not keep pace with the news of falls and never caught up. Margin calls had begun to go out by telegram the Saturday before, and by the beginning of the week speculators began to realize they might lose their savings and even their homes. On Thursday, October 24, shares dropped vertically with no one buying, and speculators were sold out as they failed to respond to margin calls. Then came Black Tuesday, October 29, and the first selling of sound stocks to raise desperately needed liquidity. So far all was explicable and might easily have been predicted. This particular stock market corrective was bound to be severe because of the unprecedented amount of speculation which Wall Street rules then permitted. In ,548,707 customers had accounts with America s 29 stock exchanges. In a population of 120 million, nearly 30 million families had an active association with the market, and a million investors could be called speculators. Moreover, of these nearly two-thirds, or 600,000, were trading on margin; that is, on funds they either did not possess or could not easily produce. The danger of this growth in margin trading was compounded by the mushrooming of investment trusts which marked the last phase of the bull market. Traditionally, stocks were valued at about ten times earnings. With high margin trading, earnings on shares, only one or two percent, were far less than the eight to ten percent interest on loans used to buy them. This meant that any profits were in capital gains alone. Thus, Radio Corporation of America, which had never paid a dividend at all, went from 85 to 410 points in By 1929, some stocks were selling at 50 times earnings. A market boom based entirely on capital gains is merely a form of pyramid selling. By the end of 1928 the new investment trusts were coming onto the market at the rate of one a day, and virtually all were archetype inverted pyramids. They had high leverage a new term in 1929 through their own supposedly shrewd investments, and secured phenomenal stock exchange growth on the basis of a very small plinth of real growth. United Founders Corporation, for instance, had been created by a bankruptcy with

17 Introduction to the Fifth Edition xiv an investment of $500, and by 1929 its nominal resources, which determined its share price, were listed as $686,165,000. Another investment trust had a market value of over a billion dollars, but its chief asset was an electric company which in 1921 had been worth only $6 million. These crazy trusts, whose assets were almost entirely dubious paper, gave the boom an additional superstructure of pure speculation, and once the market broke, the high leverage worked in reverse. Hence, awakening from the pipe dream was bound to be painful, and it is not surprising that by the end of the day on October 24, eleven men well-known on Wall Street had committed suicide. The immediate panic subsided on November 13, at which point the index had fallen from 452 to 224. That was indeed a severe correction but it has to be remembered that in December 1928 the index had been 245, only 21 points higher. Business and stock exchange downturns serve essential economic purposes. They have to be sharp, but they need not be long because they are self-adjusting. All they require on the part of the government, the business community, and the public is patience. The 1920 recession had adjusted itself within a year. There was no reason why the 1929 recession should have taken longer, for the American economy was fundamentally sound. If the recession had been allowed to adjust itself, as it would have done by the end of 1930 on any earlier analogy, confidence would have returned and the world slump need never have occurred. Instead, the stock market became an engine of doom, carrying to destruction the entire nation and, in its wake, the world. By July 8, 1932, New York Times industrials had fallen from 224 at the end of the initial panic to 58. U.S. Steel, the world s biggest and most efficient steel-maker, which had been 262 points before the market broke in 1929, was now only 22. General Motors, already one of the best-run and most successful manufacturing groups in the world, had fallen from 73 to 8. These calamitous falls were gradually reflected in the real economy. Industrial production, which had been 114 in August 1929, was 54 by March 1933, a fall of more than half, while manufactured durables fell by 77 percent, nearly four-fifths. Business construction fell from $8.7 billion in 1929 to only $1.4 billion in 1933.

18 Introduction xv Unemployment rose over the same period from a mere 3.2 percent to 24.9 percent in 1933, and 26.7 percent the following year. At one point, 34 million men, women, and children were without any income at all, and this figure excluded farm families who were also desperately hit. City revenues collapsed, schools and universities shut or went bankrupt, and malnutrition leapt to 20 percent, something that had never happened before in United States history even in the harsh early days of settlement. This pattern was repeated all over the industrial world. It was the worst slump in history, and the most protracted. Indeed there was no natural recovery. France, for instance, did not get back to its 1929 level of industrial production until the mid-1950s. The world economy, insofar as it was saved at all, was saved by war, or its preparations. The first major economy to revitalize itself was Germany s, which with the advent of Hitler s Nazi regime in January, 1933, embarked on an immediate rearmament program. Within a year, Germany had full employment. None of the others fared so well. Britain began to rearm in 1937, and thereafter unemployment fell gradually, though it was still at historically high levels when war broke out on September 3, That was the date on which Wall Street, anticipating lucrative arms sales and eventually U.S. participation in the war, at last returned to 1929 prices. It is a dismal story, and I do not feel that any historian has satisfactorily explained it. Why so deep? Why so long? We do not really know, to this day. But the writer who, in my judgment, has come closest to providing a satisfactory analysis is Murray N. Rothbard in America s Great Depression. For half a century, the conventional, orthodox explanation, provided by John Maynard Keynes and his followers, was that capitalism was incapable of saving itself, and that government did too little to rescue an intellectually bankrupt market system from the consequences of its own folly. This analysis seemed less and less convincing as the years went by, especially as Keynesianism itself became discredited. In the meantime, Rothbard had produced, in 1963, his own explanation, which turned the conventional one on its head. The severity of the Wall Street crash, he argued, was not due to the unrestrained license of a freebooting capitalist system, but to government

19 Introduction to the Fifth Edition xvi insistence on keeping a boom going artificially by pumping in inflationary credit. The slide in stocks continued, and the real economy went into freefall, not because government interfered too little, but because it interfered too much. Rothbard was the first to make the point, in this context, that the spirit of the times in the 1920s, and still more so in the 1930s, was for government to plan, to meddle, to order, and to exhort. It was a hangover from the First World War, and President Hoover, who had risen to worldwide prominence in the war by managing relief schemes, and had then held high economic office throughout the twenties before moving into the White House itself in 1929, was a born planner, meddler, orderer, and exhorter. Hoover s was the only department of the U.S. federal government which had expanded steadily in numbers and power during the 1920s, and he had constantly urged Presidents Harding and Coolidge to take a more active role in managing the economy. Coolidge, a genuine minimalist in government, had complained: For six years that man has given me unsolicited advice all of it bad. When Hoover finally took over the White House, he followed his own advice, and made it an engine of interference, first pumping more credit into an already overheated economy and, then, when the bubble burst, doing everything in his power to organize government rescue operations. We now see, thanks to Rothbard s insights, that the Hoover Roosevelt period was really a continuum, that most of the innovations of the New Deal were in fact expansions or intensifications of Hoover solutions, or pseudo-solutions, and that Franklin Delano Roosevelt s administration differed from Herbert Hoover s in only two important respects it was infinitely more successful in managing its public relations, and it spent rather more taxpayers money. And, in Rothbard s argument, the net effect of the Hoover Roosevelt continuum of policy was to make the slump more severe and to prolong it virtually to the end of the 1930s. The Great Depression was a failure not of capitalism but of the hyperactive state. I will not spoil the reader s pleasure by entering more deeply into Rothbard s arguments. His book is an intellectual tour de force,

20 Introduction xvii in that it consists, from start to finish, of a sustained thesis, presented with relentless logic, abundant illustration, and great eloquence. I know of few books which bring the world of economic history so vividly to life, and which contain so many cogent lessons, still valid in our own day. It is also a rich mine of interesting and arcane knowledge, and I urge readers to explore its footnotes, which contain many delicious quotations from the great and the foolish of those days, three-quarters of a century ago. It is not surprising that the book is going into yet another edition. It has stood the test of time with success, even with panache, and I feel honored to be invited to introduce it to a new generation of readers. PAUL JOHNSON 1999

21 Introduction to the Fourth Edition There seems to be a cycle in new editions of this book. The second edition was published in the midst of the inflationary recession, the third in the mighty inflationary depression of The economy is now in the midst of another inflationary depression at least as severe, and perhaps even more so, than the contraction, which had been the worst since the 1930s. The confusion and intellectual despair we noted in the introduction to the third edition has now intensified. It is generally conceded that Keynesianism is intellectually bankrupt, and we are treated to the spectacle of veteran Keynesians calling for tax increases during a severe depression, a change of front that few people consider worth noting, much less trying to explain. Part of the general bewilderment is due to the fact that the current, severe depression followed very swiftly after the recession of , so that it begins to look that the fitful and short-lived recovery of may have been but an interlude in the midst of a chronic recession that has lasted since Production has been stagnating for years, the auto industry is in bad shape, thrift institutions are going bankrupt by the week, and unemployment has reached its highest point since the 1930s. A notable feature of the depression is that, in contrast to , the drift of economic thought and policy has not been toward collectivist planning but toward alleged free-market policies. The Reagan administration began with a fanfare of allegedly drastic budget and tax cuts, all of which lightly masked massive xviii

22 Introduction xix increases in taxes and spending, so that President Reagan is now presiding over the largest deficits and the highest budgets in American history. If the Keynesians and now the Reagan administration are calling for tax increases to narrow the deficit, we find the equally bizarre spectacle of veteran classical liberal economists in the early days of the same administration apologizing for government deficits as being unimportant. While it is theoretically true that deficits financed by sale of bonds to the public are not inflationary, it is also true that the huge deficits (a) exert enormous political pressure on the Fed to monetize the debt; and (b) cripple private investment by crowding out private savings and channeling them into unproductive and wasteful government boondoggles which will also impose higher taxes on future generations. The twin hallmarks of Reaganomics so far have been huge deficits and remarkably high interest rates. While deficits are often inflationary and always pernicious, curing them by raising taxes is equivalent to curing an illness by shooting the patient. In the first place, politically higher taxes will simply give the government more money to spend, so that expenditures and therefore deficits are likely to rise still further. Cutting taxes, on the other hand, puts great political pressure on Congress and the administration to follow suit by cutting spending. But more directly, it is absurd to claim that a tax is any better from the point of view of the consumer taxpayer than a higher price. If the price of a product rises due to inflation, the consumer is worse off, but at least he still enjoys the services of the product. But if the government raises taxes in order to stave off that price rise, the consumer is getting nothing in return. He simply loses his money, and obtains no service for it except possibly being ordered around by government authorities he has been forced to subsidize. Other things being equal, a price rise is always preferable to a tax. But finally, inflation, as we point out in this work, is not caused by deficits but by the Federal Reserve s increase of the money supply. So that it is quite likely that a higher tax will have no effect on inflation whatsoever. Deficits, then, should be eliminated, but only by cutting government spending. If taxes and government spending are both

23 Introduction to the Fourth Edition xx slashed, then the salutary result will be to lower the parasitic burden of government taxes and spending upon the productive activities of the private sector. This brings us to a new economic viewpoint that has emerged since our last edition supply-side economics and its extreme variant, the Laffer Curve. To the extent that supply-siders point out that tax reductions will stimulate work, thrift, and productivity, then they are simply underlining truths long known to classical and to Austrian economics. But one problem is that supply-siders, while calling for large income-tax cuts, advocate keeping up the current level of government expenditures, so that the burden of shifting resources from productive private to wasteful government spending will still continue. The Laffer variant of the supply-side adds the notion that a decline in income tax rates will so increase government revenues from higher production and income that the budget will still be balanced. There is little discussion by Lafferites, however, of how long this process is supposed to take, and there is no evidence that revenue will rise sufficiently to balance the budget, or even will rise at all. If, for example, the government should now raise income tax rates by 30 percent, does anyone really believe that total revenue would fall? Another problem is that one wonders why the overriding goal of fiscal policy should be to maximize government revenue. A far sounder objective would be to minimize the revenue and the resources siphoned off to the public sector. At any rate, the Laffer Curve has scarcely been tested by the Reagan administration, since the much-vaunted income tax cuts, in addition to being truncated and reduced from the original Reagan plan, were more than offset by a programmed rise in Social Security taxes and by bracket creep. Bracket creep exists when inflation wafts people into higher nominal (but not higher real) income brackets, where their tax rates automatically increase. It is generally agreed that recovery from the current depression has not yet arrived because interest rates have remained high, despite the depression-borne drop in the rate of inflation. The Friedmanites had decreed that real interest rates (nominal rates

24 Introduction xxi minus the rate of inflation) are always hovering around 3 percent. When inflation fell sharply, therefore, from about 12 percent to 5 percent or less, monetarists confidently predicted that interest rates would fall drastically, spurring a cyclical recovery. Yet, real interest rates have persisted at far higher than 3 percent. How could this be? The answer is that expectations are purely subjective, and cannot be captured by the mechanistic use of charts and regressions. After several decades of continuing and aggravated inflation, the American public has become inured to expect further chronic inflation. Temporary respites during deep depressions, propaganda and political hoopla, can no longer reverse those expectations. As long as inflationary expectations persist, the expected inflation incorporated into interest rates will remain high, and interest rates will not fall for any substantial length of time. The Reagan administration knew, of course, that inflationary expectations had to be reversed, but where they miscalculated was relying on propaganda without substance. Indeed, the entire program of Reaganomics may be considered a razzle-dazzle of showmanship about taxes and spending, behind which the monetarists, in control of the Fed and the Treasury Department, were supposed to gradually reduce the rate of money growth. The razzle-dazzle was supposed to reverse inflationary expectations; the gradualism was to eliminate inflation without forcing the economy to suffer the pain of recession or depression. Friedmanites have never understood the Austrian insight on the necessity of a recession to liquidate the unsound investments of the inflationary boom. As a result, the attempt of Friedmanite gradualism to fine-tune the economy into disinflation-without-recession went the way of the similar Keynesian fine-tuning which the monetarists had criticized for decades. Friedmanite fine-tuning brought us temporary disinflation accompanied by another severe depression. In this way, monetarism fell between two stools. The Fed s cutback in the rate of money growth was sharp enough to precipitate the inevitable recession, but much too weak and gradual to bring inflation to an end once and for all. Instead of a sharp but short recession to liquidate the malinvestments of the preceding boom,

25 Introduction to the Fourth Edition xxii we now have a lingering chronic recession coupled with a grinding, continuing stagnation of productivity and economic growth. A pusillanimous gradualism has brought us the worst of both worlds: continuing inflation plus severe recession, high unemployment, and chronic stagnation. One of the reasons for the chronic recession and stagnation is that the market learns. Inflationary expectations are a response learned after decades of inflation, and they place an inflationary premium on pure interest rates. As a result, the time-honored method of lowering interest rates the Fed s expanding the supply of money and credit cannot work for long because that will simply raise inflationary expectations and raise interest rates instead of lowering them. We have gotten to the point where everything the government does is counterproductive; the conclusion, of course, is that the government should do nothing at all, that is, should retire quickly from the monetary and economic scene and allow freedom and free markets to work. It is, furthermore, too late for gradualism. The only solution was set forth by F.A. Hayek, the dean of the Austrian School, in his critique of the similarly disastrous gradualism of the Thatcher regime in Great Britain. The only way out of the current mess is to slam on the brakes, to stop the monetary inflation in its tracks. Then, the inevitable recession will be sharp but short and swift, and the free market, allowed its head, will return to a sound recovery in a remarkably brief time. Only a drastic and credible slamming of the brakes can truly reverse the inflationary expectations of the American public. But wisely the public no longer trusts the Fed or the federal government. For a slamming on of the brakes to be truly credible, there must be a radical surgery on American monetary institutions, a surgery similar in scope to the German creation of the rentenmark which finally ended the runaway inflation of One important move would be to denationalize the fiat dollar by returning it to be worth a unit of weight of gold. A corollary policy would prohibit the Federal Reserve from lowering reserve requirements or from purchasing any assets ever again;

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