Hi everyone,
I just wrote a post that was longer than I expected, so I’ll give the short version first:
I’m confident there’s a logical explanation for this, and I’ll probably feel like an idiot once someone points it out…but anyway, can anyone explain the cause of the 19th century booms and busts or point me to literature that competently addresses them? Thanks!
______________________________________________________________________________
Long Version:
This is my first post, so I’ll give a quick rundown on my background first: At the moment, my economic understanding comes from reading a lot of different scattered writings (and actually, I started by reading up on Keynesian economics…) and spending a lot of time thinking and working things out on my own, but I have not yet read a full-length treatise from cover-to-cover (e.g. Human Action). My understanding of Austrian economics and the ABCT is probably pretty rudimentary by the standards of some of the people here, but I “get it” in general. From what I have read, I’ve been very impressed by the logic of Austrian theory…if nothing else, I haven’t found any deep logical flaws in it. 
Plus, I’m convinced that the methodology is sound, at least for qualitative purposes. I’m an intuitive thinker anyway, so admit I’m biased in favor of a priori logical deduction anyway (as opposed to sensory thinkers, who are biased in favor of empiricism, a posteriori thinking, and logical positivism). More importantly though, I like the Austrian methodology simply because I dislike the mainstream methodology so much: By treating economic theory as an empirical science, it’s impossible to come up with the right answers and derive sound conclusions from the available data set. By trying, all you end up with is a whole bunch of contradictory correlations that you mistakenly try to fit into a sensible model of causation…and these relationships only hold “most” of the time (and never as a unified theory), because it’s impossible to isolate the variable you’re trying to study the affects of (there are just SO many dependent and independent variables involved, you can’t perform controlled experiments, and the sample pool of countries with fundamentally different economic policies is extremely small by statistical standards).
Anyway, moving onto my question…on another forum, a poster replied to one of my posts with this:
This isn’t the first time he’s brought up 19th century booms and busts as an empirical “rebuttal” of the ABCT, and it’s kind of a recurring theme. Apparently, it seems to be a sticking point for him…but the problem is, at the moment, I can only speculate about the response the Austrians have for this argument.
I’d be completely shocked if it turned out the Austrian school doesn’t have a completely logical response for this argument, though…I’m sure there is one, but I just don’t know what it is. After all, Mises did a lot of work expounding upon David Ricardo’s business cycle theory before the Federal Reserve was created. For one thing, his Theory of Money and Credit was published in 1912 (even though Human Action didn’t come until later). In other words, even before the Federal Reserve came about, the the Austrian business cycle theory cited central banking systems as the primary culprit behind booms and busts, did it not? If so, I sincerely doubt they completely ignored 19th century America (and I further doubt that Austrian economists of the past century - particularly ones FROM America - completely ignored that entire century).
Under a gold standard or free market commodity money and without the intervention of government (especially a central banking system, which can provide easy/free credit and manipulate interest rates), there’s no logical reason commercial fractional reserve banks would all act in concert, engaging in risky practices and overleveraging all at once unchecked, subsequently failing all at once. Furthermore, competition and self-interest would actually make this impossible, as Rothbard briefly explains here:
So…if this is all true - and I believe it is - why in the world did we see the boom/bust pattern in 19th century America?
I can speculate, of course:
- First, until someone shows me otherwise, I seriously doubt any of the busts came anywhere near the severity or length of 20th century crises, especially the Great Depression (and our emerging depression). My history is rusty, so I could be wrong, but…
- Second, any boom/bust around the Civil War can probably be explained by the war itself (and its effects on the economies and banking systems of the North and South)
- Finally, the rest of the booms and busts - which I presume were much smaller the major crises of the 20th century, though I mentioned I’m rusty on history - may possibly be attributed to the following factors:
- The global economy back then was different from the global economy now, but it was STILL a global economy. If other countries had central banks (and therefore nasty boom/bust cycles), this could have disrupted trade patterns and caused smaller but noticeable booms and busts in the US.
- Speaking of trade patterns, we were still transitioning from a mercantilistic economy to a capitalistic economy throughout the 19th century. Could international trade deficits and remaining mercantilist policies have played a role in creating booms and busts?
- Even then, we had a national gold standard, not freely competing commodity money: Perhaps there were some other central regulations / shenanigans that I’m not aware of which contributed to the formation of a distinct business cycle?
Back to the point: I’m confident there’s a logical explanation for this, and I’ll probably feel like an idiot once someone points it out…but anyway, can anyone explain the cause of the 19th century booms and busts or point me to literature that competently addresses them? Thanks!