section_path: Causes/Heterodox theories/Austrian School
section_name: Austrian School
paragraph_text: Austrian School
  
  Two prominent theorists in the Austrian School on the Great Depression include Austrian economist Friedrich Hayek and American economist Murray Rothbard, who wrote America's Great Depression (1963). In their view, much like the monetarists, the Federal Reserve (created in 1913) shoulders much of the blame; however, unlike the Monetarists, they argue that the key cause of the Depression was the expansion of the money supply in the 1920s which led to an unsustainable credit-driven boom.
  
  In the Austrian view, it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. Therefore, by the time the Federal Reserve tightened in 1928 it was far too late to prevent an economic contraction. In February 1929 Hayek published a paper predicting the Federal Reserve's actions would lead to a crisis starting in the stock and credit markets.
  
  According to Rothbard, the government support for failed enterprises and efforts to keep wages above their market values actually prolonged the Depression. Unlike Rothbard, after 1970 Hayek believed that the Federal Reserve had further contributed to the problems of the Depression by permitting the money supply to shrink during the earliest years of the Depression. However, during the Depression (in 1932 and in 1934) Hayek had criticized both the Federal Reserve and the Bank of England for not taking a more contractionary stance.
  
  Hans Sennholz argued that most boom and busts that plagued the American economy, such as those in 1819–20, 1839–1843, 1857–1860, 1873–1878, 1893–1897, and 1920–21, were generated by government creating a boom through easy money and credit, which was soon followed by the inevitable bust.
  
  Ludwig von Mises wrote in the 1930s: "Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth, i.e. the accumulation of savings made available for productive investment. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."