Many history teachers teach the “oversimplified version” of the 1929 crash and the ensuing Great Depression. The story goes something like this: Margin-buying in the stock market led to a speculative boom which created instability. Rumors of industry slowdowns in construction and automobile manufacturing as well as rampant speculation led large investors to sell out causing a generalized panic in the market that was unable to be saved by big banks and investors. This crash led to a great depression. From this point, banks that had investments in the market as well as substantial mortgages and loans were unable to meet the rise in depositor panic forcing many to close their doors. Surviving banks then engaged in tight lending policies leading to a contraction in business and industry. Additionally, President Hoover’s administration further slowed the economy with the Smoot-Hawley Tariff grounding international trade to a halt. Finally, US farmers never enjoyed the prosperity of the 1920s and throughout that decade continued to face foreclosures, which increased during the Depression leading to further pressures on rural banks. Despite Roosevelt’s efforts through the New Deal, it was increased government spending in WWII that brought recovery. The End.
Perhaps pieces of this overview need
some correction. Especially after the 1987 Stock Market nose-dive, it has
largely been accepted that the Stock Market crash did not inevitably lead to
the Great Depression. Nonmonetary factors, tight-money monetary policies, along
with poor fiscal policy decisions kept the economy in retraction; it was not
until the United States dumped the gold standard and then saw an unanticipated
increase in its gold reserves did the Great Depression finally end.
In the late 1920s, speculation
brought more investors into the stock market demanding money to buy which led
to an increase in margin-buying. Some economic historians contend that the
Federal Reserve engaged in tight money practices to discourage margin-buying to
slow the speculative boom.[1]
Rather than slowing the practice, margin-buying simply moved into the private investors,
corporations, and foreign banks and the bubble grew. Prior to the inclusion of
margin-buying, investors were typically more well-versed in their investments
and made sophisticated choices; thereafter, the ability to purchase stocks with
ease brought in a variety of new investors who were ignorant of their
investments.[2]
Stock overvaluation and over-speculation
were apparent to more sophisticated investors. As one stated, “When the shoeshine
boy was talking to me about his investments, I knew it was time to sell out.”[3]
Additionally, due to declines in construction and automobiles, two of the
biggest sectors in the American economy investors became jumpy leading to a selling
craze and the market crash. As in 1987, this did not have to spell a Great
Depression; however, the Federal Reserve’s continued strict monetary policies
made it inevitable. Rather than taking a note from the Federal Reserve Bank of
New York and easing lending restrictions – which confined the crash to the
stock market – the Federal Reserve maintained its tight policies which prevented
economic recovery.[4]
After the crash, with fear
surrounding the solvency of banks and the expectation of exchange-rate
devaluation, depositors showed up in droves to pull their deposits. According
to Ben Bernanke, with an unregulated fractional reserve, the banks simply ran
out of money and were forced to close their doors – which led to more panic and
bank closures. Since bank loans and investments play a leading role in the money
supply, investor panic created drains on the reserves.[5]
Rather than engage in inflationary
policies that would have led to an endogenous increase in the money supply (had
to use the word), the Federal Reserve maintained its tight money policies throughout
the 30s. The government’s adherence to the gold standard until 1933 retarded
the growth of the money supply leading to higher interest rates and less
economic growth.[6] As
Christina Romer stated in her hypothesis of what ended the Depression, if countries,
not just the United States, would have engaged in monetary expansion by dumping
the gold standard, then it would have had substantial nonmonetary benefits in
more investor optimism, as well as substantial monetary benefits in a reduction
of interest rates.[7]
Fiscal policy also contributed with
the passage of the Smoot-Hawley Tariff in 1930. The tariff contributed to a
further decline in the world economy. In fact, 1,028 economists begged Congress
to reject the tariff as they predicted it would ground international trade to a
halt.[8]
They were right. As a June 9, 1931 from the Baltimore Sun decried, some
of the US’s closest trading partners, including Canada, reacted negatively
reducing the number of purchases by about 20 million dollars.[9]
Additionally, 70 additional nations passed retaliatory tariffs. [10]
While it is short-sighted to fully blame Smoot-Hawley for the Depression, its
impact on the worldwide economy cannot be ignored.
The end of the Depression did not
come with Roosevelt’s New Deal relief programs. These programs were only
sustainable in so far as the federal government sustained them. Relief programs
did not bring true recovery.[11]
Recovery may be attributed to dumping the gold standard in 1933 as well as an unexpected
increase in the United States' gold reserves due to political instability in Europe.
According to Ben Bernanke, countries
that left the gold standard experienced better recovery and, after 1934, the US
began to experience some recovery. More compellingly, this recovery may be attributable
to the increase in the US money supply due to the political instability in
Europe. Roosevelt did not sterilize this influx, and this encouraged some
economic recovery through lower interest rates which stimulated investments and
continued through WWII.[12]
The Great Depression provides continuous
fodder for economists and economic historians to debate. It is doubtful that
there will ever truly be consensus data that all will agree upon as to what
caused and solved it. It is unlikely that it was totally one issue or another,
but rather an interplay of several issues working together that sent the world’s
economy into a tailspin and back into recovery.
[1] Ben Bernanke, “The Macroeconomics
of the Great Depression: A Comparative Approach,” Journal of Money, Credit,
and Banking 27, no. 1 (Feb. 1995), 6, https://www.jstor.org/stable/2077848.
[2] Eugene N. White, “The Stock Market
Boom and Crash of 1929 Revisited,” Journal of Economic Perspectives 4,
no. 2 (Spring 1990): 70.
[3] New York: A Documentary Film,
episode 5, “Cosmopolis: 1914-1931,” Directed by Ric Burns, on PBS, https://www.youtube.com/watch?v=RJpLMvgUXe8.
[4] White, 81.
[5] Bernanke, 6-7
[6] Ibid., 5, 16.
[7] Christina Romer, “What Ended the
Great Depression?” The Journal of Economic History 52, no. 4 (Dec. 1992):
776, https://www.jstor.org/stable/2123226.
[8] “The Smoot-Hawley Tariff: A Grisly
Tale,” The Baltimore Sun, May 7, 1953: 22. ProQuest Historical Newspapers.
[9] “U.S. Sales Abroad Show April
Slump,” The Baltimore Sun, June 9, 1931, ProQuest Historical Newspapers.
[10] “The Smoot-Hawley Tariff: A Grisly
Tale.”
[11] For a fuller understanding of the
impacts and uneven distribution in relief programs, see Price Fishback’s “The
Newest on the New Deal,” Essays in Economic & Business History 36,
(2018).
[12] Romer, 781-782.
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