This week’s headline question is still the “billion-dollar question” almost ninety years after the event. Yet, additional questions are still being asked. For example, “. . . in the history of 19th century “boom and bust” cycles, just how great was the Great Depression,” and, what caused the Great Depression? Is there a particular or “singular cause” that can be seen by economic historians from this distance in time?
According to David Wheelock, the Great Depression was the most significant macroeconomic event in US history.[1] While there were economic depressions during the 19th century, these events are unique to the period based on the metrics available regarding extant regulation of the economy, market size, shifting commodities and population factors that change over time. Further, all sources point to a myriad of difficulties when comparing the historical “Great Depression” of 1930 to any earlier significant depression of the 19th century. For example, the several Panics and Depressions that occurred during late 1839 to early 1841, and from 1873-1878 and another “Market Crash” in 1896.[2] Nonetheless, the Great Depression is considered by economic historians as not only the most significant macroeconomic catastrophe since the US Civil War, but THE defining event for economic policy studies in the second half of the twentieth and into the twenty-first centuries.
In a classic refutation of a prevailing theory of shallow thinking that professes there are “easy answers to complex questions,” there are actually several, rather than any single, contributing economic “comorbidities” that contributed to the Great Depression. The most popular causation theory commonly taught is that the Wall Street “Stock Market Crash of 1929 was to blame for the Great Depression. To be fair, because of the succession of these two events, 1929-1930, it would seem that one event did closely follow the other. The market lost 80% of its value from its peak of September 1929 to the trough of July,1930. Significant wealth was lost in the middle and upper classes and the resultant effects were felt commensurately across the country and usually based on how much one had to lose. One important difference during this period was stocks could be bought on credit. This encouraged middle class participation in a capitalist economy to an unfortunate result.[3]
Even without active participation as a stockholder, any public confidence in the stock market as a place to park one’s cash immediately declined and characterized an equity investment as highly speculative. The “Crash” encouraged conservative investors to take what would be a fateful step and keep their money in the banks. Research conducted on “uncertainty after the Crash,” conducted by the former Chair of the President’s Council of Economic Advisers Cristina Romer, found that spending on consumer durable goods declined rapidly, whereas spending on necessities continued at pre-crash levels. Thus, many of the new inventions in big ticket consumer appliance and automobile category items went unpurchased and inventories in these industries accumulated.[4]
The role of bank failures as a symptom of the Wall Street Crash is more significant to the Great Depression. But, not singular. Banks credit policies allowed loans to be made on equity purchases. When the Crash occurred, loans were called in to pay off delinquencies. If these could not be collected, the bank failed and closed their doors. In the time before Federal Depository Insurance, a bank failure wiped out all the depositor’s funds. Many expected the new Federal Reserve banking system to step in and rescue banks that were insoluble. However, to great surprise of many, President Herbert Hoover opposed any government intervention. Further, a more direct effect was that as people lost money they obviously spent less. Government taxes and user fees as a result of that loss of spending also disappeared.
When a bank closed, depositors with other community banks began a “run” to pull their funds from their still open bank. Better to be safe than sorry. A bank seldom withstood a “run.” Even more serious was that the relationship a business had established with the now defunct bank was lost. New relationships for business lending were nearly impossible to re-establish, as banks tightened their lending policies during the period when over 7,000 banks collapsed. Without a new source of funding, businesses that depended on short term loans to “floor plan” their inventories or raw materials purchases became unavailable and closed. Employees that were lost with the business, 25% in the US, became a variable in one of the several consequences of the severance of the important business lending relationship, what Bernanke calls “the cost of the credit intermediation.” [5]
The Smoot-Hawley Tariff Act of 1930 is another often mentioned contributing factors to the Great Depression. Originally enacted to protect US farmers from agricultural imports, Smoot-Hawley only encouraged retaliatory tariff measures by US trading partners. Subsequently when trade was needed the most, a significant collapse occurred in world trade. There were no winners. According to Kindleberger, world trade spiraled downward from $3.1 billion in 1929 to less than $1billion in 1933. The global economy experienced a 75 per cent decrease at the same time the US was experiencing a 30 per cent decline. Yet, according to Kindleberger, international trade accounted for a relatively small part of total US production. Consequently, Smoot-Hawley though a contributor, was not a large enough factor in and of itself to cause the Great Depression.
One cannot dispel the importance of a phrase that is oft repeated in contemporary advertising that cannot be fully understood without studying the events of 1929-1930. That phrase is, “. . . backed by the full faith and credit of the US Government . . .” Contemporary intervention by the Federal Reserve has been swift as seen in recent times during the “Great Recession” in 2008. The Great Depression lasted for more than 12 years. It was not the product of any single but of multiple macroeconomic variables that are still debated to this day.
Works Cited
Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” The American Economic Review 73, no. 3 (1983): 257-76. Accessed July 27, 2021. http://www.jstor.org/stable/1808111.
Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919- 1939. Oxford University Press, 1992.
Galbraith, John Kenneth. The Great Crash: A Laymen’s Guide to the Stock Market Crash of 1929. Houghton Mifflin Co., 1997.
Kindleberger, Charles P., De Long J Bradford, and Barry J. Eichengreen. The World in Depression, 1929-1939. Berkeley, CA: University of California Press, 2013.
McElvaine, Robert S., editor. Down and Out in the Great Depression. University of North Carolina Press, 1983.
Romer, Cristina. “The Great Crash and the Onset of the Great Depression.” The Quarterly Journal of Economics 105, no. 3 (August 1990): 597–624. https://doi.org/https://doi-org.ezproxy.liberty.edu/10.2307/2937892.
Wheelock, David C. The Strategy and Consistency of Federal Reserve Monetary Policy, 1924-1933. Cambridge, UK: Cambridge University Press, 2004.
Economic Episodes in American History: The Great Depression. Federal Reserve Bank of St.Louis, 2013. https://www.stlouisfed.org/the-great-depression/curriculum/economic-episodes-in-american-history-part-1.
Notes
[1] Economic Episodes in American History: The Great Depression. Federal Reserve Bank of St.Louis, 2013. https://www.stlouisfed.org/the-great-depression/curriculum/economic-episodes-in-american-history-part-1.
[2]Ibid., part 1.
[3] John Kenneth Galbraith. The Great Crash: A Laymen’s Guide to the Stock Market Crash of 1929. Houghton Mifflin Co., 1997.
[4]Cristina Romer. “The Great Crash and the Onset of the Great Depression.” The Quarterly Journal of Economics 105, no. 3 (August 1990): 597–624.
[5]Ben S. Bernanke “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” The American Economic Review 73, no. 3 (1983): 257-76.