"Liquidation" Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression

Abstract

During the 1929-33 slide into the Great Depression, the Federal Reserve took almost no steps to keep the money supply or the price level stable.Instead, the Federal Reserve acted -disastrously --as if the gathering Great Depression could not be avoided, arid was best endured.Such a "uiquidationist" theory of depressions was in fact common before the Keynesian Revolution, and was held and advanced by economists like Hayek and Schumpeter.This paper tries to reconstruct the logic of the "liquidatjonjst" view.It argues that the perspective was carefully thought out (although not adequate to the Depression), may hold some truth in other times arid places, and could be the core of a more productive research program than currently popular "real" business cycle theories.

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