Why Did the 1930s Depression Last So Long? Purdue Economist James A. Estey Explained Why in Strictly Austrian Terms

Estey described in detail how the shape of the economy’s structure of production is distorted by monetary inflation, creating initially a rapid expansion in the capital-goods industry. To keep the boom going, the banks and the central banks would have to advance further credits. “This further increase, however, would have to be greater than the initial one, for the general price level and the general level of incomes have now risen. . . . It is only a question of time until the changed structure becomes impossible and the former one must be restored.” Estey believed that the expansion of bank credit to finance World War II was a classic example of Hayek’s thesis, if one considers war goods as capital. 

Why did the 1930s depression last so long? Estey gave his explanation in strictly Austrian terms:

Theoretically, there should be a steady transfer of workers and nonspecific capital from the abandoned higher stages to these lower ones. In fact, this process is slow. Shorter processes still have to be started from the beginning. Goods still have to pass through the necessary steps. In addition, it is possible only gradually, as successive stages are reached in the passage of goods to the consumer, to absorb the labor and nonspecific capital released from longer and more roundabout processes. Moreover, this delay is increased by the uncertainty of producers in respect to appropriate methods in the shortened process where a relatively smaller amount of capital and a relatively larger amount of labor are needed.

    In brief, workers and mobile resources are released from the longer processes faster than they can be absorbed in the shorter, and the consequence is a growing volume of unemployment. . . . The attempt to restore the normal levels of consumption sets up a further disturbing factor—that is deflation and a fall in prices—which lengthens the depression and adds to the obstacles facing recovery.

Estey’s coverage of Hayek’s theory is extensive. He characterized the Hayekian model as “ingenious.”

—Mark Skousen, The Structure of Production, new rev. ed. (New York: New York University Press, 2015), 87.