The Great Depression | What Caused It?
The Great Depression of, the 1930s is. Still considered, by many to be a failure of the free market and the lazy Fair capitalism. At first glance it may very well seem so after. All the, American economy at the time relied, on savings, and investments, and the dollar was based on gold however. A deeper, examination reveals. A completely, different image of the underlying causes both, of the Great Depression and of its transformation, from unassuming. Beginnings, in an ordinary crisis, we. Have discussed in the Austrian, business cycle theory, video that a crisis, begins with an artificial boom driven, by an increase, in money supply and, interest rates being set far below the free market level the, Fed established, by the Federal, Reserve Act of 1913, has, removed several free-market restrictions, on inflation, from the banking system inflation, understood as a general, increase in money supply professor. Of economics, murray and Rothbard wrote only changes. In the demand for and/or the supply of money will, cause general, price changes, an increase. In the supply of money the, demand for money remaining, the same will, cause a fall in the purchasing, power of each dollar ie, a general, rise in prices, conversely. A drop, in the money supply will cause a general, decline in prices if the. Banking system is based on the fractional reserve system then, the gold standard, alone is not protect against inflation the. Fed was created to keep the inflation, in control, of the government of course. Inflation, is beneficial both to the government and to the banks so the phrase controlling, inflation is just a euphemism for causing, inflation bank, reserve ratio, fell from around 21%. In 1913. To 10% in 1917. The. Government was responsible for the reserve requirement, ratio at the time according. To rothbard the Fed contributed, to a six-fold, increase in, the monetary potential, of the American banking system by making such decisions as, a deliberate, reduction, of the reserve requirement, ratio. The, boom period, the. Boom of the roaring 20s began in 1921. And lasted, until 1929. It, was not entirely artificial, the, actual standard of living in the US did increase, more. And more Americans, had electricity, cars, and other amenities such, as toasters, and vacuum cleaners taxes, were reduced as well this, was due to the conservative, fiscal, policy, of Treasury secretary, Mellon and President Coolidge, unfortunately. At the same time something was interfering with the economic, growth it was the feds policy, of flooding the market with cheap money during, practically, the entire 1920s. Thus disrupting production. Processes, and causing, Mao investments, to amass. During. The boom the money supply increased, from forty five point three billion dollars to, seventy three point two six billion dollars, that, is by 61.8%. The. Increase was not caused by printing money but, by a credit expansion allowed, by the fractional, reserve banking the, amount of cash was fairly constant, throughout the period instead. The increase in money supply applied, to the money substitutes that, his funds normally, treated by society, as equal to cash these. Substitutes, included, demand time and other easily cashed out deposits, some. Argued, that the inflation was caused by an inflow of gold but, during the boom the gold reserves increased, only by one point one six billion dollars, which, is negligible compared, to twenty eight billion dollars, of total money supply increase. There. Were two factors causing inflation the. First factor was a change in the effective reserve, requirement, ratio it, is true that the reserve requirement, ratio itself, did not change in the 1920s. Throughout. The period the ratio applied to demand deposits, was thirteen ten or seven percent depending, on the bank and the, ratio applied to the time deposits, was three percent regardless. Of the bank the, change in the effective reserve, requirement, ratio was, caused by a significant, increase in the total amount of funds in time deposits, relative, to demand deposits, the, funds in demand deposits, increased, by approximately 31. Percent while, the funds and time deposits increase approximately, by seventy-two percent if. A reserve requirement ratio imposed, on a bank is ten percent then, such a bank can create ten, dollars out of each deposited, dollar however. When, time deposits, are considered, the bank must maintain only, 3% and reserves and, this allows for a much greater money creation before. The Fed was established, the banks had to maintain the same reserves for both kinds of deposits. Bypassing. The Federal Reserve Act the government not only caused the overall level of reserves to fall greatly between 1913. And 1917. But. Also brought about a second, reserve requirement, ratio for, time deposits, because. Banks profit, from lending money then it should not come as a surprise that banks strove to minimize the reserve requirements, by accruing more money in time deposits, this, shift and the effective reserve requirement, ratio was.
Responsible, For eighteen, point five percent of the money supply increase, during the boom period. The. Second, and main factor, causing inflation was an increase in the total amount of bank reserves the. Total amount of bank reserves increased, from one point six billion dollars in 1921. To, two point three six billion dollars, in 1929. There. Were several factors responsible for this increase Murray, Rothbard analyzed. This topic extensively, in his book America's. Great Depression after. Analyzing, individual, factors, Rothbard, divided, them into ones controlled, by the Fed in the Treasury Department, and the ones uncontrolled. By the governmental, according. To Rothbard in the analyze period, the amount of uncontrolled, reserves decreased, by about 1 billion dollars, while, controlled reserves swelled by 1 point 7 9 billion dollars, this, was done on purpose. Secretary, of treasury at the time of the feds creation, William, G Mecca do said the primary, purpose of the Federal Reserve Act was to alter and strengthen our banking system that, the enlarged credit resources demanded. By the needs of business and agricultural. Enterprises, will, come almost automatically, into existence, and at rates of interest slow enough to stimulate protect, and prosper all kinds of legitimate, business by. Keeping discount rates below market rates the Fed gave banks of permanent access to credit, this, was quite relevant to the overall increase in reserves, and the. Increase in total reserves was responsible, for 81.5%. Of money supply growth during. There. Is no doubt that the government was in favor of inflation, ISM the presidents, of the period Harding, and Coolidge both, supported, keeping discount rates low and appointed, Federal Reserve Board governors accordingly, the. Federal Reserve System also lent money for investments, in stock market, charging, a much lower interest rate than it was before the establishment of the Fed moreover. President, Coolidge's, in Secretary, of Treasury Mullins, public speeches and policies, further stimulated. The artificial, stock market boom up. To a point no effort was spared to keep the boom from fading away, finally. The stock market boom and a significant, increase in stock prices in the second half of 1927. Caused, the Fed officials to worry in, 1928. They, made a few clumsy attempts at slowing the boom down the, Fed started to increase interest rates gradually, from 3.5 percent in early 1928. To 6 percent in August 1929. While. Fed officials tried, to lower the reserves and dealt with one factor of their increase another, factor caused the reserves to swell thus, increasing, the money supply they. Managed to slow down the boom only between May and July, later. However the, Fed was forced to buy a large number of bankers acceptances, to which it had previously committed thus, at the end of the year making money supply reached the highest level since the inflation, began from. This moment onward the money supply practically. Ceased to grow in 1929. Its, growth was negligible, after. A few months without the monetary crutch the Mao investments, made during the artificial boom began to surface and by July the Great Depression began, to wreak havoc the.
Stock Markets crashed in October, in the, worst two days called, Black Monday and black Tuesday the Wall Street lost 13 and 12 percent of its value respectively. Many. People, lost their belongings in the stock market crash and committed suicide, the. Great Depression, on March. 4th a 1929, shortly. Before the Great Depression broke, out Herbert, Hoover became the President of the United States today. Many, people view him as a lazy fairest, who stood by and did nothing to help the economy when such help was needed this. Is a direct opposite, of the truth as a trade secretary, in the 1920s. Hoover, urged the government to fight unemployment by, reducing, work time and raising wage rate simultaneously. In supported. Forming of trade unions he. Was a strong advocate of increasing, government spending, on public works during economic slowdowns, Hoover. Maintained, that allowing the wages to fall during the crisis, caused the purchasing, power of the nation to decrease, and thus exasperated. The crisis. During. The previous crises, American, governments did not interfere in the economy, this, made crises, both milder, and shorter after. All during crises it is best to let now investments, fail by, supporting, Mao investments, the government artificially, takes away resources from other more productive uses, wages. Should fall as any other prices unless we want huge unemployment such, as the Great Depression during. Past crises, the economy, free of the government intervention, in wages time, and again rapidly, came back to full employment the. Lazy Faris government, should also cut, taxes, and government spending radically. Thus reducing, the time the economy needs to adjust to a crisis, so. What, actions did Hoover actually, undertake, during the Great Depression this. Is what he had to say the. Primary question, at once arose as to whether the President and the federal government should undertake to investigate, and remedy the evils, no. President, before had ever believed that there was a governmental, responsibility. In such cases no. Matter what the urging on previous occasions presidents. Steadfastly. Had maintained, that the federal government was apart from such eruptions therefore. We had to pioneer, a new field from. The beginning it was certain that Hoover was not going to be guided by the most effective, and well tested ways a fair remedies. Propping. Up wages Hoover. Inaugurated. His presidency, with a series, of White House conferences, in which he persuaded entrepreneurs. Not to decrease wage, rates and to continue to invest he, said that it is necessary to keep wage rates on high levels, and if they do fall then the fall shouldn't be greater than the fall and the cost of living expenses, seemingly. Noble, though in fact economically, horrifying, Hoover's, idea was to shift the blunt force of the depression, from the employees, wages to, the entrepreneurs, profits, instead. Of standing down the, businesses, in the worst case were to cut down the workweek, entrepreneurs. Agreed, on the plan seduced, by the then, fashionable, theory of keeping wages high in order to maintain the purchasing, power of society they. Were misguided in thinking that the cause of the depression was. Overproduction, and sub consumption, this. Was not the case obviously as the real issue here was the disrupted, structure, of production. Misallocation. Of resources stemming, from interest rates being too low cause some companies to over produce while others under produced, maintaining. High wage rates only made it more difficult to properly reallocate. The resources, ie, work, it. Was also agreed upon that, instead of standing down the entrepreneurs, would cut work hours and redistribute. Work among more employees, this. Reduced the pressure on wage cuts even further as a, result, in the early 1930s, nominal. Wage rates were maintained, but real wages have increased because. The prices, of most goods and services were falling, in September. 1930, immigration. To the United States was banned in order to maintain wages. And fight unemployment work. Grew very expensive, keeping. Prices above free market levels creates unsalable, surpluses, in case. Of work the surplus is called unemployment. During. The Great Depression unemployment. Was enormous peaking, at 28 point three percent in March 1933. With. Falling production, turnover. Prices, and rising unemployment propping. Up wages only wreaked more havoc to the economy, during.
The Previous crisis, unemployment peaked. At eleven point seven percent in 1921. Rapidly. Falling to two point five percent in, 1923, the difference, was that in 1921. Wage rates decreased, by 20% within, a year the. Market returned to full employment without, government, intervention in wages. Tariff. Policy, in, 1930. Hoover, already, raised quite high tariffs, by signing a bill reported, to him by Congress. The, alleged goal of the bill was to help farmers the. Tariff rates were raised to the highest levels in American, history, tariffs. Hurt farmers, producing, for exports, entrepreneurs. Importing, goods they needed in their own production, processes, and domestic. Consumers, who had to spend more money on imported, goods the. Automotive industry is a good example here the. Government imposed tariffs, on 800, goods used in the production cars. Moreover. Car exports, were hit by European, retaliatory, tariffs. And result. Car sales fell from 5.3. Million dollars, in 1929. To, a meager 1.8. Million dollars in 1932. The. Tariffs, along, with the economic slowdown devastated. American, exports, which fell from 7 billion dollars to 2.5, billion dollars over the 1929. To 1932. Period. Government. Spending. According. To an American, economist, dr. Robert, Murphy as, far as government spending is concerned Hoover. In his first two years in office acted, like a model Keynesian, in the. 1920s. The budgetary, surpluses, were a good reason to cut taxes, and pay off debt, Hoover. Inherited, from his predecessor a budget surplus of, 700 million dollars given. That the entire budget was worth 3.3, billion, dollars, this was a big deal but. During Hoover's term this had changed drastically in, the, fiscal year of 1932. 1.9. Billion dollars, were collected, from taxes while the spending climbed to 4.7, billion dollars, the. Deficit, expenses, were indeed huge finally. After, complete failure, of using deficit, spending to cure the depression, in 1932. Hoover, gave it up by. Then however the, unemployment already. Exceeded, 20 percent after. A year Hoover reduced the deficit albeit, dubiously, the. Deficit, fell very slightly from 2.7, billion dollars in 1932. To 2.6. Billion dollars, by the next year, 55. Percent of the amount was a result of a huge tax increase that in accordance with the Laffer curve did not bring the expected, inflows the, remaining 45 percent was due to an actual spending cut please. Note that during previous crises all which certainly did not merit the name Great Depression the, government actually cut spending at the same time as the inflows were declining. Rescuing. Farmers, Hoover. Fulfilled one of his election promises, by creating, a federal farm board or ffb, its. Aim was to grant all purpose loans to agricultural. Cooperatives, at low interest in order to maintain the prices of agricultural products. And to manage any surpluses. You, have already learned the results, of such a policy from our video on the price system as the, ffb was managed by the representatives. Of its own beneficiaries. That is the agricultural, cooperatives, the result, quite predictably, was, creation, of an agricultural cartel. After. The crash the ffb went 150. Million dollars, to the cooperatives, to hold the wheat off the market and thus to increase its price the, absurd idea was that people needed to pay artificially. High food prices just. As the depression stifled, the economy, this, push farmers, to intensify, grain production and thus, the price of grain plunged, down the. Next idea was to persuade the farmers to reduce production in order to maintain the proper price but. They simply refused, this. Prompted the farmers National grain corporation, created by the FF B to buy 7.2. Million tonnes of wheat, off the market but, this intervention did nothing to stop the prices from falling rothbard, estimated, the losses, in wheat and cotton or similar steps were undertaken, as well at 300, million dollars not, to mention the huge amounts of wheat and cotton given, for free to the Red Cross the. Federal farm board also tried to control prices of wool butter, and grapes, but this was done on a smaller scale the, government, subsidized, the production, of other products, the, ffb only, managed to aggravate, the agricultural, crisis, and was finally dismantled, yet, after the FF bees failure, Hoover, continued, his attempts at propping up the prices by recommending, that productive lands be withdrawn from cultivation. The crops be plowed under and that immature farm, animals be slaughtered, even, though some citizens, were suffering from hunger all. This to reduce surplus, this. Was destruction, of wealth plain, and simple the, government failures, led many people to organize protests. Demonstration. And strikes that were anything but peaceful by. The end of 1934. Said, that everything, was fine because, even though the overall prices, of wheat and cotton fell by 40% in the prices of other agricultural.
Products Fell by 20% in the US the, wheat price was 50% higher than in Ken and, the price of wool was 80% higher than in Denmark this, meant that if not for huge tariffs, citizens, would buy wheat 50%, cheaper and wool 80%, cheaper not, to mention that these products were impossible to sell abroad due to their high price. Public. Works a part. Of the huge deficit, spending went to public works designed, to combat unemployment, Hoover. Sent a message to the governor's urging, expansion, of Public Works soon. A special, organization was, established to, collaborate, with state governments, in the implementation of, Public Works there. Was a public construction department, created as well on July, 3rd 1930. The Congress approved spending 913. Million dollars on a Public Works program that, included the famous Hoover Dam we, have not explained how ill-advised, such an idea is in the video that which is seen and that which is not seen Hoover. Later bragged about how he persuaded, the federal and state governments, during the Depression to increase Public Works programs, by 1.5. Billion dollars, in only, four years of his term Hoover, spent more money on this than his predecessors, did in 30 years but. The government had more ideas of its sleeve for. Example, an agency, was, established, to provide huge loans to financially, troubled banks, and railways the. Loans financed. By taxpayer, money often, ended, up in hands of well-connected people last. But not least there were bank runs during. Hoover's, term some eleven thousand banks went bankrupt because, people lost confidence in the banking system of course, this loss of trust was justified, by the fact that most of the time the banks under the fractional, reserve system are, actually out of their clients money the. Loss of trust only exacerbated. In months preceding Roosevelt's. Appointment, due to the rumors of his plan to abolish the gold standard. Unfortunately. Instead of protecting the property of the depositors, the, government chose to protect the banks imposing. Bank holidays, that allowed the banks to simply refuse to pay the just claims of their depositors, such. Decisions, only aggravated, the loss of trust in the banking system, Hoover's. Policy, shattered the economy, turning a crisis, into the Great Depression as you. Can see Hoover, abandoned, the policy, of non-intervention, ISM. Worked well during previous crises, instead. He decided to take matters into his own hands and repair the alleged, errors of the free market which, of course were, actually, government faults in the effect of increasing money supply, when, he left his office the, country was in a state of economic, collapse, some. Believe that Roosevelt's, New Deal which, actually, was Hoover's policy, on steroids, pulled, America, out of the depression this. Is also untrue, by. 1935. Unemployment. Exceeded 20%, then fell to 14% during, the next two years only to rise again to 19%, in, 1938. In the, entire period, until the end of the 1930s, the unemployment, never even got close to its peak in the previous crisis, let alone the average in the 1920s. That, is 3.3, percent unemployment. True. The, GDP, grew but, the economists leee Ohanian. And Harold L Kohl estimated. That in 1939. It was 27%, below, its long-term trend, meaning. The economy, was recovering slower, than it should have, moreover. It is also untrue that the Second World War pulled, the u.s. out of the depression I encourage. You to explore these topics by, reading a book by dr. Bob Murphy the politically incorrect guide to the Great Depression in, the New Deal you. Will also greatly benefit, from a thorough analysis, of the causes of the Great Depression and of Hoover's actions and professor, Murray Rothbard z' book America's. Great Depression, available. For free at the Mises Institute website. We. Greatly appreciate all of your help and invite you kindly to visit our website at econo. We. Encourage you to subscribe to our youtube channel and to like our Facebook page you, will find the links in the video description.