I was recently debating online with a monetarist over the cause of the Great Depression: he suggested that the contractionary monetary policy of the Federal Reserve was the cause, while I expounded the Austrian theory of the business cycle. During the course of the debate, I came across this passage in Murray Rothbard's A History of Money and Banking in the United States (pdf), pages 101-103:
Rothbard:With the crisis of 1839 there ensued four years of massive monetary and price deflation. Unsound banks were finally eliminated; unsound investments generated in the boom were liquidated. The number of banks during these four years fell by 23 percent. The money supply fell from $240 million at the beginning of 1839 to $158 million in 1843, a seemingly cataclysmic drop of 34 percent, or 8.5 percent per annum. Prices fell even further, from 125 in February 1839 to 67 in March 1843, a tremendous drop of 42 percent, or 10.5 percent per year. [...] But didn’t the massive deflation have catastrophic effects—on production, trade, and employment, as we have been led to believe? In a fascinating analysis and comparison with the deflation of 1929–1933 a century later, Professor Temin shows that the percentage of deflation over the comparable four years (1839–1843 and 1929–1933) was almost the same.83 Yet the effects on real production of the two deflations were very different. Whereas in 1929–1933, real gross investment fell catastrophically by 91 percent, real consumption by 19 percent, and real GNP by 30 percent; in 1839–1843, investment fell by 23 percent, but real consumption increased by 21 percent and real GNP by 16 percent. The interesting problem is to account for the enormous fall in production and consumption in the 1930s, as contrasted to the rise in production and consumption in the 1840s.
But didn’t the massive deflation have catastrophic effects—on production, trade, and employment, as we have been led to believe? In a fascinating analysis and comparison with the deflation of 1929–1933 a century later, Professor Temin shows that the percentage of deflation over the comparable four years (1839–1843 and 1929–1933) was almost the same.83 Yet the effects on real production of the two deflations were very different. Whereas in 1929–1933, real gross investment fell catastrophically by 91 percent, real consumption by 19 percent, and real GNP by 30 percent; in 1839–1843, investment fell by 23 percent, but real consumption increased by 21 percent and real GNP by 16 percent. The interesting problem is to account for the enormous fall in production and consumption in the 1930s, as contrasted to the rise in production and consumption in the 1840s.
This seems like a refutation of the monetarist theory that monetary contractions cause recessions. Have there been any monetarist responses to this evidence?
Murray N. Rothbard's best study of the Great Depression is his book America's Great Depression, and he shows all the evidence that proves that the Federal Reserve did not contract the money supply (that is, the supply of credit). I would also suggest Garet Garret's The Bubble that Broke the World, although it focuses mostly on loans made to foreign countries.
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