What are the causes of America's Great Depression? Protectionism?
thank you for taking the time to respond!
It depends on what you mean. The initial crash is the bursting of an unsustainable bubble caused by inflation of the money supply. The fact that it lasted so long is due to government efforts to revive the economy, including protectionism, price fixing, public works projects and deficit spending.
Every decent man is ashamed of the government he lives under - Mencken
Laissez faire, free market Capitalism. Duuuuuuuuuh
Can you please expound on your answer? What types of action did the government take to worsen the economy and such? What were the results and response from the public?
How did we get out of the great depression?
Murray Rothbard wrote a 400 page book about it. You can get if for free here. There is a much shorter, free book called Great Myths of the Great Depression, which may also be of use to you.
Very quick bottom line answer: The great depression started off as a typical business cycle, where the govt printed a ton of money, which people wasted on harebrained schemes for making money which were doomed to fail. When the schemes indeed failed, obviously people lost a lot of money and a lot of people who were employed in these schemes lost their jobs.
Had govt at least stayed out of the way at this stage, things would have settled down after a year or two at most, like they always did until then. But for the first time in history, first Hoover and to much greater extent Roosevelt, started taking away money from people at an unprecedented rate to give to other people. They thought this would somehow "create jobs" and improve the economy. Of course it did just the opposite. They did this in all kinds of ways, each more damaging than the next, all the way until 1945. So the economy was a shambles until then. Finally in 1946, the govt cut spending to a third of what it was [meaning they only stole a third of what they were stealing until then], and the economy bounced back as never before.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Smiling Dave has some good advice: read Rothbard's America's Great Depression.
Viception: “The 1920s, the decade before the Great Depression, was possibly the most prosperous decade in U.S. history. Homes acquired electricity, followed by radios, refrigerators, toasters, and vacuum cleaners. From 1923 to 1929, real income per person rose 2.1% per year. During the same time the U.S. population rose from 111.9 million to 121.8 million. Treasury Secretary Andrew Mellon reduced the top income tax bracket from 73% in 1921 to 25% by 1925. He reduced taxes on the poor from 4% to 1.5% in the same time period. He reduced tax rates while there was a federal budget surplus each year of the Coolidge presidency. His tax cuts helped cause the prosperity. He anticipated the Laffer curve, named after Arthur Laffer, a curved graph that shows the relationship between tax rates and tax revenue. If tax rates rise above a certain level, people do not work as much reducing tax revenue. For example, 0% tax leads to no revenue and 100% tax leads to no revenue due to people not wanting to work to have all their money taken away, people investing in tax-exempt things, and people illegally not paying. One criticism of the 100% tax equals no revenue argument is that Soviet Union had a 100% tax and acquired some revenue. The point while accurate does not undermine the concept that lower tax rates lead to more tax revenue. Politicians, especially those who support sin taxes to discourage alcohol and cigarette use, understand taxing something discourages it. Regarding the Great Depression, there were growing signs of an economic problem. The Florida real estate bubble burst in 1925. A bubble is where asset prices rise beyond their fundamentals only because others expect them to rise. A bubble cannot gently deflate. Without more investors to raise prices, the potential buyer loses interest. Thus demand crashes as does the bubble. A bubble caused the 1929 Wall Street stock market crash. President Herbert Hoover, Treasury Secretary Andrew Mellon, and others told the public the prosperity would continue, the stock market crash was a temporary, and they should not panic. The average unemployment in 1930 was 8.9%, almost 16% in 1931, more than 23% in 1932, and 25% in 1933. There are three primary Great Depression explanations. The first explanation: the free market caused the Great Depression. This explanation is Keynesian economics, also called Keynesianism, named after economist John Maynard Keynes. What happened was consumer demand fell, which led businesses to fire unneeded workers, who ceased buying goods and/or services (which I will call ‘stuff’), which hurt businesses, which led to more fired workers, until this cycle led to the Great Depression. For whatever reason, consumers periodically and simultaneously lower their consumption which lowers demand for stuff causing recessions, according to Keynesianism. The government should have spent money to fight the recession, according to Keynesianism. What this explanation commonly omits is Herbert Hoover’s spending. He is falsely accused of doing nothing to alleviate the recession, and making it worse by balancing the budget. Herbert Hoover did not come close to balancing the federal budget in 1932. In Fiscal Year 1933 (July 1, 1932 to June 30, 1933), the federal government ran a $2.6 billon deficit. The deficit was due to spending $4.6 billion while receiving $2 billion. Thus, as a revenue percentage, federal spending was huge. In Fiscal Year 2007, during the U.S. housing bubble, the federal deficit would have to have been $3.3 trillion, not the actual $162 billion to match the same proportion of overspending. The reason the budget deficit was so huge, leading to tax hikes and budget cuts in Fiscal Year 1933, was because Hoover acted like a Keynesian during his first two years in office. Hoover inherited a $700 million budget surplus and changed it to a deficit. Federal spending rose by 42% over Hoover’s first two years in office. For comparison, when World War I ended, the federal government reduced its budget from $18.5 billion in Fiscal Year 1919 to $6.4 billion one year later. As the economy began a recession, the budget was reduced to $5.0 billion in Fiscal Year 1921, and reduced again to $3.3 billion in Fiscal Year 1922. Unemployment peaked at 11.7% in 1921, and then fell. The depression was over by the Harding presidency whereas the recession under Hoover continued. If government spending is the key to ending a recession, why was it unneeded to end the 1920-1921 depression? The reason is because economic recovery occurs when capital and labor are reallocated to their most efficient uses. Government jobs are unprofitable because they consume more than they produce. If this was false, profit-seekers would have funded them already. The government can not know if it does anything profitably because it does not operate by profit and loss that tells it if it is using its resources well. If government raises taxes, borrows money, or inflates the currency, to spend money, it offsets private spending which is more efficient because people spend their own money more carefully than they spend other people’s money. If government taxes to spend, it transfers money from one person to another. If it borrows to spend, the lender has less money to spend. If it prints money to spend, the money loses value. Viewing government jobs is easy. Unseen are the jobs that could have been created and the loans that could have been made by the private sector. During the 1932 presidential election, Franklin Delano Roosevelt criticized the Hoover administration as ‘the most reckless and extravagant that I have been able to discover in the statistical record of any peacetime government anywhere, any time.’ Roosevelt’s running mate, John Nance Garner said Hoover was ‘leading the country down the path to socialism.’ In April 1939, monthly unemployment was above 20%. Roosevelt’s Treasury Secretary Henry Morgenthau wrote in his diary: ‘We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong… somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…. I say after eight years of this Administration we have just as much unemployment as when we started…. And an enormous debt to boot!’ The second Great Depression explanation: A free market naturally experiences ups and downs, but the Federal Reserve System, also called the Federal Reserve or the Fed, the U.S. central bank, let the money supply shrink in the early 1930s causing the Great Depression. This explanation was promoted by economists Milton Friedman and Anna Schwartz in their book A Monetary History of the United States, 1867-1960. Those who believe this ‘monetarist’ explanation believe lowering interest rates is the proper response to a recession. Keynesians and Monetarists cannot explain why previous U.S. recessions ended usually within two and at most within five years with much less government intervention. If the monetarist explanation is right that the Federal Reserve’s inaction caused the Great Depression, why did not worse depressions occur before 1913, when the Federal Reserve System did not exist? Before the federal government tried to stop recessions, they ended much faster than when the government tried to reverse the 1929 Wall Street stock market crash. The Wall Street stock market boom and bust was due to the Federal Reserve System’s 1927 bailout of the Bank of England. The gold standard was abandoned during World War I by all belligerents, except the United States. Britain retied its currency, the pound, to gold. It pegged its pound to gold at its pre-war parity, although it had printed too much money during the war for this to work. The Federal Reserve defied the gold standard by expanding the supply of dollars instead of demanding the British government, which set its exchange rate too high, devalue the pound or reduce its money supply. Instead of letting Britain adjust for its wartime inflation, money supply expansion, the Federal Reserve lowered interest rates in 1927 which increased the supply of dollars and halted Britain’s gold outflow. Inflation, money supply expansion, can lead to a general rise in prices. An expanded money supply affects the stuff supply by allowing buyers to buy more and sellers to charge more which can lead to a general rise in prices, an effect of inflation. Money is payment for stuff you provided. You buy stuff with the payment you made for past stuff you provided. New money being spent was not acquired by providing past stuff. The people who first spend new money are taking stuff from the economy without having provided any past stuff. In a barter economy, where transactions occur without money, the equivalent would be stealing your stuff. Inflation, money supply expansion, always pressures prices upwards. Inflation can occur without rising prices if there is a stuff supply expansion lowering prices, due to economic competition, while inflation pressures prices upward. The downward and upward pressures on prices cause price stability. Money supply expansion and stuff supply expansion caused price stability in the 1920s. Production data showed increasing output in major parts of the economy: automobiles, petroleum, manufactured goods, and raw materials. Money supply increases pressured prices upward while stuff supply increases pressured prices downward causing price stability. The money supply rose by about 7.3% per year, a total 55% increase from July 1921 to July 1929. The money supply rose by an increase in loans to businesses. The currency in circulation was constant during the 1920s. Inflation prevents a better living standard by preventing falling prices that benefit consumers. Money supply expansion does not affect everyone equally and simultaneously. The money is usually first acquired by favored government recipients. These recipients can use the money before prices have risen. The increased money supply has yet to pressure prices upward. When you, a non-favored person, receive the money, prices have risen, and you have paid those prices on your devalued money. Inflation discourages saving. When people know their money will devalue in time, they are incentivized to spend it instead of save it. Before paper money backed by nothing was widely used, people could safely save using common money like gold and silver. Gold and silver either maintained or rose in value since their quantity was relatively stable while the stuff supply rose. The only way for a general price rise, excluding a stuff supply contraction, is if the money supply rises. Some people have argued credit cards can cause general rising prices. In an honest economy, any credit lent must first have been saved. Any credit-caused spending was due to someone saving, preventing general price rises. Some economists fear fallings prices. Falling prices, due to productivity, is a rising living standard. With an honest money supply backed by a commodity (usually gold and/or silver), there is a tendency for prices to fall. The money supply stays relatively constant while the stuff supply rises, allowing each money unit to gain purchasing power. The same amount of money and more stuff means the price of the stuff falls. Money supply expansion is easy. Stuff supply expansion is not easy. Money is not wealth. Stuff is wealth. Money was created by people, not government. People used paper redeemable in a commodity like gold or silver because using paper was easier than carrying either commodity. Rulers decided to put their faces on the money and eventually involuntarily severed the tie between the commodity and the paper because one cannot print gold or silver. If you use a printing press to create money, you are a criminal counterfeiter who devalues the currency. If government uses a printing press to create money, it engages in legal monetary policy. The Federal Reserve’s money supply expansion led to a Wall Street stock market boom. On November 1, 1929, three days after Wall Street’s Black Tuesday, the New York Federal Reserve reduced its interest rate six times so that by December 1930, its discount rate (the interest rate on loans to member banks) was 2%. It was reduced to 1.5% in May 1931. The Fed raised interest rates in October 1931, after Britain abandoned the gold standard a month earlier, to stop investors from panicking about the U.S. gold outflow. During the 1920-1921 depression, the Fed raised interest rates. The third Great Depression explanation: The Federal Reserve caused the stock market boom with its expanded money supply and low interest rates. This explanation is Austrian business cycle theory, whose most famous member is Nobel Prize-winning economist Friedrich Hayek.”
“What about margin trading? Did not that play a role in causing the depression?”
“That assumes government bureaucrats care about investors’ money more than the investors themselves, and that government bureaucrats understand markets better than the professionals. Lenders knew there were risks. If the collateral, the stock itself, devalued, the lenders would lose interest payments and principal. Why did so many investors make bad forecasts? Why did so many lenders let the investors lose their money? The reason is the Federal Reserve System reduced the interest rates in 1927 below their free market level. In a free market, where banking and money are not interfered with by government, the interest rate and the money supply are determined by the market. The boom-bust business cycle is due to interest rate and money supply manipulation. The interest rate is the cost to borrow money. In an honest banking system, loans come for deposited savings. Interest rates go up or down depending on the supply of loanable funds and the demand for loanable funds. If more people save, the loanable funds supply rises and interest rates fall. If there is strong demand for loanable funds and/or little savings to loan, interest rates rise. Lower interest rates provide businesses an opportunity to start long-term projects that would be unprofitable under high interest rates. Businesses respond to lower interest rates by raising their productive capacity: expanding an existing building and buying new equipment are examples. The only reason the businesses have the loans is because of loaned consumer savings. Those savings represent a lower desire to consume in the present. If people desired to save little and consume now, businesses could not affordably start long-term projects because of higher interest rates. The interest rate coordinates production. The interest rate can only optimally coordinate production if it is allowed to move up and down due to changes in demand and supply. If the interest rate is forced lower, by a central bank, than the free market would put it, discoordination begins. The central bank control interests rates and the money supply. The central bank expands the money supply and lowers interest rates. The cheap credit misleads businesses into long-term projects while the public has not saved enough to fund them. The public does not have the necessary purchasing power to buy the future stuff produced by the long-term projects. Austrian business cycle theory explains the bust, not the depression. Herbert Hoover, the 31st President of the United States (1929-1933), tried to re-inflate the stock market bubble after the 1929 stock market crash. Rexford Tugwell, an agricultural economist in Roosevelt’s administration, said, ‘We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.’ After the 1929 stock market crash, Hoover asked business leaders to not cut wages, believing high wages give workers the means to purchase stuff. He did not understand that high wages were a symptom, not cause, of prosperity. If high wages could produce prosperity, poverty could be ended if the minimum wage was raised to hundreds of dollars. Hoover’s agricultural policy was farm assistance which made food more costly. The American agricultural sector grew during World War I when European production was disrupted. After the war, the American agricultural sector was too large. People and resources should have been moved to other sectors. Hoover signed the Smoot-Hawley Tariff Act on June 17, 1930 which raised tariffs by about 59% on more than 25,000 items. Other countries responded with tariffs which halted international trade. Franklin Delano Roosevelt, the 32nd President of the United States (1933-1945), lengthened the recession now known as the Great Depression. He continued Hoover’s policy of artificially high wages combined with mandatory minimum prices. He cartelized the economy via the National Industrial Recovery Act which regulated production, wages, prices, and distribution allowing companies to charge more for their products than would happen in a free market. His agricultural policies were to slaughter six million pigs and destroy ten million acres of cotton to raise farm prices to benefit farmers while people were hungry. Later the policies were slightly adjusted: pay farmers not to grow food. The Agricultural Adjustment Act primarily benefited large landowners by removing poor farmers from their lands and paying the wealthy landowners not to grow food. The Department of Agriculture found that America did not produce enough food to feed its population. The high-food price policy continued. Taxes were repeatedly raised. Private investors were uncertain what the Roosevelt administration would do next, so they stopped investing. Any jobs created by the government displaced private-sector jobs. The 1937-1938 Recession, sometimes called the Roosevelt Recession, a recession within the Great Depression, was caused by lowered government spending, falsely argued Keynesians. That recession was due to the 13.7% wage raises in 1937, due the Supreme Court’s favorable ruling on the 1935 National Labors Relations Act. The wage raises were not due to rising productivity. Higher employment costs raised unemployment causing the recession. World War II did not end the Great Depression. U.S. unemployment nearly ceased to exist due to 11 million people joining the armed forces, mostly by conscription. The government allocated large amounts of gasoline, rubber, steel, and other resources away from the production of cars, radios, refrigerators, and other consumer goods, and into the production of bombs, ships, tanks, and other weapons. That made people poorer. The depression was hidden by war production. If defense production is excluded, the civilian economy during World War II had less growth than during the prewar depression. At the beginning of the Roosevelt administration, the national debt was about $20 billion. When Roosevelt died, the national debt was about $260 billion. The economy recovered after the war ended, when resources were returned to the private sector, when taxes were lowered, and when economic uncertainty ended after the Roosevelt administration ended.”
“Your business cycle explanation is different from the one I learned at college. I was trying to compare the two explanations while you spoke, but I became confused. Summarize the business cycle explanation you said.”
“The business cycle is the periodic unsustainable boom, recession, and recovery. Austrian business cycle theory is how money supply expansion, inflation, lowers the interest rate for money. Borrowed money is invested in projects that consumers cannot in the long-term afford. The new money circulates in the economy pressuring prices upward, especially in the investment projects. A temporary boom occurs. Once consumers are unable to afford the new projects, the boom becomes bust (recession). The investment projects were malinvestments that must be liquidated for recovery. Malinvestment liquidation does not require massive unemployment. Employment is mainly due to rigid wage rates. If workers accept lower wages, recovery can occur without massive unemployment. Austrian business cycle theory explains inflation-induced recession, not depression. Recessions and depressions can occur for non-money reasons (natural disaster and war are examples). Sustainable growth requires investment financed by savings, not inflation.”
“What about the bank stabilization under Roosevelt? The banking system was collapsing and Roosevelt stopped that, right?”
“Commercial banks allowed people to deposit their money and told them they could withdraw their money at any time they wanted. They made a demand deposit. The bankers lent out most of these deposits, instead of holding them. Banks can prevent a bank run by a contract saying they will not return the money until a certain date. If banks had the legal ability to turn away customers, they did not need the Roosevelt to order it. What happened is the bankers lent most of their depositors’ savings, raising bank profits, and hoped the risky business would not fail. When it did, Roosevelt absolved them of their responsibilities. Roosevelt closed all banks, healthy ones included. The bank holiday did not fix banking system problems. Jesse Jones, head of the Reconstruction Finance Corporation, said ‘It developed that probably no fewer than 5,000 banks required considerable added capital to make them sound . . . It could easily be charged, and properly so, that a fraud was practiced on the public when the President proclaimed during the bank holiday [fireside chat] broadcast that only sound banks would be permitted to reopen. It was not until the late spring of 1934, nearly fourteen months afterward, that all the banks doing business could be regarded as solvent.’ The Federal Deposit Insurance Corporation, created by the Glass-Steagall Act of 1933, provided deposit insurance. The banks did not have insurance because some things cannot be insured because providing insurance for them would make them likely to occur. If one wanted gambling insurance, no one would insure it because once whatever deductible is reached, the insurer has to pay. The insurer can specify what gambling it will insure, limit the total payout, but there would be no mutually advantageous agreement. The Deposit Insurance Corporation insures banks, allowing them to profit from risky loans and force the taxpayer to pay for losses. The Deposit Insurance Corporation’s bailout of the savings and loan associations during the 1980s cost the taxpayers $519 billion. The last defense for honest banking is removed since they are not allowed to fail. While insurance does not work for banks, branch banking does. Most bank failures in the 1930s were small regional banks. Small bankers sought and received unit banking laws that banned branch banking. This made the whole U.S. banking system vulnerable. In Canada, where branch banking was allowed, there were zero bank failures during the Great Depression.”
“Your explanation makes sense if there is a central bank to affect the interest rate and the money supply, but there were recessions before the Fed existed.”
“Prior to the Federal Reserve System, the business cycle occurred in U.S. history due to low interest rates and money supply expansion by state banks as in the Panic of 1819. The state banks paper money expansion was not tied to their gold holdings. The boom-bust process occurred again in the Panic of 1857. This process was not a mystery. James Buchanan, the 15th President of the United States (1857-1861), in his 1857 State of the Union address, said, ‘that our existing misfortunes have proceeded solely from our extravagant and vicious system of paper money and bank credits.’ The 1863 and 1864 National Banking Acts created a quasi-central banking system that led to the Panic of 1873. Money and banking have been interfered with by government throughout U.S. history. Government-backed national banks, special privileges for weak banks, imposed gold-silver ratios, bailouts, and so on have occurred. There never was a free banking system that collapsed in U.S. history. There has always been a government banking system that regularly malfunctions.”
“Despite all the problems of government intervention, providing immediate relief in the form of unemployment insurance was good.”
“Around 1910, private unemployment insurance was sold to railroad workers. Seeking to sell insurance to other workers, private insurers were repeatedly banned from doing so by state governments. In 1931, the New York legislature approved private unemployment insurance growth. The bill was vetoed by Governor Franklin Delano Roosevelt, the future president who provided government unemployment insurance.”
“Why was Roosevelt reelected if he was pursuing bad policies?”
“Roosevelt directed federal funds in states he needed to win. Alabama, a Democratic state, received much less federal money than Pennsylvania, a swing state. Moses Annenberg, the editor of the Philadelphia Inquirer, criticized the Roosevelt administration. Roosevelt responded by having Annenberg audited by the Internal Revenue Service, convicted of tax evasion, and imprisoned. Roosevelt then sent federal money to the Philadelphia Record, the Democrat newspaper that competed with the Philadelphia Inquirer. He was reelected because he bribed voters and silenced critics.”