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Shaken by the U.S. Stock Market crash in the fall of 1929, countries around the globe slipped into an economic recession that quickly became the historical Great Depression of the 1930s. Between 1929 and 1932, global GDP fell roughly 15%, and unemployment in the United States reached a peak high of nearly 25% in 1933. There are two competing mainstream views of what led to the depression. The first is the Keynesian view, which focused on low demand from consumers and insufficient spending by the government. The second view is that of the Monetarists, who argued that a lack of money in the system, caused the Depression. However, there is a third theory that bears some discussion, called the Austrian Theory. This theory, like the first two, places blame on the actions of the Federal government, however taking the opposite approach in arguing that interference of the government contributed to inflation during the 1920’s that led to later economic issues.

The Austrian school of economics comes from nineteenth century economist Carl Menger and is based on the concept than human choices are what drives an economy.[1] The theory is based on human science as opposed to physical science, arguing that while data can give us insights to human actions and interactions, it ultimately cannot determine the deeper meanings that impact the decisions of mankind. George Mason economics professor Peter J. Boettke writes that if the principles of Austrian theory are true, then “economic theory would be grounded in verbal logic and empirical work focused on historical narratives,” and “severe doubt would be raised about the ability of government officials to intervene optimally within the economic system, let alone to rationally manage the economy.”[2]

And this is where the Austrian Theory steps in to place the blame of the Great Depression on the Federal government. Hansjörg Klausinger cites that Austrian economist Friedrich Hayek saw three factors contributing to this. The first is that of monetary overinvestment, stimulated by U.S. policy during the boom of the 1920s was the main cause of the depression to begin with. Secondly, policies of high expenditure and high taxation caused a shortage of capital prior to the depression itself. And finally, these same policies extended the depression longer than necessary. Specifically speaking, the government attempted to stabilize falling prices and in doing so instead created inflation.[3]

Critics of the Austrian Theory such as economist Milton Friedman and Ben Bernanke cite that President Hoover was influenced by “liquidationism” arguments by Hayek and others who felt that the government should just let the economic downturn play out and correct itself. This view is incorrect, according to Lawrence White of the University of Missouri, writing in the Journal of Money, Credit, and Banking.  White argues that Hoover would not have been influenced by Hayek at the time, and that “Hayak’s monetary policy norm in fact called for the stabilization of nominal income, and thus for central bank action to prevent its contraction.”[4]

Later on, Austrian economic theorist Murray Rothbard’s 1963 book America’s Great Depression would lay out the Austrian Theory in more detail. Rothbard continued the argument that government intervention was the cause of the depression and cited Hoover’s continually meddling in the economy as a key reason. One idea criticized by Rothbard was wage maintenance, the idea that higher wages would maintain higher demand during a recession.[5] In the introduction to the fifth edition of Rothbard’s book, historian Paul Johnson states “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.”

This essay was composed to fulfill requirements for a graduate level History course.

[1]Peter J. Boettke, “Austrian School of Economics,” The Library of Economics and Liberty. Accessed April 23, 2021.  


[3]Hansjörg Klausinger, “Schumpter and Hayek: Two Views of the Great Depression Reexamined.” History of Economic Ideas 3, no. 3 (1995): 108-110.

[4]Lawrence White, “Did Hayek and Robbins Deepen the Great Depression?” Journal of Money, Credit and Banking 40, no. 4 (2008): 765.  

[5]Johnathan D. Rose, “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression.” The Journal of Economic History 70, no. 4 (2010): 847.  

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