Causes of the Great Depression

[Propertarian]

I know the traditional Keynesian theory is that the Great Depression happened because Herbert Hoover was a believer in laissez-faire. People underconsumed, causing a Depression and the Federal Reserve did the wrong thing by deflating instead of inflating. Then FDR came along and saved the day with the New Deal. Neo-Conservatives historians tend to mostly agree with the standard liberal account, but they believe that the New Deal didn't work and that World War II ended the Depression.

However, I don't believe in this account, as it doesn't make alot of sense when you look at the historical record. Hoover was not a believer in laissez-faire and spent his time that he campaigned in 1932 telling people that he didn't listen to the "reactionary" economists. The businesses that went broke at the beginning of the Depression were not consumer goods businesses, but rather business-to-business companies. When you look at the record of the New Deal, it didn't do anything to actually stop the Depression and actually prolonged it. World War II had nothing to do with it either as things weren't much better immediately after World War II.

I personally think the post-war recovery (which actually surprised every mainstream analyst at the time, as they all thought that Communism was the wave of the future and far more efficient) was actually due to the 80th Congress, which was the first Congressional term in which the anti-New Deal Old Right got a majority. The 80th Congress filibustered the "Fair" Deal, which included the first Socialized Medicine proposal in American history and prevented it from passing. They also repealed price controls and passed legislation to put stricter limits on the activities of trade unions. Had Eisenhower decided to run as a Democrat in 1952, rather than a Republican, the Old Right would have won the presidency and repealed the entirety of the New Deal and probably restored the laissez-faire Capitalism of the 1800s. They would definitely have cut off Social Security, as the Old Right at that time consisted of most of the Senior citizens and they absolutely hated that now-beloved entitlement program.

I probably agree most with Murray Rothbard about the Depression. He wrote a book about its causes in the 60s, which was mostly ignored at the time.

 

[sydhe]

Laissez-faire more describes Coolidge than Hoover. Hoover didn't stand pat during the Great Depression; it's more that nothing he tried worked. One thing he did that actually did prolong the Depression was the Smoot-Hawley Tariff which drastically cut down on trade. This helped collapse other economies in South America and Europe which compounded the problem since we couldn't relieve our problems by increasing trade. The European economies were particularly fragile between the wars and immediately after. Don't underestimate the influence of the Marshall plan on our economy as well as Europe's.

 

[Godwynn]

Here are the very brief causes of the Depression:

Stock Market Crash of 1929 - Vast insider trading
Smoot-Hawley Tariff - American exports plummeted by half overnight
Federal Reserve Not Bailing Out Banks - Bank runs, and bank collapses
Federal Reserve Destroying Money - Between 1929 and 1933 a full one third of all of the money in the United States was destroyed

If anything F.D.R. prolonged the Depression, the depression was not a failure of capitalism, it was a failure of government.

 

[simonnomis]

That's an overly americo-centric view of the depression. America was a player in an *international* economic system that was fundamentally flawed and was incapable of its pre-1914 operation due primarily to the weakness of European (partcularly the British and German) economies. It was the complete imbalance of the entire system, a symptom of which including the over-enrichment of the USA after WW1, that made the depression 'great' since no other economy was in a position to regulate the system. Had politicians recognised that the world had changed after 1918, and that a return to pre-war times was impossible, things might have been different.

 

[Godwynn]

That's an overly americo-centric view of the depression. America was a player in an *international* economic system that was fundamentally flawed and was incapable of its pre-1914 operation due primarily to the weakness of European (partcularly the British and German) economies. It was the complete imbalance of the entire system, a symptom of which including the over-enrichment of the USA after WW1, that made the depression 'great' since no other economy was in a position to regulate the system. Had politicians recognised that the world had changed after 1918, and that a return to pre-war times was impossible, things might have been different.

Ofcourse it's Americentric, I am American! From my limited knowledge of other nations' economies it could be attributed to the large debts Germany had to pay out to the Entente. Germany couldn't pay it, so it simply printed the money, causing it to lose value and have skyrocketing inflation. Also, it made the debts it paid worthless.

 

[Integral]

Stock Market Crash of 1929 - Vast insider trading
Smoot-Hawley Tariff - American exports plummeted by half overnight
Federal Reserve Not Bailing Out Banks - Bank runs, and bank collapses
Federal Reserve Destroying Money - Between 1929 and 1933 a full one third of all of the money in the United States was destroyed

That's a pretty good summary of what happened in the USA. The Federal Reserve's actions were deplorable and lengthened the Depression considerably. (Then again, the Fed is only as good as its governors and Chairman--contrast the 30's with Greenspan in the 90's.) At a time when they should have poured liquidity on Wall Street (in the form of a money supply increase) they contracted the money supply by about one-third. The Smoot-Hawley Tariff didn't help any, and retalitatory tariffs by other nations decimated world trade by a huge margin (upwards to half, I think). Stock market troubles would have been containable if the Fed and Congress hadn't made things worse.

Integral

 

[Fanaza]

not enough serotonin?

 

[Provolution]

I think communist and socialist rhetoric and violent political activism made entrepeneurs and creative geniuses psychologically ill. The driving forces of modernization and economic growth were hammered down by an avalanche of totalitarian malaise, to the point that the booming market did not handle labor rights as they should or did harness their own energy the right way.

 

[Ace]

Here are the very brief causes of the Depression:

Stock Market Crash of 1929 - Vast insider trading
Smoot-Hawley Tariff - American exports plummeted by half overnight
Federal Reserve Not Bailing Out Banks - Bank runs, and bank collapses
Federal Reserve Destroying Money - Between 1929 and 1933 a full one third of all of the money in the United States was destroyed

If anything F.D.R. prolonged the Depression, the depression was not a failure of capitalism, it was a failure of government.

Stock Market Crash of 1929 - primary cause was margin trading, not insider trading. People were thinking that the "roaring Twenties" would last forever and buying stock on margin...20% cash and the rest on credit. This worked great as long as the market went up, but when it went down people could not make their margin calls because all their cash was invested and they had to sell their stock to make the margin calls, starting a vicious downward spiral which let to many bankkruptcies. And the banks were no exception, they were also speculating to the max on credit.

Smoot-Hawley didn't help, but the damage was already done.

The Fed was not designed to "bail out" banks back then, there was no Federal Deposit Insurance Act at that time. And as for the Fed destroying one third of the currency supply, if it was not needed, get rid of it or face the massive inflation Germany suffered in the twenties.

The USA didn't really come out of the Great Depression until the massive buildup for World War II started in 1940/41. FDR's programs fed a lot of people, and created a number of jobs, but it took WWII to jumpstart the economy.

 

[ParkCungHee]

The Fed was not designed to "bail out" banks back then, there was no Federal Deposit Insurance Act at that time. And as for the Fed destroying one third of the currency supply, if it was not needed, get rid of it or face the massive inflation Germany suffered in the twenties.

Indeed. The only account I can recall of and immediate bailing out of Banks was by Governor Long, which was, in typical Long Fashion, of Questionable Legality.
When the market crashed he got a call pleading for him to prevent a bank from collapsing. He said he'd handle it. He shows up the next day at the bank before it opens and sits down in the presidents chair.
He wrote a Check for the exact contents of the Main Bank in Louisiana, if anyone insisted on making a withdrawal, well he was here first and would cash his check, and you wouldn't get any money at all. So of course no one could make a withdrawal.

 

[Godwynn]

Stock Market Crash of 1929 - primary cause was margin trading, not insider trading. People were thinking that the "roaring Twenties" would last forever and buying stock on margin...20% cash and the rest on credit. This worked great as long as the market went up, but when it went down people could not make their margin calls because all their cash was invested and they had to sell their stock to make the margin calls, starting a vicious downward spiral which let to many bankkruptcies. And the banks were no exception, they were also speculating to the max on credit.

D'oh, You're right!

Smoot-Hawley didn't help, but the damage was already done.

I would say Smoot-Hawley did the more damage than the stock market crash. In 1987 the Dow dropped 25% in a single day, we came out of that alright. One half of all exports will kill an economy, instantly. Since then the factories that are exporting will have to lay off half of their workers.

The Fed was not designed to "bail out" banks back then, there was no Federal Deposit Insurance Act at that time. And as for the Fed destroying one third of the currency supply, if it was not needed, get rid of it or face the massive inflation Germany suffered in the twenties.

The Federal Reserve had the chance to bail out banks, J.P. Morgan and other chairman of the New York Federal Reserve decided against it. It may not have been designed to, but they thought about it.

The currency back then was still on the gold standard. $1 was worth $1 in gold. So destroying money tightened the supply, and one third of all gold in the United States was sitting in a vault, unused.

The USA didn't really come out of the Great Depression until the massive buildup for World War II started in 1940/41. FDR's programs fed a lot of people, and created a number of jobs, but it took WWII to jumpstart the economy.

I would say F.D.R.'s programs prolonged the Great Depression and caused more harm than any good.

 

[Ace]

Godwyn said: "I would say Smoot-Hawley did the more damage than the stock market crash. In 1987 the Dow dropped 25% in a single day, we came out of that alright. One half of all exports will kill an economy, instantly. Since then the factories that are exporting will have to lay off half of their workers."

By June of 1930, when the Smoot-Hawley act passed, the depression was already in full bloom. It certainly didn't help, but it did not cause the depression. In 1987, the drop in the Dow was a shock, but since investors owned their stock outright, and did not have to sell off their holdings to generate cash to cover their margin calls, they could ride out the dip and wait for the market to recover.

The massive falloff in exports and imports was mostly caused by the stock market crash, which rippled across the world's economies.

 

[MadScotsMan]

Europe was extremely debt ridden and torn by nationlists everywhere, like Ireland, the Balkans, General Franco, and (dunno about this) a lack of workers, because so many men had died. Was this a factor?

 

[Godwynn]

Godwyn said: "I would say Smoot-Hawley did the more damage than the stock market crash. In 1987 the Dow dropped 25% in a single day, we came out of that alright. One half of all exports will kill an economy, instantly. Since then the factories that are exporting will have to lay off half of their workers."

By June of 1930, when the Smoot-Hawley act passed, the depression was already in full bloom. It certainly didn't help, but it did not cause the depression. In 1987, the drop in the Dow was a shock, but since investors owned their stock outright, and did not have to sell off their holdings to generate cash to cover their margin calls, they could ride out the dip and wait for the market to recover.

The massive falloff in exports and imports was mostly caused by the stock market crash, which rippled across the world's economies.

Was it the great depression before Smoot-Hawley or just a recession?

 

[Ace]

Was it the great depression before Smoot-Hawley or just a recession?

Technically, it didn't become the "Great Depression" until some years later when people started referring back to it as the "Great Depression". According to my father (b.1916) and my grandfather (b.1891), it was just "The Depression" until after World War II, sorta like World War I just being called "The War", or "The Great War" until September, 1939.

 

[Harbourboy]

The Federal Reserve's actions were deplorable

The more important question is whether history is going to repeat itself. Any time soon. The USA and much of the western world has been riding an unprecedented wave of easy credit fuelled liquidity over the last 10 years or so. Have the actions of the 21st century Federal Reserve been any more responsible? Do fundamental economic principles ever change?

The financiers of the 1920s boldly claimed before the Depression that "the world has changed" and that "the old rules don't matter any more". The same sort of head-in-the-sand attitude can be seen everywhere today.

 

[sydhe]

Before the 1930's the "Great Depression" was what is now called the "Long Depression," and lasted from 1873 through 1896. The ends of that are the Panic of 1873 and the Panic of 1893, and in the United States was notable for the rise of Greenbackism, Free Silver, a gold shortage in the early 1890s and a prolonged agricultural recession and eventually the Populism. That coincided with the end of Reconstruction and a series of very close Presidential elections, as well as some radical shifts in the composition of Congress in 1890 and 1894. I think a lot of it may have had to do with price depression caused by the spread of industrialization and the railroads.

http://en.wikipedia.org/wiki/Long_Depression

 

[.Shane.]

I personally think the post-war recovery ... was actually due to the 80th Congress, which was the first Congressional term in which the anti-New Deal Old Right got a majority.

I was waiting for the punchline and wasn't disappointed. Turns out this is a anti-SS screed masked as an objective discussion about the Great Depression. Kudos!

 

[austin2359]

People lost their confidence in the market. The marginal propensity to save started to outweigh the propensity to spend. People simply held onto their money because they thought the American economy was a bad investment.

That is why FDR used so much government intervention, he had the government spend money for the people, because the people weren't spending it on their own.

 

[Verbose]

The first is a credible Canadian historian (specialist on technology reception in colonial situations):
http://history-world.org/great_depression.htm

The other one, I've no idea really, but the reasoning seems pretty solid:
http://www.cyberessays.com/History/163.htm