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The Coming Great Depression
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&
The Fall of Fiat Standards
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Explaining the Business Cycle from an Austrian Perspective

searchwinginsafresearchwingins November 17, 2010

afresearchwinginsafresearchwin Author: Dr. Akbar Ali Khan

Committee: Economics

ginsafresearchwinginsafresearch Dossier # 003

Version # 001

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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards

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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards

Table of Contents

INTRODUCTION ............................................................................................................................... 4
THINGS THAT NEED TO BE EXPLAINED .............................................................................................. 5
TIME PREFERENCE THEORY AND THE PURE RATE OF INTEREST ....................................................... 5
ELEMENTS OF A CAPITAL BASED MACRO-ECONOMIC FRAMEWORK ................................................... 6
1. THE LOANABLE FUNDS MARKET .............................................................................................. 6
2. PRODUCTION POSSIBILITY FRONTIER (PPF) ............................................................................ 7
3. STRUCTURE OF PRODUCTION.................................................................................................. 8
4. STAGE-SPECIFIC LABOR MARKET.......................................................................................... 10
APPLICATIONS OF AUSTRIAN CAPITAL BASED MACROECONOMIC FRAMEWORK ................................ 11
1. SUSTAINABLE GROWTH PATTERN .......................................................................................... 11
2. UNSUSTAINABLE GROWTH PATTERN - THE BUBBLES AND THE BUSTS ...................................... 12
ROAD TO THE PRESENT: A BRIEF REVIEW ..................................................................................... 15
CONCLUSION ................................................................................................................................ 19
ABOUT THE AUTHOR ..................................................................................................................... 20
BIBLIOGRAPHY ............................................................................................................................. 21

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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
The Coming
Great
Depression &
The Fall of Fiat
Standards
Explaining the Business Cycle from
an Austrian Perspective
In wake of 2008 Bust of the Sub-Prime Housing
Mortgage industry, United States found itself in
the midst of an economic recession. President
Obama predictably acted in line with the
recommendations of mainstream economists to
embark upon a trillion dollars bailout package
for the failing banks and mortgage institutions.
This, from the point of view of contemporary
Keynesian and Friedmanite schools of thought
saved the economy from a ‘depression’; but
from the Austrian school’s perspective it just
gave a dose of Morphine to a chronic addict, so
as to cajole him up for a while but ultimately
preparing him for a much bigger over hang.
This paper tends to analyze the Austrian
perspective on the bubble and the busts to
show how the fiscal stimulus so triumphantly
propounded upon has made the Bubble bigger
and uglier beyond proportions so that its soon
arriving Bust will leave the Government of
United States with only two very painful
options--- 1) An outright Debt Default or 2)
Hyperinflation, which will cause the collapse of
the paper dollar’ standard. Of special
importance is the Keynesian myth that WWII
catapulted the US out of the Great Depression
so that recourse to war, of a much larger scale,
will be a serious possibility when such
economic distortions eventually manifest
themselves.
Introduction
The Austrian School of thought came into
prominence when Carl Menger (1840-1921)
challenged the Classical Cost of Production
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i
theory with that of Marginal Utility. Also, in the
early twentieth century when most of the
Western world was merrily riding the tide of
Socialism, it was the Austrian School that made
significant contributions to not only prove that
the Social and Moral system suggested by
Communists was unnatural, unworkable,
corrupt and would lead to a condition much
worse than the one it plans to address under
Capitalism; but that Central economic planning
sailing the winds of economic egalitarianism
was doomed to failure. Ludwig Von Mises
(1881-1973), amongst identifying a myriad of
loopholes in Socialism, had actually pinned
down Engel’s Utopians and Marxist
Communists to the impossibility of economic
calculations under their proposed schemes,
which would subsequently subject people to
even more misery.ii History has not proven him
otherwise.
Pertinent to our concern here is the remarkable
contribution made by the Austrian School in
explaining the mysterious Cycles of
Businesses. Since the inception of Federal
Reserves in 1913, United States has
undergone a series of recessions.iii Well known
amongst these is the Great depression of 1929,
the Stock Market Crash of 1973, the Dot Com
Bust of 2001 and recent Housing Mortgage
bust of 2008. What is not well known to many
about these bubbles and the subsequent busts
is that the Austrian school has ably been
identifying the bubbles and predicting the busts
exactly during the time of the bubble as if they
were gazing into a magic ball. Though mocked
at by their contemporaries and the media at
that time; none can now dispute the claims of
Ron Paul and Peter Schiff, when as early as in
2003 they had warned about the impending
financial disaster which occurred in 2008.iv
The reason that Austrian economists have
efficiently been able to describe the Business
Cycles is because of the sound knowledge of
Time preference theory integrated
synchronously with the macroeconomic
framework for natural market processes. One is
then able to realize how easy credit policies of
the Fed (or any Central Bank for that matter)
brings about an expansion of monetary base
through the Fractional Reserve banking system
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
to cause or prolong the period of artificial
unsustainable prosperity, the bubble.
In order to better comprehend the matter at
hand we will have to take a methodological
approach as suggested by F.A. Hayek which in
summary states that ‘even before we can ask
how things might go wrong, we must first
explain how they could ever go right’.v So
initially, we may take to the Austrian Time
Preference theory and the Macroeconomic
Framework as to how a free market would
normally function followed by discussion as to
how the market is manipulated by the banking
system to cause the dreaded cycles of
business.
Things that need to be explained
There are certain phenomena as pointed out by
Professor Murray N Rothbard, which need to
vi
be explained regarding the business cycles.
These are,
1. The explanation of depressions will not
be found by referring to any specific or
even general business fluctuations per
se. The main problem that a theory of
depression must explain is: why is
there a sudden general cluster of
business errors? This is the first
question for any cycle theory. Business
activity moves along nicely with most
business firms making handsome
profits. Suddenly, without warning,
conditions change and the bulk of
business firms are experiencing losses;
they are suddenly revealed to have
made grievous errors in forecasting.
2. Another common feature of the
business cycle also calls for an
explanation. It is the well-known fact
that capital-goods industries fluctuate
more widely than do the consumer-
goods industries. The capital-goods
industries—especially the industries
supplying raw materials, construction,
and equipment to other industries—
expand much further in the boom, and
are hit far more severely in the
depression.
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3. A third feature of every boom that
needs explaining is the increase in the
quantity of money in the economy.
Conversely, there is generally, though
not universally, a fall in the money
supply during the depression.
Time Preference Theory And The Pure
Rate of Interest
Let us suppose an economy with a given
supply of money. Some of the money is spent
in consumption; the rest is saved and invested
in a mighty structure of capital, in various
orders of production. The proportion of
consumption to saving or investment is
determined by people’s time preferences—the
degree to which they prefer present to future
satisfactions.
People’s Time Preference =
Amount of Consumption
Amount of Savings / Investments
Less the people prefer satisfactions in the
present, meaning that they save more, the
lower will their time preference rate be, and the
lower therefore will be the pure interest rate,
which is determined by the time preferences of
the individuals in society. A lower time-
preference rate will be reflected in greater
proportions of investment to consumption, a
lengthening of the structure of production, and
a building-up of capital. Higher time
preferences, on the other hand, will be reflected
in higher pure interest rates and a lower
proportion of investment to consumption. The
final market rates of interest reflect the pure
interest rate plus or minus entrepreneurial risk
and purchasing power components. Varying
degrees of entrepreneurial risk bring about a
structure of interest rates instead of a single
uniform one, and purchasing power
components reflect changes in the purchasing
power of the money-unit, as well as in the
specific position of an entrepreneur in relation
to price changes. The crucial factor, however,
is the pure interest rate. This interest rate first
manifests itself in the “natural rate” or what is
generally called the going “rate of profit.” This
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
going rate is reflected in the interest rate on the
loan market, a rate which is determined by the
going profit rate.
vii
Elements of a Capital Based Macro-
Economic Framework
The Austrian model for macroeconomic
framework takes into account four elements
with time integrated as an endogenous
variable, as explained by Professor Roger W.
viii
Garrison. These include:
1. The Loanable Funds Market
2. Production Possibility Frontier
3. Structure of Production
4. The Stage Specific Labor Market
1. The Loanable Funds Market
It shows the amount of savings available to
entrepreneurs over time for investment
purposes. Diagrammatically it can be
expressed as shown in Figure-1. ix
Figure-1: The Loanable Funds Market
The simplified diagram shows interest rates
along the y-axis and supply/amount of
savings/investments along the x-axis, denoted
by S at any given time. D is the demand curve,
which shows the (pure) interest rate borrowers
(entrepreneurs) are willing to pay at that time
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for the given quantity of fund. Intersection of
supply and demand curve will determine the
equilibrium point for the rate of interest. Figure-
2 shows what happens when people shift their
time preferences in favor of more consumption
or more savings. This shift would be reflected
by change in interest rates, which would move
accordingly with the amount of funds available
for loaning activities.
Figure-2: Effect of Change in Savings /
Investments on Interest Rates (Pure)
An increase in the amount of savings from S to
S+ would cause the interest rates to fall from I
to I- as intersection point will slide down along
the demand curve to its new equilibrium,
whereas a decrease from S to S- would cause
the interest rates to jump from I to I+.
Thus we observe that interest rate is an
indicator for the amount of savings available for
loaning activities. An increase in savings would
signal a decrease in pure rate of interest
whereas a decrease in savings would signal an
increase the pure rate of interest. From the
Austrian perspective interest rate is the key;
rather than some indefinable ‘waxing and
waning animal spirit’ (according to Keynes). As
investments are limited by the actual amount of
savings that are available, it has important
implications on entrepreneurial activity and
decisions viz-a-viz the interest rate.
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
2. Production Possibility Frontier (PPF)
The PPF shows alternative uses of economy’s
resources and their allocation to a particular
use. It leaves us with a tradeoff between
consumption and investment goods, that is, you
can get some of one only at the expense of
other. Diagrammatically it can be expressed as
follows, Figure-3.
Figure-3: The Production Possibility Frontier
The PPF diagram shows Investments along x-
axis and Consumption along y-axis. The PPF
curve is bowed out as some resources are
better at producing consumer goods rather than
investment goods and vice versa.
Under favorable conditions the intersection will
occur at the PPF and markets will function
along the curve, which then shows efficient and
possible use of available economic resources
at the given levels of investments. On the
frontier the economy is said to be fully
employed. If the intersection point is below the
PPF curve then the markets are said to be in a
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recession whereas when the intersection is
above the PPF at given level of investments; it
is said to be overheating. Though under normal
conditions, it cannot breach the PPF unless
x
there is an increase in investments.
Economies will be identified as stable if the
maintenance/replacement investments equal
total/gross investments. In healthy or growing
economies there will always be net positive
investments left out of the gross investments
available for future growth of the economy. Net
positive investments are the result of increased
savings or decreasing time preferences of the
people that allows the economy to grow. See
Figure-4.
Figure-4: Growth of Economy due to availability
of Net Positive Investments
When the available savings increase or time
preferences for present goods decrease even
further, the newly derived investments as a
result will allow the economy to expand even
further, Figure-5. This will also, in the longer
run allow for an increase in consumptive power
of an economy as it becomes oriented towards
use of its available resources.
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards

Figure-6: Increased Net Investment due to

increased Savings signaled via low interest rate

3. Structure of Production

This is a temporal structure, which shows

Figure-5: Effect of Increased Savings on
Growth of Economy different stages of production where the output
of one stage serves as an input to another
stage. Goods move through the structure of
Thus, we see that an increase in savings cause production from one stage onto the other till
they are available to the consumer. The
more of net positive investments and hence
more growth, causing the economy to grow structure of production is entirely unique to the
Austrian school. Diagrammatically it can be
even faster. An opposite relation would occur in
expressed by the Hayekian triangle as
case of more consumption, the economy would xi
formulated by F.A Hayek. See Figure-7.
recede as it becomes more consumer-service
oriented rather than manufacture oriented. To
know how possible can actually happen in a
market economy and show how time
preferences esp. changes in time preferences
effect decisions in the investment community
we have to take into account the rate of
interest, which is the key price signal for
available savings and subsequent investments
that occur. See Figure-6.

Figure-7: Structure of Production

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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards

Austrian school views production as how far

removed it is from consumption. Consumer
goods produced which are nearly available for
consumption constitutes lower orders of capital
or late stages of production whereas Capital
goods which are far removed from consumption
are called higher orders of capital or early
stages of production. The Hayekian Triangle at
its base shows time required produce a certain
good. Consumption is marked along the vertical
side of the right angle whereas the hypotenuse
curve shows rate of interest, which expresses
itself as increasing cost relative to time.

In order to visualize the effect of decreased or Figure-8b: Effect of decreased savings and
increased time preferences on the structure of increased consumption on structure of
production we will consider the following production
diagrams, Figure-8a and Figure-8b.

Whereas, an increase in consumption would

cause the exact opposite effects, that is,
capitalists near consumption stages will bid
away capital resources and labor services from
remote stages of production towards stages
relatively nearer to consumption. An increase in
interest rate would cause the structure of
production to shorten through time. Also, the
structure of production fluctuates along with
PPF. In future oriented economies, with net
positive investments PPF and structure will
show coherent patterns of growth. See Figure-
9.

Figure-8a: Effect of increased savings and

decreased consumption on structure of
production

We may see from the figure above that the

change in time preferences in favor of more
savings creates profit opportunities in early
stages of production that will cause the
capitalists to bid away capital and labor
services from the stages of production relatively
close to the final (consumption) stage and into
stages relatively remote from the consumption
stage. They are also induced by the lowering of
the interest rate to create additional stages that
had previously been unprofitable. There is re-
allocation of resources within the production
triangle.

Figure-9: Growing PPF and Structure of

Production

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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
4. Stage-Specific Labor Market
Austrian School takes a neo classical approach
towards the labor market where wage rates are
determined by supply and demand of labor,
with an exception that it is stage specific. This
means that the labor market will react
differentially to changes in investment patterns.
Figure-10 gives an expression of the labor
market.
Figure-10: The Labor Market
In the given diagram for labor market, wage
rates (W) are given y-axis and quantity/number
of labor force available (N) along x-axis
denoted by S. D represent the demand curve
for labor. The intersection of supply and
demand will determine the wage rates that are
offered to laborers by their employers.
We may integrate the structure of production
along with labor market in order to visualize the
effect of shift in time preferences on the stage-
specific labor market model. Thus a decrease
in time preference of the people (increased
savings) would be presented as in Figure-11.
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Figure-11: Effect of Increased Savings on
Stage Specific Labor Market
The figure-11 shows that as a result of
decreased consumption the demand for labor
near the late stages of production will
necessarily decline and will lead to
unemployment at that stage. This according to
Keynes will cause a positive destructive cycle
causing the unregulated markets to fall upon
itself. But what he conveniently ignores and
what Austrians have neatly pointed out is that
though there may be unemployment; at later
stages of production but it will necessarily be
temporary as declining interest rates due to
increased saving in turn will cause a
lengthening of the structure of production. All
unemployment will be frictional as resources
are soaked up by higher orders of production.
An opposite chain of events would occur if
consumption were to increase i.e. demand for
labor services would increase near the
consumption stage and would bid away
resources for the early stages of production.
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
Applications of Austrian Capital Based
Macroeconomic Framework
The elements of a macroeconomic framework
can be integrated to show that growth occurring
on a market will be Sustainable when it is
supported by savings and Unsustainable when
supported by artificial expansion of credit by the
banking system. The integrated model is given
as follows. See Figure 12.
Figure-12: Capital Based Macroeconomic
Framework
1. Sustainable Growth Pattern
In the Austrian Macroeconomic framework the
elements appear to function in tandem in a
coherent manner. When people decide to save,
it apparently sends two conflicting signals to the
economy;
1) Decreased consumption dampens
demand for investment goods that are
in close temporal proximity to
consumer goods. This is called the
demand- derived effect.
2) A reduced interest rate, which means
lower borrowing costs; stimulates the
demand for investment goods that are
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temporally away remote from
consumable output. This is called
interest –rate or time-discount effect.
Derived demand and time discount are only in
conflict if ‘investment’ is conceived as a simple
aggregate as in C+I+G, as in the Keynesian
cross. Austrian model for Capital-based
macroeconomics is distinguished by its
propitious disaggregation, which brings into
view both the problem of inter-temporal
resource allocation and the potential for a
market solution. xii
F. A. Hayek showed that a coordination of
saving and investment decisions could be
achieved by market-governed movements in
interest rates. He also recognized that this
aspect of the market economy is especially
vulnerable to the manipulation of interest rates
by the central bank.
Increased savings results in re-allocation of
resources among the stages of production. The
two effects i.e. demand derived and time
discount have their separate but complimentary
effects on the capital structure. See Figure-13.
Figure-13: Effects of Increased and Decreased
Savings on Capital based Macroeconomic
Framework
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards

1) Demand Derived effect: A decreased this prosperity yielded by artificial credit

demand for goods dampens expansion will necessarily be temporary and
investment activities in late stages of will need correction as there are no savings to
back it up and consumption and investment are
production reducing the height of
pitched into a tug of war which will snap the
Hayekian Triangle. economy into a depression once the supply of
credit runs out. All malinvestments will then be
2) Time discount effect: A reduced rate of liquidated.
interest stimulates investment activities
in the early stages of production,
increasing the base of the Hayekian
triangle.

Increased savings (in green) then have a

positive effect on both the magnitude of
investment aggregate and temporal pattern of
capital creation, achieving a pattern of growth
that is sustainable. Decreased savings or
increased consumption (in red) will exert the
opposite effects, that is, it will cause the
Hayekian triangle to increase in height and
decrease at its base. xiii

2. Unsustainable Growth Pattern - the

Bubbles and the Busts

Unsustainable growth patterns occur when

Central banks create money out of thin air. The
new money flowing through the fractional
reserve system masquerades as savings
(S+M) and pushes the supply of loanable funds
towards the right without there being any real
increase in savings (in red). See Figure-14. No
resources are freed from consumption; so that
real resources have not been released from
consumer sectors in order to fuel the expansion
of the capital sectors. Responding to low
interest rates people actually save less and
consume more (in yellow), either because the
incentive to save has diminished due to lower
interest rates or because people see the value
of their equities going up, as occurred with
mortgaged home equities during the housing
bubble. This causes the interest rates to wedge
as increased consumer spending is pulling
interest rates upward and artificial credit
expansion is pushing it downwards.

On PPF scale the artificially lowered interest

rates signal increased savings available for
entrepreneurs to invest in various projects. But
the consumers in reality have increased
consumption. This causes the economy to
transcend the PPF and edge towards an
unattainable virtual equilibrium point. The
economy is said to be overheating. Though all
Figure-14: Capital based Macroeconomic
Framework showing Unsustainable Growth
Pattern
The structure of production will also show
distortion patterns as a result. Low interest

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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
rates will allow investors to take on projects that
had previously seemed unprofitable. They will
embark on long term projects, lengthening the
structure of production in accordance with
signals on the market but most of these
projects will never reach completion as
consumers have shifted their preferences in
opposite direction towards more consumption,
which would then cause the structure of
production of shorten. Thus we have a case of
dueling triangles.
The bubble essentially can be summarized as a
period where there is wedging of interest rates,
tug of war at the PPF and dueling triangles in
the structure of production, as Professor Roger
W. Garrison puts it. Ludwig Von Mises
described the bubble as a period of
‘malinvestments and overconsumption’ which
means that the bust is period of healing where
the market liquidates and re-evaluates the
prices of all the bad investments and takes on a
fresh start.xiv
An analogy of the events occurring, according
to Professor Robert P. Murphy would be ‘that a
circus comes to a town, sets up its tents and all
the circus men and women go into the town’s
restaurant to have food. The restaurant owner,
not knowing that the demands for his services
have temporarily been jacked up by the arrival
of the circus, thinks of it as a permanent
increase in clientele’. So he adds another
restaurant to his chain only to find out that the
increased demand was temporary or artificial
as the circus has left the town and he ended up
with a malinvestment that will need to be
liquidated. All the scarce capital resources
(labor, furniture, food etc) allocated to the
second restaurant will need to be released for
use in more efficient processes. To prop up his
second restaurant from the earnings of the first
would be needlessly raising the stakes that
would well end in bankruptcy and a bigger
financial crunch’.
During the bubble period businessmen are
misled by artificially suppressed interest rates
that cause them to pour money in low return
projects that they would not invest in under
normal conditions. For example, an
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entrepreneur is giving an interest of 8% on a
profitable business that fetches him around,
say 10%. The high yield of his business is due
to the fact that it is in demand and the owner
caters to the needs of his clients to their
satisfaction, which is why he is in business. If
the interest rate goes down to 1%, all of a
sudden the entrepreneur(s) will find low return
projects with a yield of say 4%, to be profitable
and will invest in that direction. Now if the
interest rate had been lowered by a change in
time preferences of the people towards more
savings, all will be well and fine. But if interest
rate is suppressed by artificial injection of
money into the banking system by the Central
bank, then it will necessarily shoot up after
some time as money trickles into the economy,
the artificially created savings depletes and find
their way into consumption. All low yield long
term projects will then manifest themselves as
malinvestments and overcapacity will result.
This is the time of the bust. Businessmen had
been tricked into investing in low return projects
by artificial expansion of credit.
The whole process has been neatly summed
up by Murray N Rothbard in America’s Great
Depression, that “Nduring the boom,
businessmen are misled by bank credit inflation
to invest too much in higher-order capital
goods, which could only be prosperously
sustained through lower time preferences and
greater savings and investment; as soon as the
inflation permeates to the mass of the people,
the old consumption–investment proportion is
reestablished, and business investments in the
higher orders are seen to have been wasteful.
Businessmen were led to this error by the credit
expansion and its tampering with the free-
market rate of interest. The “boom,” then, is
actually a period of wasteful malinvestment. It
is the time when errors are made, due to bank
credit’s tampering with the free market. The
“crisis” arrives when the consumers come to
reestablish their desired proportions. The
“depression” is actually the process by which
the economy adjusts to the wastes and errors
of the boom, and reestablishes efficient service
of consumer desires. The adjustment process
consists in rapid liquidation of the wasteful
investments. Some of these will be abandoned
altogether (like the Western ghost towns
constructed in the boom of 1816–1818 and
deserted during the Panic of 1819); others will
be shifted to other uses. Always the principle
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
will be not to mourn past errors, but to make
most efficient use of the existing stock of
capital. The inflationary boom hobbles the
efficiency of the free market, and distorts the
structure of production, which no longer serves
consumers properly. The crisis signals the end
of this inflationary distortion, and the
depression is the process by which the
economy returns to the efficient service of
consumers. In short, and this is a highly
important point to grasp, the depression is the
“recovery” process, and the end of the
depression heralds the return to normal, and to
optimum efficiency. The depression, then, far
from being an evil scourge, is the necessary
and beneficial return of the economy to normal
after the distortions imposed by the boom. The
boom, then, requires a “bust.”
Thus, bank credit expansion sets into motion
the business cycle in all its phases: the
inflationary boom, marked by expansion of the
money supply and by malinvestment; the crisis,
which arrives when credit expansion ceases
and malinvestments become evident; and the
depression recovery, the necessary adjustment
process by which the economy returns to the
most efficient ways of satisfying consumer
desires.
What, specifically, are the essential features of
the depression recovery phase? Wasteful
projects, as we have said, must either be
abandoned or used as best they can be.
Inefficient firms, buoyed up by the artificial
boom, must be liquidated or have their debts
scaled down or be turned over to their
creditors. Prices of producers’ goods must fall,
particularly in the higher orders of production—
this includes capital goods, lands, and wage
rates. Just as the boom was marked by a fall in
the rate of interest, i.e., of price differentials
between stages of production (the “natural rate”
or going rate of profit) as well as the loan rate,
so the depression-recovery consists of a rise in
this interest differential. In practice, this means
a fall in the prices of the higher-order goods
relative to prices in the consumer goods
industries. Not only prices of particular
machines must fall, but also the prices of whole
aggregates of capital, e.g., stock market and
real estate values. In fact, these values must
fall more than the earnings from the assets,
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through reflecting the general rise in the rate of
interest return.
Since factors must shift from the higher to the
lower orders of production, there is inevitable
“frictional” unemployment in a depression, but it
need not be greater than unemployment
attending any other large shift in production. In
practice, unemployment will be aggravated by
the numerous bankruptcies, and the large
errors revealed, but it still need only be
temporary. The speedier the adjustment, the
more fleeting will the unemployment be.
Unemployment will progress beyond the
“frictional” stage and become really severe and
lasting only if wage rates are kept artificially
high and are prevented from falling. If wage
rates are kept above the free-market level that
clears the demand for and supply of labor,
laborers will remain permanently unemployed.
The greater the degree of discrepancy, the
more severe will the unemployment be.
Thus, the Misesian theory of the business cycle
accounts for all of our puzzles: The repeated
and recurrent nature of the cycle, the massive
cluster of entrepreneurial error, the far greater
intensity of the boom and bust in the producers'
goods industries.
Mises; pinpoints the blame for the cycle on
inflationary bank credit expansion propelled by
the intervention of government and its central
bank. What does Mises say should be done,
say by government, once the depression
arrives? What is the governmental role in the
cure of depression? In the first place,
government must cease inflating as soon as
possible. It is true that this will, inevitably, bring
the inflationary boom abruptly to an end, and
commence the inevitable recession or
depression. But the longer the government
waits for this, the worse the necessary
readjustments will have to be. The sooner the
depression-readjustment is gotten over with,
the better. This means, also, that the
government must never try to prop up unsound
business situations; it must never bail out or
lend money to business firms in trouble. Doing
this will simply prolong the agony and convert a
sharp and quick depression phase into a
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
lingering and chronic disease. The government
must never try to prop up wage rates or prices
of producers' goods; doing so will prolong and
delay indefinitely the completion of the
depression-adjustment process; it will cause
indefinite and prolonged depression and mass
unemployment in the vital capital goods
industries. The government must not try to
inflate again, in order to get out of the
depression. For even if this reinflation
succeeds, it will only sow greater trouble later
on. The government must do nothing to
encourage consumption, and it must not
increase its own expenditures, for this will
further increase the social
consumption/investment ratio. In fact, cutting
the government budget will improve the ratio.
What the economy needs is not more
consumption spending but more saving, in
order to validate some of the excessive
investments of the boom.
The Misesian prescription is thus the exact
opposite of the Keynesian: It is for the
government to keep absolute hands off the
economy and to confine itself to stopping its
own inflation and to cutting its own budgetN”
From above discussion we should now be able
to realize now, according to Jesus Huerta de
Soto, “that the spontaneous order of the
unhampered market is not responsible for the
crisis situation. And one of the most typical
consequences of every past crisis, and of
course of this current one, is that many people
are blaming the market and firmly believing that
the recession is a "market failure" that requires
more government intervention.
The market is a process that spontaneously
reacts in the way we have seen against the
monetary aggression of the bubble years,
which consisted of a huge credit expansion that
was not only allowed but even orchestrated and
directed by central banks, which are the
institutions truly responsible for all the
economic sufferings from the crisis and
recessions that are affecting the world. And
paradoxically central banks have been able to
present themselves to the general public not
only as indignant victims of the list of ad hoc
scapegoats they have been able to put together
(stupid private bankers, greedy managers
receiving exorbitant bonuses, etc.), but also as
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the only institutions that, by bailing out the
banking system as a last resort, have avoided a
much greater tragedy.
There is no free market in the monetary and
banking system but just the opposite: private
money has been nationalized, legal-tender
rules introduced, a huge mess of administrative
regulations enacted, the interest rate
manipulated, and most importantly, everything
is directed by a monetary central-planning
agency: the central bank. In other words, real
socialism, represented by state money, central
banks, and financial administrative regulations,
is still in force in the monetary and credit
sectors of the so-called free-market
economies.”xv
Road to the Present: A Brief Review
In wake of the Dot com bust in 2001, Alan
Greenspan, the then chairman of the Federal
Reserve immediately lowered the interest rate
to 1%. The expansionary cycle was set in
motion as the artificial expansion of credit and
investment occurred as a result — without a
parallel increase in voluntary household
savings. In fact, consumer spending increased
as people saw their housing equities go up.
Newly created loans granted at extremely low
(and even negative in real terms) interest rates
fueled a speculative bubble in the shape of a
substantial rise in the prices of capital goods,
real-estate assets, and the securities that
represented them which were exchanged on
the stock market, where indexes soared. The
bubble was to a great extent supported by
Government sponsored enterprises (GSE’s)
like Fannie Mae and Freddie Mac which had an
inexhaustible line of credit from the Fed and
was involved in secondary mortgage payments,
that is, it bought home loan mortgages from the
banks and then chopped up those mortgages
(from different states within the US) into
caskets or baskets to be sold off to local and
foreign investors. Housing prices were
artificially bid up by a combination of low
payment mortgage rate adjustments, by a
complete absence of any lending standards
and speculative buying on the Wall Street.
Mortgage brokers, bankers on Wall Street and
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
GSE’s all made handsome profits during the
process. Easy credit policy of the Fed kept the
bubble inflating till a point was reached where
there were way too many houses than people
actually wanted.
The bust ensued when the artificially set low
lending standards were eventually revised
enforcing discipline on further borrowing and
lending operations causing the speculative
buyers to turn into sellers. Foreclosures set
apace when prices of houses dropped and
people refused to pay greater sums of money
and interest for a house that was of lesser
value and caused them to revert to the old time
preferences. All bankers, GSE’s and investors
suddenly found themselves sitting on top of
worthless mortgages. Since the banks had
gambled away all of people’s money in the
housing sector, they were left in a position
where it became evident that they could no
honor their liabilities- namely the demand
deposits. The fragility of fraudulent exercise of
fractional reserve banking was exposed as the
banks stood on the verge of collapse and begin
to fail one after the other.
Before the market could swing into action to
correct the malinvestments that occurred, Ben
Bernanke, the then (and current) chairman of
the Fed did exactly what his predecessor Alan
Greenspan did but this time to a much greater
extent. Bernanke immediately lowered the
interest rates to Zero percent and re-inflated
the bubble. Not only that but the FED has since
then literally pumped trillions and trillions of
dollars into the economy under programs like
the Troubled Assets Relief Program (TARP),
guarantees made by the FDIC, and other direct
bailouts.xvi
At the time of Dot Com bust, market uncertainty
coupled with artificially lowered interest rates
caused resources to be allocated to what was
considered to be the safest investment
possible. The bubble was channeled to the
housing sector under the assumption that home
prices ‘always’ go up and that there had ‘never’
been a downfall of housing prices at the
national level. Well, not till we had Alan
Greenspan at the Fed. This time around the
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safest investments rated as AAA are assumed
to be the US treasury bonds, because in case
anything goes wrong, the FED will always buy
US T-Bills in exchange for US dollars. This has
caused the banks (using the bailout money) to
heavily invest in US bonds in order to build their
capital reserves.
But things are going wrong. Obama
administration is using all that money poured
into the bond market in completely wasteful
make-work projects such as the Cash for
clunkers, Obama care etc. which have no hope
of any payback. So how will the US
Government ever be able to pay the bond
yields? It simply can’t. This is why the Fed has
to continuously engage in ‘open market
operations’ (that is, buying up the bonds via
counterfeiting i.e. printing money out of thin air)
to maintain the confidence in bond market and
keep the interest rates artificially low. Recently
a $600 billion QE2 (Quantitative Easing 2)
comes after an unprecedented $8 trillion in
federal-government power has already been
unleashed through actions by the Federal
Reserve. In The Mystery of Banking Murray
Rothbard contemplated Quantitative Easing,
using an example of the Fed buying $100
billion of Treasury debt directly and a 20
percent reserve ratio. If the ratio is 10 percent
and the amount is $600 billion the effect is
much greater than what Rothbard describes
below.
“If the Fed were to finance new Treasury bond
issues directly, as it was only allowed by law to
do for a while during World War II, this step
would be wildly inflationary. For the Treasury
would now have an increased $100 billion not
just of newly-created bank money, but of “high-
powered” bank money—demand deposits at
the Fed. Then, as the Treasury spent the
money, its claims on the Fed would filter down
to the private economy, and total bank reserves
would increase by $100 billion. The banking
system would then pyramid loans and deposits
on top of that by 5:1 until the money supply
increased by no less than $500 billion. Hence
we have the highly inflationary nature of direct
Fed purchases of new bonds from the
Treasury”
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards

Statistics aren’t of great help either. Doug production and trade patterns. But it certainly
French, Professor of Economics at LVM wouldn't make Americans poorer.xix
institute, Alabama sheds some light on the
issue; “The federal-funds rate has been During the administration of President George
between 0 and 0.25 percent since December W. Bush, the gross debt increased from $5.6
2008. And while interest rates have fallen, trillion in January 2001 to $10.7 trillion by
unemployment has risen. In October of 2008 December 2008,xx rising from 58% of GDP to
the unemployment rate was 6.1 percent. Now 70.2% of GDP. Bush junior accumulated
it's 9.6 percent. If you count discouraged greater debt than all of the American presidents
workers and those forced to work part-time, the before him. Under the Obama administration,
unemployment rate is 17 percent. There were starting in March 2009, the Congressional
1.2 million discouraged workers in September Budget Office estimated that gross debt will
— more than double the 503,000 from this time rise from 70.2% of GDP in 2008 to 100.6% in
a year ago. The average length of official 2012.xxi The current US budgetary deficit
unemployment has increased to 24.5 weeks, according to official figures is estimated to be
the longest since government began tracking around1.3 trillion dollars, which comes after the
this data in 1948. The number of long-term end of the US financial year, represented 8.9%
unemployed (i.e., for 27 weeks or more) has of GDP. According to unofficial estimates the
now jumped to 4.5 million, an all-time high.”xvii debt and deficit figures will be much higher, as
the problem is usually understated officially.
Despite all this the Fed chairman hinted that Obama is accumulating more debt than George
the US central bank is ready to push even more W. Bush and all US presidents before him,
money to reverse the slide in the growth combined.
momentum of the CPI in order to revive the
economy. But if the pool of real savings is
declining and the investments are financed by
debts with artificially lowered interest rates,
then in this situation, the more money the Fed
pushes the worse the economic conditions
xviii
become. As for now foreign central banks,
particularly China's, have gobbled up hundreds
of billions of dollars worth of bonds from Uncle
Sam. According to the alarmists, this injection
of foreign savings has allowed American
consumers to maintain a high level of apparent
prosperity, despite their abysmally low savings
rate. But as Austrian business cycle theory
informs us, this fiat house of cards must
eventually collapse. Without the influx of their
savings, US interest rates would be higher than
they are now. The actions of the Chinese
government are distorting world trade patterns
and US interest rates. But it is distorting in
America’s favor. If the Chinese government
debases its currency, it facilitates the American
consumer at the expense of its own people; The kind of reckless spending behavior US
analogy of which will be that if China stole a government has indulged itself into will lead to
bunch of TVs from its people and shipped them even greater deficits in near future. Huge
to Americans chosen randomly from the phone deficits will leave foreigners less willing to keep
book; that would also distort international purchasing US Treasury debt - in the form of
bonds. This could result in high interest rates

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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
as the government is forced to offer more
attractive rates to lure investors.
Higher Interest rates combined with increasing
debt and growing deficit will allow room for a
continuous Quantitative Easing policy by the
FED. Pouring more dollars into the economy
printed out of thin air will erode the value of
existing pool of dollars causing the lenders
abandon further financing of the US debt and
instead call upon the US government to fulfill all
its obligations. All financing institutions
nationally and worldwide will recognize that
they are sitting on top of worthless bonds since
the US government is currently in and will be in
no position to clear all of its outstanding debts.
The logical recourse for US government will be
to ‘default’ and abandon the dollar altogether or
more likely step up the printing press at the
FED to flood the world with dollars ending up in
a crack up boom of ‘hyperinflation’. Of course it
is only if things keep going the way they are
and they will, as we have no indication
whatsoever as of now that the US Government
tends to massively cut and balance the budget,
allow malinvestments propped up by easy
money policy to be liquidated, get rid of the
Central Bank and give time to the market to
heal itself.
Needless to say the world is inching towards a
financial crisis of colossal proportions. The
current president of the World Bank, Robert
Zollick, has sensed the problem looming large
and has sought to reopen the Gold standard
xxii
debate.
The implications will ripple throughout the
world. Pakistan with a range of 5-25% banking
reserve ratio should have no illusions about its
situation. It will necessarily find itself wedged
between default, allow a wreaking contraction
and let the fractional reserve based- banks’ to
collapse or hyperinflate (more probable) and
destroy the rupee in the process of bailing out
its unsound financial sector. There will, as
always, be one and only one sound way out of
the chaos; return to a gold standard (the
discussion of which is beyond the scope of this
paper). It would greatly help though if
Pakistan’s banks etch up their reserves ratio as
close to 100% as possible.
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For now, as Rothbard wrote, “the time is ripe to
recall what has today been completely
forgotten, even among economists, that the
Misesian explanation and analysis of the
depression gained great headway precisely
during the Great Depression of the 1930s —
the very depression that is always held up to
advocates of the free market economy as the
greatest single and catastrophic failure of
laissez-faire capitalism. It was no such thing.
1929 was made inevitable by the vast bank
credit expansion throughout the Western world
during the 1920s: A policy deliberately adopted
by the Western governments, and most
importantly by the Federal Reserve System in
the United States. It was made possible by the
failure of the Western world to return to a
genuine gold standard after World War I, and
thus allowing more room for inflationary policies
by government. Everyone now thinks of
President Coolidge as a believer in laissez-faire
and an unhampered market economy; he was
not, and tragically, nowhere less so than in the
field of money and credit. Unfortunately, the
sins and errors of the Coolidge intervention
were laid to the door of a non-existent free
market economy.
If Coolidge made 1929 inevitable, it was
President Hoover who prolonged and
deepened the depression, transforming it from
a typically sharp but swiftly-disappearing
depression into a lingering and near-fatal
malady, a malady (erroneously thought to be)
"cured" only by the holocaust of World War II.
Hoover, not Franklin Roosevelt, was the
founder of the policy of the "New Deal":
essentially the massive use of the State to do
exactly what Misesian theory would most warn
against — to prop up wage rates above their
free-market levels, prop up prices, inflate credit,
and lend money to shaky business positions.
Roosevelt only advanced, to a greater degree,
what Hoover had pioneered. The result for the
first time in American history was a nearly
perpetual depression and nearly permanent
mass unemployment. The Coolidge crisis had
become the unprecedentedly prolonged
Hoover-Roosevelt depression.
Ludwig von Mises had predicted the depression
during the heyday of the great boom of the
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
1920s — a time, just like today, when
economists and politicians, armed with a "new
economics" of perpetual inflation, and with new
"tools" provided by the Federal Reserve
System, proclaimed a perpetual "New Era" of
permanent prosperity guaranteed by our wise
economic doctors in Washington. Ludwig von
Mises, alone armed with a correct theory of the
business cycle, was one of the very few
economists to predict the Great Depression,
and hence the economic world was forced to
listen to him with respect. F. A. Hayek spread
the word in England, and the younger English
economists were all, in the early 1930s,
beginning to adopt the Misesian cycle theory
for their analysis of the depression — and also
to adopt, of course, the strictly free-market
policy prescription that flowed with this theory.
Unfortunately, economists have now adopted
the historical notion of Lord Keynes: That no
"classical economists" had a theory of the
business cycle until Keynes came along in
1936. There was a theory of the depression; it
was the classical economic tradition; its
prescription was strict hard money and laissez-
faire; and it was rapidly being adopted, in
England and even in the United States, as the
accepted theory of the business cycle.
What swamped the growing acceptance of
Misesian cycle theory was simply the
"Keynesian Revolution" — the amazing sweep
that Keynesian theory made of the economic
world shortly after the publication of the
General Theory in 1936. It is not that Misesian
theory was refuted successfully; it was just
forgotten in the rush to climb on the suddenly
fashionable Keynesian bandwagon. Some of
the leading adherents of the Mises theory —
who clearly knew better — succumbed to the
newly established winds of doctrine, and won
leading American university posts as a
consequence.
(The events that occurred in the 70’s and are
occurring now has caused economists to
proclaim that "Keynes is Dead.") After decades
of facing trenchant theoretical critiques and
refutation by stubborn economic facts, the
Keynesians are now in general and massive
retreat. Once again, the money supply and
bank credit are being grudgingly acknowledged
to play a leading role in the cycle. The time is
ripe — for a rediscovery, a renaissance, of the
Mises theory of the business cycle. It can come
none too soon; if it ever does, the whole
concept of a Council of Economic Advisors
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would be swept away, and we would see a
massive retreat of government from the
economic sphere. But for all this to happen, the
world of economics, and the public at large,
must be made aware of the existence of an
explanation of the business cycle that has lain
neglected on the shelf for all too many tragic
xxiii
years.”
Conclusion
It is known that the Mayans were good at their
predictions; it is little know that they may have
been good at economics and banking. But the
current financial situation suggests they may
have been doing well at both. One of the
dangerous Keynesian (the predominant school
of thought) fallacies hold that WWII saved US
out of the depression and solved the problem of
unemployment. Yes it did but it was not the
war. It was the break given to the market from
Hoover-Roosevelt interventionist policies to
stimulate the economy. More so unemployment
was ‘cured’ because conscription sent the
youth to battlefields, to die. That sent the
unemployment graph to point down. Food
rationing, taxes and other such emergency war
time restrictions decreased the living standards
of US citizens as scarce capital resources
(labor, raw materials) were allocated to
manufacturing war time gear and machinery
which would prove to be completely useless
and run obsolete during times of peace. But
this is rather an ignored version of history and it
xxiv
continuously remains to be as such. So
when the looming financial crisis begins to
unfold itself the US will be tempted to expand
the war. Indicators are pointing in that direction
and a recent report (31st October, 2010) by
David S. Broder in the Washington post has
erroneously repeated the same fallacy,
“NLook back at FDR and the Great
Depression. What finally resolved that
economic crisis? World War II. Here is where
Obama is likely to prevail. With strong
Republican support in Congress for challenging
Iran's ambition to become a nuclear power, he
can spend much of 2011 and 2012
orchestrating a showdown with the mullahs.
This will help him politically because the
opposition party will be urging him on. And as
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
tensions rise and we accelerate preparations
for war, the economy will improve;” xxv
This is where the world needs to be vigilant. In
not so far away future we will see the Chinese
realize that they cannot perpetually subsidize
the American consumer at the expense of their
own by continuous debasements of their
currency. Otherwise the Yuan will become the
Ruble of 90’s even before the US dollar does.
China will soon need to allow its currency to
strengthen causing its heavily subsidized
export industry to undergo a bust and retool
itself to suit the preferences of Chinese
consumer.
As the Quantitative easing pumps more money
into the economy the slide of US dollar against
commodities will steepen. Gold and silver
prices will necessarily rise as increasing money
supply erodes the value of the dollar even
further. And countries begin to hedge against
the dollar inflation. Gold and silver provide the
necessary security against confiscation of
savings. The rate of rise in commodity prices is
directly proportional loss of confidence in the
current system that is failing. Saudi Arabia has
recently doubled its gold reserves to the tune of
xxvi
323 tones. India, Bangladesh, China, Sri-
Lanka and a number of countries have boosted
their gold reserves and will continue to do so as
the dollar drops.xxvii Pakistan needs to seriously
take note of its own reserve status, both
banking and gold, and try to increase them as
much as it can to buffer itself from the
impending crisis.
Europe is in no better shape as well. When
Greece joined Euro-zone its deficits were 113%
of its annual GDP. In order to cushion and
facilitate Greece the Euro Central Bank pushed
interest rates down to 1 % on Greek Treasury
bonds, which slinged back as Greeks increased
government spending taking advantage of
lowered interest rates. In effect Greece was
being bailed out even before the real bailout.
More money (Euro’s) poured into the country
causing prices to rise and pushing its people to
buy cheaper goods from outside the country
within Europe (as the currency was same). But
now people in Germany and France found out
that their lifestyles being affected as the prices
in general were rising before the pay-scales as
the Greeks effectively externalized the costs.
And when discipline could not be imposed and
Greece ventured near a default on its Debts,
European Central bank along with the Fed
engineered a bailout for Greece amounting to
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trillions of Euros. So the Euro zone
establishment rewards the one doing the wrong
things and punishes those who do things right.
Interest rate on German bonds is around 5 %.
Portugal, Ireland, Spain and Italy have caught
on to the idea and the day is not far when crisis
and financial collapse situation will start
emerging in these countries. Together with
Greece these countries are collectively called
PIIGS. At this very hour, a crisis has already
emerged in Ireland and Portugal and
indications are pointing heavily in favor of a
Greek style bailout. This will effectively step up
towards the demise of Euro as Professor
xxviii
Philipp Bagus puts it.
Lewis E. Lehrmann once remarked, “When
stable political institutions are overturned, the
result is revolution. Inflation and deflation are
revolutions in the world of commercial affairs.
And history shows that a price revolution often
precedes a political revolution. Lenin in Russia,
Hitler in Germany, and Mao in China—to name
just three examples—came to power after great
xxix
inflations.” History is literally littered with
examples of how fiat paper money
hyperinflations wrecked the social, moral and
cultural fabric of societies and laid them to
ruins.xxx In these pernicious times we blindly
follow those footsteps. Only by adopting free
market principles, reversion to a gold standard
and honest full reserve banking can help us
weather the crisis.
As for now we may conclude as per the
Austrian School that the financial fiasco brought
upon by us the cabal of Central economic
planners is going to manifest itself in a not so
far away future.
The world is in for a rideN
About the Author
Dr. Akbar Ali Khan is a student of Economics.
His special interests include Money and
Banking. He mainly follows the Austrian School
of thought, as instructed at the Ludwig Von
Mises Institute, Auburn Alabama. He is a
Dentist by profession.
[E-mail: akbar_ak@hotmail.com]
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Committee on Economics The Coming Great Depression & The Fall of Fiat Standards
Bibliography
i
Principles of Economics (1871) by Carl Menger
ii
Socialism; An Economic and Social Analysis
(1920) by Ludwig von Mises. Also see Pictures of a
Socialistic Future by Eugene Richter And Man,
Economy and the State by Murray N Rothabrd
iii
Though recessions did occur even before 1913
and the failure of Gold standard is the most favorite
explanation but that is injustice when the
manipulative role of Banking and Government
interventions occurring at that time is completely
ignored and the heap is arbitrarily shifted to where it
does not belong. See Victor Zarnowitz Business
Cycles and Growth: Some Reflections and
Measures," NBER Working Paper #665, April 1981
in US Gold Commission Report by Ron Paul, 1982.
Also see First and Second Bank of United States in
Mystery of Banking by Murray N Rothbard
iv
Dr. Ron Paul is a US congressman, amongst the
Republican US Presidential Candidate runner up for
2008 elections. He is a champion of the liberty and
U.S. Constitution and has great insight of Austrian
Economics. He has authored many books including
the likes of End the Fed and The Case for Gold.
Peter Schiff is president and chief global strategist
of Euro Pacific Capital Inc., a broker-dealer and
author of the books Crash Proof: How to Profit
from the Coming Economic Collapse (2006), How
an economy grows and why it crashes.
v
F.A Hayek, The Counter-Revolution of Science, p.
99. Also see Hayek, "The Use of Knowledge in
Society," in Individualism and Economic Order. (Of
course Keynes never thought that things could ever
go right in a market economy. Left to its own tools
market economies would perform pervasively).
vi
See The Positive theory of Cycle in America’s
Great Depression (2000, 5th Edition, LVM Institute)
by Murray N. Rothbard
vii
This is the “pure time preference theory” of the
rate of interest; it can be found in Ludwig von
Mises, Human Action (New Haven, Conn.: Yale
University Press, 1949); in Frank A. Fetter,
Economic Principles (New York: Century, 1915),
and idem, “Interest Theories Old and New, ”
American Economic Review (March, 1914): 68–92.
--- in America’s Great Depression by Rothbard
viii
See Austrian Macroeconomics: A
Diagrammatical Exposition(1978) by Roger W.
Garrison
Insaf Research Wing
ix
This is the only diagram that appears in Keynes
‘General Theory’ page 180. It is most closely
identified with Sir Dennis H. Robertson (1890-
1963), a close friend Keynes but a strong critic of
his Liquidity preference Theory of Interest.
Keynes’s purpose was to show explicitly just what
about pre-Keynesian thought was being discarded—
namely, its loanable-funds theory. He puts in the
diagram only to throw it out. Lecture notes, Capital
based Macroeconomics by Roger W. Garrison
x
The use of PPF gives us a sharp contrast between
Austrian and Keynesian Schools. For the Austrian
there is a tradeoff whereas from Keynesian
perspective consumption and investments are
lumped into one C+I+G. Lecture on Capital Based
Macroeconomics, by Roger W Garrison 2009,
Ludwig Von Mises Institute, Auburn Alabama
xi
Pure Theory of Capital (1950), page 113 by F.A.
Hayek
xii
Macroeconomics: A Diagrammatical Exposition
(1978) by Roger W. Garrison
xiii
Lecture Notes: Capital Based Macroeconomics,
by Roger W Garrison 2009, Ludwig Von Mises
Institute, Auburn Alabama
xiv
See Chapter 20: Interest, Credit Expansion, and
the Trade Cycle in Human Action: A Treatise on
Economics, Scholar’s Edition (Auburn, Alabama.:
Mises Institute, 1998), by Ludwig Von Mises.
xv
Economic Recessions, Banking Reform, and the
Future of Capitalism; Mises Daily: Monday,
November 01, 2010 by Jesus Huerta de Soto;
Professor of Economics, University of Madrid
xvi
Bernanke: Bail out bad borrowers, too by David
Goldman, February 25, 2009 CNN online Special
Report
xvii
The Pretense of Knowledge Continues by Doug
French, Mises Daily: Monday, November 15, 2010
xviii
Should the Fed Be Concerned about Low Price
Inflation? By Frank Shostak, Mises Daily:
Tuesday, October 26, 2010.
xix
Trade Deficits and Fiat Currencies by Professor
Robert P. Murphy, LVM Institute, Alabama.
xx
Bureau of the Public Debt - Input Dates 1/1/2001
and 12/31/2008
xxi
See Table 1-1 : Comparison of Projected
Revenues, Outlays, and Deficits in CBO’s March
Page 21
Committee on Economics The Coming Great Depression & The Fall of Fiat Standards

2009 Baseline and CBO’s Estimate of the

President’s Budget
xxii
Zoellick seeks gold standard debate By Alan
Beattie in Washington Financial Times report
Published: November 7 2010 22:31 (It is to be
mentioned though, that Zollick’s association with
the notorious Bilderberg group raises suspicions
amongst many genuine gold standard advocates)
xxiii
Explaining the Bubble and the Bust by Murray
N. Rothbard
xxiv
Herbert Hoover Makes the Depression Great,
page 27 in The politically incorrect guide to the
Great Depression and the New Deal, by Professor
Robert P Murphy - LVM institute, Alabama
xxv
The war recovery? by David S. Broder,
Washington Post report, Sunday, October 31, 2010
xxvi
Saudi Arabia's Gold Reserve Doubles By Patrick
A. Heller June 22, 2010 at Numismaster.com
xxvii
Sri Lanka gold reserves value hit $700 million;
Commodity Online Report Published on: July 29,
2010; India Buys IMF Gold to Boost Reserves as
Dollar Drops (Update2); By Thomas Kutty
Abraham and Kim Kyoungwha -Bloomberg
November 3, 2009. Bangladesh boosts its gold
reserves; Commodity News Report September 10th,
2010.

xxviii
The Bailout of Greece and the End of the Euro
Mises Daily: Thursday, February 11, 2010 and
Tragedy of the Euro by Philipp Bagus

xxix
See Case for Gold (US Gold Commission
report) by Ron Paul and Lewis E. Lehrman
xxx
See Fiat Money Inflation in France by Andrew
Dickinson White for a wonderful account of the
whole process of hyperinflation.

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