This file is a short single-author polemical economics essay, structured as a rapid rebuttal of nine public explanations of the October 19, 1987 stock-market crash. Its scope is not archival reconstruction but diagnosis: Rothbard treats the crash as a test case in Austrian business-cycle theory and as evidence of the failures of mainstream policy commentary.
Let's try to sort out and rebut some of the nonsense about the nature, causes, and remedies for the crash.
Rothbard first rejects the soothing language of a mere market correction. For him, Black Monday was not an isolated technical event but the visible culmination of a contraction already underway.
Meltdown Monday simply put the seal on a contraction process that had gone on since early September.
His next conceptual move is to attack tautological explanation. Saying prices fell because stocks were overvalued, he argues, explains nothing about the causal forces that produced the boom or the collapse.
A definition has been magically transmuted into a “cause.”
The essay then turns against scapegoats: computers, index futures, and market mechanisms that reveal bad news. Rothbard’s defense of futures markets is also a defense of price discovery against political attempts to blame instruments rather than policy.
People trade, and people program computers.
He likewise dismisses the trade deficit as a cause. The alleged deficit is, in his view, balanced by capital inflows; foreign investment in dollar assets is not a national humiliation but part of international exchange. This anti-mercantilist claim lets him separate the crash from popular anxieties about American decline.
There is nothing wrong with a trade deficit.
Rothbard is more ambivalent about the federal budget deficit. He considers deficits harmful, but refuses to make them the cause of every economic disorder. His sharper objection is to the proposed remedy of tax increases, which he treats as Hooverite and recessionary.
Raising taxes will clearly level a damaging blow to an economy already reeling from the crash.
The positive Austrian prescription appears in his discussion of spending cuts and saving. Lower government expenditure, he argues, would reduce wasteful public uses of resources and shift the economy toward investment, thereby easing the liquidation forced by the bust.
More saving and investment in relation to consumption is an Austrian remedy for easing a recession, and reducing the amount of corrective liquidation that the recession has to perform, in order to correct the malinvestments of the boom caused by the inflationary expansion of bank credit.
The central thesis emerges most clearly in the treatment of Federal Reserve policy. Rothbard argues that the crash resulted from the prior credit boom, not from insufficient liquidity. Greenspan’s post-crash monetary support therefore repeats the original error: it attempts to cure a credit-generated distortion with more credit.
Only in Cloud Cuckoo-land, to repeat, is the cure for inflation, more inflation.
Rothbard’s most distinctive move is to reinterpret recession itself. Once inflationary bank credit has produced malinvestment, recession is not an avoidable evil but the corrective process by which the boom’s errors are liquidated. The proper role of government is therefore abstention, not rescue.
The important point about a recession is for the government not to interfere, not to inflate, not to regulate, and to allow the recession to work its curative way as quickly as possible.
The final myth concerns the idea that policy should switch from anti-inflation to anti-recession after a crash. Rothbard attacks this as a revival of the Phillips Curve mentality, ignoring the inflationary recessions of the 1970s. His warning is that inflation and recession are not opposites: expansionary policy can intensify both.
The looming danger is another inflationary recession, and the Greenspan reaction indicates that it will be a whopper.
The essay’s relevance lies in its compressed statement of Rothbard’s monetary theory of crisis. It rejects psychological, technological, fiscal, and trade-balance explanations in favor of a single causal chain: Fed-driven credit expansion lowers interest rates, fuels unsound investment and asset inflation, then gives way to rising rates, collapse, and attempted monetary rescue. Its polemical force comes from reversing conventional remedies: tax increases, regulation, exchange closures, and liquidity injections are not stabilizers but ways of prolonging the distortion.
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