NCPA - National Center for Policy Analysis

What Caused The '29 Crash And Great Depression?

October 29, 1999

Today marks the 70th anniversary of the stock market crash of 1929. There is still no consensus on causes of the crash or its relationship to the Great Depression. These are still important questions because many of the suggested causes are still relevant today.

Take the Smoot-Hawley tariff on imported goods:

  • Protectionists argue that it could not have affected the stock market because the law was not passed until 1930.
  • However, much of the legislative activity took place in 1929, and markets quickly capitalize any policy that will affect future profits.
  • Economist Douglas Irwin argues that because many of the tariff increases were specific monetary amounts, deflation had the effect of increasing their real effect by 30 percent.
  • He concludes that Smoot-Hawley was responsible for at least 40 percent of the decline in imports after 1930.

Another factor was the Federal Reserve's over-reliance on low inflation (price stability) as the main indicator of the correctness of monetary policy. Stable prices could disguise underlying economic imbalances caused by monetary policy.

During most of the 1920s, Fed policy was too easy; it turned sharply tighter in the late 1920s and remained tight throughout the 1930s until World War II.

  • Gold inflows in the 1920s expanded the money supply, but did not raise the general price level because the money was channeled into securities markets, where it fueled a stock market boom.
  • In early 1928, the Federal Reserve became alarmed by the boom and moved to tighten money.
  • In 1929, it tightened money further -- and the money supply fell by 27 percent between 1929 and 1933.

Thus, the length and severity of the Great Depression was due primarily to a disastrous monetary policy by the Federal Reserve.

Source: Bruce Bartlett (National Center for Policy Analysis), "Wall Street Crash Plus 70," Washington Times, October 29, 1999.


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