NCPA - National Center for Policy Analysis

Blunders Which Caused Depression Not Likely To Be Repeated

October 23, 1998

Every time the stock market wobbles, the specter of the 1930s Great Depression is raised. Many economists hold that such a scenario won't be played out again -- at least any time soon. The market crash of 1929 and ensuing events were "the result of a series of policy blunders," according to economic historian Robert Higgs of the Independent Institute.

Since then our understanding of economic causes and effects has vastly improved. Leaders in the former era were dumbfounded by events which seemed to overwhelm them. Their answer was the New Deal, which many economists now concede only made matters worse. Milton Friedman has traced the roots of the catastrophe to ill-conceived Federal Reserve policies and passage of the protectionist Smoot-Hawley Act.

  • Between 1921 and 1929, the U.S. money supply grew more than 60 percent, which -- by keeping interest rates low -- encouraged risky loans and excessive borrowing.
  • When the Federal Reserve suddenly began raising interest rates in 1929, business activity was choked off and profits began to fall -- precipitating the market crash.
  • Smoot-Hawley raised tariffs in 1930, sparking international trade wars and destroying markets for U.S. exports.
  • Two years later, Washington passed what was then the biggest peacetime tax increase in history -- then added insult to injury by establishing Social Security, which necessitated more taxes and added to labor costs.

As thousands of banks failed, the money supply dried up -- falling by one-third between 1929 and 1933. Wages and prices should have fallen -- which would have led to more jobs and greater sales -- but politicians did all they could to prop up wages. By 1933, unemployment peaked at 25 percent and gross national product hit bottom.

This series of disastrous policies only prolonged the agony, most of today's economists agree. By 1939, ten years after the crash, unemployment still stood above 15 percent -- despite huge, new and costly federal make-work programs.

Source: Charles Oliver, "It Takes Real Effort to Get Depressed," Investor's Business Daily, October 23, 1998.


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