Available at

"Understanding the Great Depression
 & Failures of Modern Economic Policy"
 by Dan Blatt - Publisher of FUTURECASTS online magazine.

 Explaining the Great Depression and failures of "New" Keynesian interest rate suppression policy without ideological clap trap, theory confirmation bias or political spin.

Table of Contents & Introduction

"Understanding the Economic Basics & Modern Capitalism: Market Mechanisms and Administered Alternatives"
by Dan Blatt - Publisher of FUTURECASTS online magazine.

Smith: Wealth of Nations.   Ricardo: Principles.
Marx: Capital (Das Capital).   Keynes: General Theory.
Schumpeter: Capitalism, Socialism and Democracy.

Economics is the miracle science. Even imperfect capitalist markets routinely raise billions out of poverty.

Table of Contents & Chapter Introductions


The Great Deception

Page Contents

Great Depression myths

Great Depression facts

Great Depression causes & cures

Great Depression graph

FUTURECASTS online magazine
Vol. 3, No. 4, 4/1/01.


 Cassandra ignored:

  There was no mystery about the causes of the Great Depression Crash of 1929. Nor was there any mystery about the forces that thereafter prevented recovery and caused the decade-long economic disaster of the Great Depression.
     Economists - starting with John Maynard Keynes as early as 1919 - had written extensively about the weaknesses and dangers of  government policies that ultimately were among the major blunders that brought on the Great Depression. Of course, the usual "authoritative" governmental and private voices determinedly ignored these warnings and dominated press coverage of the debate. However, by the beginning of 1931, even the press was forced to recognize the blatant stupidity of these "authoritative voices," and began providing extensive coverage of those pointing an accusing finger at government policies as the causes of the economic debacle.
  See the seven FUTURECASTS "Great Depression Chronology" articles, taken primarily from contemporary accounts.

The Crash of  '29

Rebound from the Crash of  '29 (1930) 

 Collapse of agriculture (1930

Debate begins (1931)

Collapse of international finance (1931)

Collapse of WW I financial obligation
s (1932)

Collapse of governments (1932-1933)

The Great Deception:



  Nevertheless, the various enemies of capitalism  and advocates of egalitarian, collectivist and/or command economy economic policy approaches viewed the Great Depression as a wonderful opportunity to attack capitalism and further their various causes. They proceeded to use the Great Depression - successfully - to discredit capitalism in whole or in part - to cast blame on capitalism for the Great Depression - and to offer their own approaches as substitutes for - or the means to save - capitalism.

Advocacy scholars have filled whole library shelves with the most incredible stupidity in their efforts to convince the American people to abandon free markets in favor of socialist, "industrial policy," and entitlement welfare state alternatives.

  A combination of widespread complicity and ignorance in intellectual and academic circles facilitated these efforts. John Maynard Keynes and his legion of followers were - and remain - especially complicit. Advocacy scholars like John Kenneth Galbraith and Lester C. Thurow (Paul Krugman calls them "policy entrepreneurs") filled whole library shelves with the most incredible stupidity in their efforts to convince the American people to abandon free markets in favor of socialist, "industrial policy," or entitlement welfare state alternatives that uniformly proved disastrous whenever and wherever in the world they were tried. Advocacy scholars routinely cited the Great Depression as a primary example of the weaknesses and instability of capitalism that required resort to their alternative policies. See, Modern Advocacy Scholars.
  The result was that a mythology concerning the causes and cures of the Great Depression became one of its most lasting - and dangerous - legacies. FDR and most of the New Deal policy makers accepted several of these myths. These beliefs explain initial New Deal disinterest in the restoration of world trade - and its resort instead to monetary inflation, deficit spending, cartel-like price and wage fixing policies, and other command economy policies - that condemned the nation to five more years of Depression.
  For an example of the distortions still being caused by these myths in serious scholarship, see, David Kennedy, "Freedom from Fear" (I), Economic Great Depression, a seriously flawed Pulitzer prize winning volume of the Oxford History of the U.S.

The causes of the Great Depression were cumulative and complex. Static analysis of this issue is inherently incompetent.

  Herein, FUTURECASTS deals with seven of these myths - some totally fallacious and others misleading half-truths - six of which concern causes of, and one the cure for, the Great Depression.  Also presented are some of the anomalies of the Crash, a presentation of the FUTURECASTS view of the complex factors involved in the Great Depression collapse and failure to recover, a summary of basic indisputable facts, and a graphic presentation of contemporary economic indicators and Crash facts through 1930.
  The cumulative and complex interactions of these events are stressed. Indeed, they cannot be overemphasized. Static analysis of this issue is inherently incompetent. 
  No single factor provides an adequate explanation for the Great Depression. This was not an "inventory" problem - as in 1921. It was not caused by austerity measures required to get inflation under control - as in 1980. There were no major banking failures until more than a year after the Crash of '29.
  The complex mix of governmental policy stupidities in the U.S. and internationally - and the cumulative mix of their manifold economic impacts building up throughout the 1920s -  made the world's capitalist system vulnerable to Depression and thereafter prevented recovery. The ordinary economic problems that tend to accumulate during prosperous times, and the many triggering factors that played temporary roles in initiating the '29 Crash, are also herein set forth.

A) The Inherent Instability of Capitalism

 The Marxist expectation of capitalist collapse:
   The Great Depression - the decade-long economic disaster of the 1930s - shook confidence in the stability of capitalist economic systems. It apparently validated one of the many stupidities of Karl Marx - the expectation of ultimate capitalist instability and collapse.

 Cyclical business reversals are part of the process by which capitalism forces needed corrections of policy errors.
   It was not the stock market crash and the economic reversal - as bad as they were - that shook confidence in the system. Capitalism had suffered periodic panics and depressions throughout the 19th century, and even suffered several reversals in the generally prosperous decade after WW-I. In an imperfect world - with periodic unexpected crises and imperfect economic policies and practices, both governmental and private - such reversals were understandable. They were even viewed as part of the process by which capitalist market mechanisms forced needed correction of errors.
  There was no lack of understanding of the broad weaknesses of the economic policies of the 1920s. Also, the overextended nature of the financial situation in the fall of 1929 was notorious despite official efforts to gloss over the problems.

  No amount of policy reversals or liquidation of overextended positions was enough to restore stability and create the conditions for recovery.
  But the automatic corrective powers of the markets failed this time. Massive price and policy adjustments were ruthlessly forced on a typically reluctant world - but without apparent affect. Unlike past depressions, no amount of policy reversals or liquidation of overextended positions was enough to establish new equilibrium points, restore stability and create the conditions for recovery.
  It was this failure to recover that was the critical difference for the Great Depression. This is what seemed to validate the Marxist myth.

 Marx stupidly expected supply to permanently outstrip demand.


   Marx wrote that the capitalist drive to invest and expand production was so powerful that it would inevitably push supply beyond demand, cause profits to plummet and capital to collapse, bringing on a crisis (like the Great Depression) that would end the capitalist system.
  So potent was this myth - so traumatic was the Great Depression - that for decades after WW II, people still expected a renewal of depression and conducted their lives accordingly. Many people - often despite great personal prosperity - lived austere lives, saved every dime they could, made only the most conservative investments, some even avoiding the purchase of a home, in expectation of a renewal of depression.

 Keynes and the Keynesians accepted this Marxist myth, and succumbed to the "automation" scare.
   John Maynard Keynes accepted much of the Marxist stupidity, including the myth of the inherent instability of capitalism. He predicted that a 20 year period of prosperity would result in such a flow of investment and expansion of supply that profits would be critically squeezed. This would force the government to take possession of all major productive assets so that it could prevent economic collapse and run the assets for public benefit.
  His followers, like Prof. Paul A. Samuelson, author of the leading college economics textbook during the 1950s and 1960s, still fretted about this mythological instability decades later. Samuelson wrote that the arrival of the computer and the development of "automation" could initiate the feared inherent instability.

The combination of increased productivity and creative destruction always results in new and improved goods and services, increased demand, and new jobs that exceed those lost and provide higher pay.
   Of course, this was always obvious nonsense. Increases in productivity always permit capitalist systems to produce more and newer and better goods and services - at lower prices - than before. As long as the economy retains sufficient capitalist flexibility, productivity increases always increase demand and create more and better paying jobs. Creative destruction is a vital part of this process - forcing the demise of outmoded, poorly managed and poorly placed facilities - so that the feared accumulation of excess productive assets never occurs.
  Advances such as that made possible by computers have always created more jobs than they destroy. In fact, the computer has proven itself the champion job-creating technology of all time - world wide - even surpassing the automobile.
  That academics and government officials never have any clue as to what the new or improved goods and services will be - or which productive assets should be permitted to die and which should be permitted to expand - is just one more explanation of the need for economic freedom and the impossibility of successful government "industrial policy," centralized socialist or other command economy approaches.

B) The Propensity to Save and Income Disparity

 The "liquidity preference" fallacy:
   The Keynesian explanation for the business cycle and the initiation of depression is based on his savings gap (his "liquidity preference") fallacy. Keynes theorized that, during prosperity, savings expand faster than investment opportunities, thus ultimately resulting in insufficient demand to sustain prosperity.

Savings declined before the '29 Crash, for the first time in two decades.


In fact, as prosperity increases in free market capitalist nations, prosperous people rely increasingly on their asset wealth for reserve purposes, and need less savings.





 During prosperous times, money markets facilitate the useful employment of all savings deposits.


   Unfortunately, reality perversely failed to conform to Keynesian expectations. Savings - which had increased substantially in good years and in bad for two decades - actually declined in the last year before the '29 Crash. Not only did the amount of savings decline, there was actually a decline of more than 500,000 in the number of accounts on the books of the savings banks. Savings accounts had been increasing by 3 million to 5 million per year, in good years and bad, since WW-I. Indeed, before the '29 Crash, banks had insufficient savings with which to meet all investment needs, as proven by the rising interest rates.
  Current prosperity has since been accompanied by declining savings rates instead of rising savings rates - which gives economists something else to worry about. In fact, as prosperity increases in free market capitalist nations, prosperous people rely increasingly on their asset wealth for reserve purposes, and need less savings. It is in developing countries and nations like Japan that have government directed financial systems that the highest savings rates are found.
  Where there are modern banking systems and money markets, savings do not lie idle in bank vaults, or get stuffed uselessly into mattresses, until well after depressions begin and banks begin to fail. During prosperous times, money markets facilitate the useful employment of all savings deposits.
  Current efforts to blame income disparities also fail, for similar reasons. The surge in income of the top 20% in 1929 - and today - did not and has not resulted in increased savings rates and insufficient demand. Indeed, Keynesians should today be advocating even greater income disparities - as a cure for the declining savings rates that they currently find so worrisome.
  If the current "politically correct" myth that income disparity was a cause of the Great Depression is correct, then we should expect this first decade of the 21st century to be another Great Depression decade. Disparities in 1999 were much greater than in 1929. While some period of recession is likely during this decade - as FUTURECASTS has long asserted - a return to anything like the Great Depression is definitely not in the cards.

C) Tight Money

 The rapid decline of interest rates:



   Federal Reserve Board monetary tightness in the first three quarters of 1929 - in response to the speculative excesses of that period - has also drawn criticism from Keynesians - and more recently from monetarist followers of Milton Friedman and Allan Meltzer - and fails similarly because of the perverse failure of reality to conform to this theory.

 As early as the first week of October, weeks before the Crash, interest rates began a rapid and continuous decline.


As the Great Depression deepened, there was an adverse credit shift -- a rapid decline in the number of individuals and businesses - and governments - that had the credit to borrow at the low interest rates. Even more important, there was a rapid decline in the profitable opportunities that could justify the incurrence of debt.

   Interest rates did move higher in the first seven months of 1929. Short term "call" rates were at or above 15% at times during March, April, May and July of 1929. However, they had already dropped to 10% and below by the end of August, 1929. There were substantial interest rate cuts in the first week of October and thereafter, driving rates to 7% and below, weeks before the actual Crash.
  Currency in circulation did decline substantially during the year from July, 1929 to July, 1930. However, after the end of 1929, this was more because of a lack of demand for currency than a lack of availability.
  Easier monetary conditions were noted in the financial press in early October, 1929 - more than three weeks before the Crash - and bank loans increased sharply during October and November of 1929. Money was readily available at low interest rates during the business and market revival of the spring of 1930. 
  On October 17, 1929 - one month after the market high but 12 days before the Crash - the New York Times reported:

  "Money has just about ceased to be a factor, the supply is so ample, and even though the demand from the interior is extraordinarily active, rates indicate a plethora of funds."

  Indeed, interest rates declined to the lowest levels since the summer of 1928. By the middle of November, 1929, basic short term interest rates had declined to 5% and below. During the first half of 1930 it was readily noticeable to the Fed and many others that money in circulation was declining due to a lack of borrowing demand rather than any shortage of available funds.
  This does not mean that the high rates of the first three quarters of 1929 were unimportant. High interest rates obviously played a vital role in undermining economic activity abroad and slowing the booming economy in the United States - a role they have played in countless other "normal" business cycles. They were perhaps the most influential "triggering" factor in the Crash of '29.
  However, money was obviously not a factor during the rest of the Great Depression - and certainly cannot be blamed for the subsequent failure of economic recovery. The importance of money is, of course, its purchasing power. As prices declined at double digit rates throughout the first 14 quarters of the Great Depression, the purchasing power of money in circulation expanded accordingly. Viewing the money supply in terms of the "real" money supply - based on the purchasing power of money - provides a dramatically different picture of monetary policy during the Great Depression. "Real" interest rates were high due to the extent of price deflation, but that is inherent in periods of serious depression and deflation and never prevented recovery in the past.
  Nor is the definition of "money" without its ambiguities. Throughout those first years of the Great Depression, people were moving vast sums out of checking accounts and in to time and savings accounts - much of which as a matter of practice was available on demand almost as readily as checking account funds. A slightly broader definition of the "money stock" substantially reduces its measured rate of decline and further undermines the extreme monetarist view.
  Most important, the Great Depression was not a temporary business cycle phenomenon. Monetary manipulations could not have changed the political policies that had destroyed international markets. The Federal Reserve System at several points could indeed have more aggressively acted to mitigate Depression impacts on the banking system, but its resources and authority were limited while the duration of the Great Depression was not.

  For comprehensive accounts of the view that Federal Reserve System tight money policies played a decisive role in the initiation of the Great Depression and the subsequent failure to recover, along with comments critical of this view, see, Friedman & Schwartz, "Monetary History of U.S.(1867-1960)," Part II, "Roaring Twenties Boom - Great Depression Bust (1921-1933)," segments on "Great Depression Bust (1929-1933)" and "Power and Limits of Monetary Policy," and Friedman & Schwartz, "Monetary History of U.S.(1867-1960)," Part III, "Age of Chronic Inflation, (1933-1960)," segments on "the New Deal (1933-1939)," "New Deal Failures and Successes," and "Impacts of Fluctuations in the Money Stock." Also, see Meltzer, "History of Federal Reserve, vol. 1 (1913-1951)," Part II, "The Engine of Deflation (1923-1933)," and Meltzer, "History of Federal Reserve, Part III, "The Engine of Inflation (1933-1951)."

  Of course, abundant liquidity and low interest rates did not mean "easy money." As the Great Depression deepened, there was an adverse credit shift -- a rapid decline in the number of individuals and businesses - and governments - that had the credit to borrow at the low interest rates. Even more important, there was a rapid decline in the profitable opportunities that could justify the incurrence of debt.

D) The Gold Standard

 The over valuation of the British pound:



   Criticism of British efforts to restore the gold standard after WW-I at rates that left the pound sterling grossly overvalued, is similar to the tight money criticism, and proves similarly inadequate as an explanation of the Great Depression. For several years before the Great Depression, economists criticized the over valuation of the pound and warned that this would force economic contraction until domestic prices and wages were driven down far enough to justify those valuations.

 Rapid price declines quickly eliminated currency over valuation as a cause of the continuing Depression.
   This was undoubtedly true, and is exactly what happened in England in the mid 1920s. England tried to restore the pound sterling at an unrealistically high value - $4.86 per pound sterling - although France more realistically pegged the franc at just 20% of its pre WW-I value. Moreover, since the British pound was then the world's premier reserve currency, turbulence in the pound had broad significance well beyond Great Britain and its Empire.
  However, this does not explain the Great Depression. An overvalued pound should have helped other European nations - at least until the Great Depression hit England. It thus does not explain why Germany and almost all other European nations other than France and the Scandinavian nations fell into depression before England - and why recovery failed even after England's domestic and export prices were driven down well beyond levels that should have corrected any of the imbalances in foreign trade caused by the excessive currency valuations.
  It also does not take into account the role of U.S. policies in the breakdown of the gold standard. The Federal Reserve System monetary sterilization policies undermined the adjustment mechanisms of the gold standard, and the U.S. trade war levels of tariffs overburdened it. See, Friedman & Schwartz, "Monetary History of U.S.(1867-1960), Part II, "Roaring Twenties Boom - Great Depression Bust (1921-1933)", at segment on "Sterilization of Gold;" and Meltzer, "History of Federal Reserve (1913-1951)," Part II, "The Engine of Deflation (1923-1933)," at section F) "The Search for an Administered Alternative."
  The gold standard did not fail. The protectionist trade war policies of the United States government and its sterilization of gold inflows critically obstructed the functioning of the gold standard and played a major role in the collapse of international markets and the onset and continuation of the Great Depression. 

E) Irrational Pessimism

 The prevailing optimism of securities markets:



   The psychological explanation for the Great Depression asserts that the "irrational optimism" of the boom was replaced by "irrational pessimism" during the Crash. The stock markets were certainly overoptimistic before the Crash of '29, maintaining their high levels for weeks in the face of an incoming tide of worsening financial news. They finally gave way after some critical economic activities began to decline, providing irrefutable evidence of imminent economic decline.

 Only optimists play the market. Only optimists risk what they have in the hope of receiving adequate compensation for their investment in the uncertain future.


Pessimism did not dominate the market until the second half of 1931.
   Indeed, optimism is the prevailing nature of financial markets. Only optimists play the market. Only optimists risk what they have in the hope of receiving adequate compensation for their investment in the uncertain future.
   In fact, the market continued to behave optimistically - continued to expect and to discount future recovery - for at least one year after the Crash. The market did not go straight down. It repeatedly rebounded vigorously at every opportunity, resuming the decline each time - but only after irrefutable evidence that the economic decline was continuing and that economic recovery was not in sight.
  Dividend yields were an attractive form of return on investment in those days before high marginal tax rates. Yield rates, even though based on previous year earnings - which were clearly significantly higher than those expected immediately thereafter - did not indicate that the market had become pessimistic - that the market had lost hope of impending recovery - until the end of 1930. Indeed, it wasn't until the last half of 1931 that yield rates rose high enough to indicate that the market had begun to discount further decline.
  By that time, it was irrational not to be pessimistic.

F) Financial Losses from the 1929 Crash

 The "boom and bust" argument:
   The devastating financial losses suffered in the '29 Crash provides us with the final - and most widespread - false explanation for the Great Depression.

 The NYSE lost almost 50% in two months - but quickly rebounded in the next five months to cut its losses to just about 12% - some of which was balanced out by gains in the bond markets.





   This argument is especially attractive because of its simplicity and directness. It appears to be simple cause and effect. First came the speculative boom. Then came the inevitable bust. Then came the business Depression.
  The New York Stock Exchange (NYSE) lost over one-third of its value from its high of about $90.5 billion on September 19, 1929, to its low of about $60 billion after the October, 1929, Crash. By November 13, 1929, it had fallen to about $48 billion - nearly a 50% drop in less than two months. There were similar declines on the smaller stock markets both within the United States and abroad.,
  The Keynesians are particularly attracted to this argument because it appears to justify the government intervention by means of budgetary deficits and monetary expansion that the Keynesians favor. Even at this late date, many Keynesian economists continue to offer this simple - and simplistic - explanation for the Great Depression.

 Stock market volatility was always tied to developments in the "real" economy - its observable impact on those developments were surprisingly marginal.
   To repeat, the stock markets did not go straight down. If you are going to blame financial losses from the '29 Crash for the Great Depression, then you must explain why the substantial financial gains of the market rebounds in November and December of 1929 and in the spring of 1930 - accompanied by gains from the bond markets which remained strong into June of 1930 - failed to stimulate recovery.
  Bond financing and refinancing surged in the early months of 1930 as public and private entities took advantage of the lower rates to lower their financing costs.

 Gains in the securities markets failed to spur recovery or avoid further economic decline.
   By April 10, 1930, the NYSE had rebounded to recover about 73% of its losses. It had surged about $30 billion, a gain of about 65%, in just five months, and stood at less than $12 billion below its all time high - a loss of only about 12%.
  Moreover, gains in the bond markets undoubtedly further cut total losses from securities markets for that period.

G) Facts about the Crash of 1929

  By any measure, the securities markets were not the cause of the Great Depression or the failure of recovery during the spring business revival of 1930.
  It was in the "real" economy that we find losses that were substantial and irrecoverable. Business decline was increasingly evident in the weeks before the stock market decline began in mid September, and the business and financial news worsened appreciably between the beginning of the decline and the ultimate Crash. The securities markets were primarily a messenger - and their periodic sharp declines were their message.
  Only after April, 1930 - after the business depression was well under way and international commodity markets collapsed - did securities losses begin to seriously impact average wealth in the United States.

 The accelerating business depression:



   Imports and exports showed the most severe and inexorable decline. They began to tail off before the summer of 1929. By the first quarter of 1930, they were running at about 23% below previous year levels - about half due to declining prices and half to declining volume. The passage of the Smoot-Hawley Tariff on June 17, 1930, and the retaliatory tariff increases all around the world, accelerated the decline. It would continue at multiple double digit rates well into 1933. Exports for the last half of 1932 ran 82% below those of 1929.

 Almost all financial and economic elements had periods of recovery - except for exports and imports, which dropped inexorably and sharply throughout the first 4 years of the Great Depression.
  The collapse of international markets in copper, silver, textiles and agricultural commodities clearly undermined the promising spring, 1930, business revival. Particularly damaging were the approximately 50% declines in wheat and auto exports. Both of these declines had begun before the autumn of 1929. (See "The trade war," below.)
  Automotive exports in the first quarter of 1930 fell 46% below 1929 levels. Autos had been dependent on exports for as much as 20% of sales. The precipitous drop in automotive exports cost the industry about 40,000 units per month in that first quarter of 1930, when economic recovery had its best chance.
  The sudden and disappointing decline in automotive exports and sales in the spring of 1929 was one of the first major signs of economic trouble. This resulted in large inventories that weren't worked down until the winter after the Crash. This resulted in immediate substantial cuts in the production of autos and, by September, 1929, in steel and other associated industries as well.
  During the first quarter of 1930, and in the subsequent recovery periods of the next three years, almost all financial and economic elements had periods of recovery - except for exports and imports.
  Depressed business conditions increasingly affected the domestic economy as one sector after another began to decline, well before the April 10, 1930 stock market recovery high. The value of real estate was dropping sharply, devastating second mortgages and the small rural banks that held them. Bankruptcies were running at or near record levels. Railroad car loadings - an especially important economic indicator in those days - were running at seven year lows - indicating that real problems remained and were growing in the "real" economy.
  It is thus not in the securities markets, but here in the "real" economy - and in the political policies that affected the "real" economy - that one must look for the causes of the Great Depression and the reasons why market adjustments were unable to restore the conditions needed for recovery.

H) Some Anomalous Facts About the Crash

The 1929 Crash occurred even though:

    • There was no inflation in either commodity or industrial prices prior to the Crash. For example, steel prices proved extremely sticky in an UPWARDS direction. In 1929, they were only about 4% higher than their depressed 1922 levels despite the seven prosperous years before the Crash, and despite several periods when production ran near or even above 100% of rated capacity and unfilled order backlogs were at or near record levels. Indeed, because of productivity gains, steel prices, like those of autos and many other products, had a substantially DOWNWARDS bias during the prosperous periods of the 1920s. They declined from $60.60 per ton in the prosperous April, 1923, to $51.25 in the booming first half of 1929, with a low of $48.60 during the 1927 recession.
    • Merchandise inventories were at generally moderate levels except for autos.
    • Interest rates did move higher, but they were well below their 1929 highs throughout September, 1929. They broke substantially lower early in October, 1929, and declined rapidly thereafter.
    • The major banks and most of the smaller banks were financially strong. During the first half year after the '29 Crash, bank failures were confined to small banks at rates about average for previous 1920s slumps, and the first major bank failure didn't occur until more than a year after the Crash.
    • The nation had huge gold reserves, holding as much as $5 billion of the world's $11.3 billion of monetary gold.
    • The Federal Reserve Bank was strong and able to extend substantial assistance to national banks as needed by the system. However, many of the state chartered banks were in their usual parlous state.
    • Prices declined quickly under the influence of vigorous, ruthless market forces, which operated exactly as they were expected to in such conditions. Commodity and industrial prices were forced sharply lower, generally below post WW-I lows within the first year of the Great Depression - but the economy could not find equilibrium points at any depth.

I) Causes and Cures

Synergy at its worst:






  Obviously, it required a combination of many powerful causes to undermine the inherently stable and incredibly resilient capitalist economic system, and enmesh the world in the Great Depression. No theory that emphasizes just one or two of these factors - or that fails to consider the massive synergistic impacts of all of them functioning together - is going to be able to provide a valid understanding of these events. There is simply no easy one dimensional answer or theory that will suffice.
   Moreover, all of the economic causes were quickly eliminated by vigorous market adjustments, but the political causes took years and even more than a decade to remove, and new political policy blunders were added at various points during the decade.

All of the economic causes were quickly eliminated by vigorous market adjustments, but the political causes took years to remove - and new political policy blunders were added. 


  The political blunders stayed stubbornly in place - and incredibly were periodically even made worse and compounded with additional policy blunders - until economic systems collapsed and governments themselves were smashed or politically replaced - and the world descended into the abyss of WW-II..
  Of these primary political causes, the trade war restraint and subsidy policies remained and grew substantially worse even as all the other causes - major and minor - economic and political - ran their course, were liquidated, or otherwise came to an end. The trade war restraint and subsidy policies were joined by New Deal  cartel-like price and wage fixing policies and other command economy policies that provided new political policy blunders that became additional weighty factors preventing economic recovery.
  To repeat, there was no mystery about the causes of the Great Depression. By the beginning of 1931, articles in the contemporary financial press covered them all. Unfortunately, most investors ignored them until the '29 Crash and - more importantly and incredibly - most of the politicians and bureaucrats in Washington, D.C., determinedly ignored them even after the '29 Crash.

  For purposes of analysis, FUTURECASTS divides these causes into three groups.

  • First, there were the major fundamental weaknesses of government economic policy that comprised the real underlying causes that made the Great Depression worse and longer than any other economic depression.
  • Second, there were the intermediate effects that were caused by the cumulative and synergistic impacts of the government policy blunders, and later by the initial economic downturn, and then themselves became substantial factors in the decline.
  • Third, there were the contemporary events that triggered the initial economic decline and stock market Crash, but were not themselves an explanation for the depths or duration of the Great Depression.

 Fundamental causes:

   World War I has to be the starting point for any analysis of the Great Depression. Indeed, many contemporary commentators called the Great Depression "The Last Battle of the Great War."

Physical economic distortions:



Agricultural overcapacity in the U.S. remained a growing problem from the end of WW I until the beginning of WW II.









Substantial subsidies prevented the needed contraction of agricultural capacity.
   There were many physical economic distortions caused by the conflict, as one would expect from any great war. However, by 1929, only the massive surplus agricultural capacity - especially in the United States - remained. Moreover, by 1928, worldwide trade war protectionist and subsidy policies had extended this problem worldwide.
  American farmers substantially increased production to feed Europe during the war, but they did not decrease production after the war. The federal government provided an agricultural exemption from the antitrust laws in 1922, and encouraged the formation of agricultural cooperatives that shielded farmers from market pressures that would have forced reductions in agricultural production. This proved to be a very imperfect shield for the smaller and less efficient producers but, more importantly, encouraged further expansion of the larger and most efficient producers.
  Farm income ran more than 50% above prosperous pre WW-I levels from 1924 through 1928. There was a rapid mechanization of farming methods in the 1920s that greatly increased productivity. Wheat acreage actually peaked as late as 1927. Annual wheat exports ran substantially above 200 million bushels during the four years before 1929 from a crop that averaged above 820 million bushels. Despite the excess capacity and the continuous "creative destruction" of inefficient small farms, this was hardly a picture of widespread agricultural distress.
  However, the excess capacity problem became critical after the record U.S. and worldwide wheat crops of 1928 - which left huge surplus carryovers and threatened agricultural commodity prices. In 1930, the trade war destroyed the European market for U.S. and Canadian wheat. Incredibly, U.S. Government subsidization policies were instituted in the summer of 1929, and continued even after the '29 Crash, resulting in disastrously huge crops in 1930 and 1931. These were almost as large as the 1928 record crop -- they were produced during a period when exports had been cut more than in half -- and they were priced out of vital export markets by the price supports.

War debts: 

Unlike debts that finance investments, war debts are a leaden financial weight on economic systems.
   There were also many financial burdens as a result of the war, as the combatants borrowed heavily to finance their military efforts.
  War debts - both domestic and foreign - are an especially heavy financial burden since they finance only consumption. Unlike debts that finance investments that, hopefully, provide more than the wherewithal needed to meet debt servicing costs, war debts are for "consumption" of wartime goods and services, and are a leaden financial weight on economic systems.





A vindictive peace treaty ultimately ruined victors and vanquished alike.
   The Treaty of Versailles that ended the war imposed vindictive terms on the losers. The widespread public emotions that led to this result were certainly understandable - but the vindictive peace treaty was a catastrophic policy blunder. See, MacMillan, "Paris 1919, Part I, "The Reordering of Europe," and Part II, "The Far East, the Middle East, and the Treaty of Versailles,"
  Germany's reparations obligations were massive and - in combination with the trade war that followed WW-I - resulted in the destruction of the German economy. Germany was the third most important customer for American exports, and was even more important as a customer for European nations. See, Keynes, "The Economic Consequences of the Peace."

The trade war:



The trade war made it impossible for nations burdened with heavy international financial obligations to earn the wherewithal to meet those obligations.



It was the U.S. tariffs that did the most damage, since they were higher than the tariffs of any other nation except Spain, and the U.S. was by far the world's primary creditor nation.



Unlike the other major causes of the Great Depression, the trade war intensified both in impact and as a matter of policy, and undermined all efforts at recovery until WW II.



Worldwide and U.S. surplus capacity, maintained and encouraged by trade war subsidies and protectionist policies, began to undermine the broader markets in the summer of 1929, destroyed them in 1930, kept driving them down to disastrous depths until the end of 1932, and thereafter prevented recovery, with immediate and widespread impacts on the rest of the economy.
Economic prospects for the U.S. collapsed with the collapse of its European grain exports and the overwhelming of Farm Board price supports.




  The trade war began soon after WW-I. It involved high tariffs, quotas, licensing requirements, currency restrictions and other restraints on international trade, along with domestic trade restraints and subsidy and price support programs. It also involved the failure of the Federal Reserve System and French monetary authorities to operate in accordance with gold standard rules. Instead of using gold, they hoarded it and drained it from the international system.
  The trade war:

  • made it impossible for nations burdened with heavy reparations obligations or war debts or other international debts to earn the wherewithal to meet their obligations;
  • reduced the ability of export growth to assist in the economic recovery of depressed national economies;
  • critically reduced productivity and limited growth throughout the world;
  • induced wasteful maintenance and even expansion of capacity of protected and/or subsidized industries - especially in agriculture and some parts of the mining industry - and stimulated the production of huge surplus carryovers that depressed agricultural and mining markets.
  • Sucked vast quantities of gold into the U.S., undermining foreign currencies and forcing deflation on foreign nations.

  Tariffs and other limits on imports were deemed necessary to assure maximum self sufficiency in preparation for "the next round" of great European wars. There were no illusions in Europe about "The Great War" being the last big European war. By generally undermining economic stability and preventing recovery in Germany and elsewhere in Europe, trade war restrictions proved to be an important part of a self-fulfilling prophesy.
  Tariffs and other import restraints were also deemed essential to preserve the foreign currency and gold reserves needed to pay off war debts and reparations for nations whose exports were blocked by the trade war.
  With two such powerful excuses in hand, political proclivities towards destructive protectionist tariffs and other trade restraints and domestic subsidy programs ran rampant all around the world. However, it was the U.S. tariffs, failure to permit its money supply to reflect its gold inflows, and other trade restraints that did the most damage, since U.S. tariffs were higher than the tariffs of any other nation except Spain - and the U.S. was by far the world's primary creditor nation and holder of gold.
  The trade war helped destroy the economies of Germany and other debtor nations, caused widespread instability, and placed limits on economic prosperity throughout the world. For a dramatic account of the financial chaos thus caused during the 1920s, See, James, "The End of Globalization."
  Unlike the other major causes of the Great Depression, the trade war intensified both in impact and as a matter of policy as the Great Depression continued, and undermined all efforts at recovery until WW-II.
  For the United States, the trade war was particularly destructive for mining and agriculture. Wheat was heavily dependent on exports and heavily burdened by vast surpluses from record 1928 crops in the U.S. and around the world. A world crop of 4.7 billion bushels of wheat had left a 1/2 billion bushel carryover.
  About 35% of the American wheat crop was exported during the four years before 1929, but wheat exports were cut more than in half - a loss of over 130 million bushels per year - for the years 1929 through 1931 - and practically disappeared during the five years thereafter. Protected by tariffs, German wheat acreage increased about 40% during the 1920s, and French and Italian wheat acreage also had substantial increases. By early 1930, this eliminated the important European market for North American wheat - with immediate and devastating impact on all North American grain prices. 
  Agriculture was still a huge part of the U.S. economy at that time, employing about 25% of the workforce. Surplus capacity was a problem throughout the 1920s for the smaller and least efficient producers. Worldwide and U.S. surplus capacity - maintained and encouraged by trade war subsidies and protectionist policies - began to undermine the broader markets in the summer of 1929, destroyed them early in 1930, kept driving them down to disastrous depths until the end of 1932, and thereafter prevented recovery, with immediate and widespread impacts on the rest of the economy.

  The trade war impact on market prices was dramatic. This multiplied its impact on affected economic segments and the broader economy. When Federal Farm Board price supports were overwhelmed, agricultural commodity prices sunk like stones. Agriculture Department farm income figures show the impact - dropping from $12 billion in 1929 to $9 1/3 billion, $7 billion, and $5 1/4 billion in 1932, despite periodic Farm Board efforts to support prices.
  The automobile industry was similarly impacted, as pointed out above. The collapse of the vast agricultural sector had an immediate impact on domestic auto sales, housing and rural real estate - the "big ticket" consumer items - critically undermining the promising spring, 1930, business revival.

  NOTE: All of these fundamental causes were the result of government policies and activities. None of them arose from the normal activities of capitalist economic systems, or from the policies or activities of private entities.
  Rather than proving capitalist instability, the ability of capitalist systems to function at all for a whole decade during the 1920s under these governmental restraints and burdens provided a remarkable example of capitalist stability and resiliency.
  Rather than providing a rationale for "command economy" or Keynesian solutions, this deplorable period of government policy stupidity constitutes a warning about the dangers inherent in government economic policies - dangers that were amply demonstrated in the failures of  "command economy" and Keynesian policies throughout the rest of the Great Depression and indeed throughout the rest of the 20th century.

 Cumulative and synergistic impacts:




Those who reject the trade war as a primary cause of the Great Depression routinely ignore the offensive side of the battle, and the synergistic impact when coupled with WW I and commercial indebtedness and agricultural and other overcapacity.

   When evaluating the impact of these fundamental causes, it cannot be emphasized too much that their impact was cumulative. Even for the United States, it was not limited to just the 8% of the economy consisting of foreign trade.
  Moreover, "war" implies offense as well as defense. Trade wars include not just "defense" against imports by such methods as tariffs, quotas, licensing requirements, discriminatory regulation, currency exchange controls, etc., but also "offense" that encourages domestic production of goods in international commerce by such methods as subsidies, price and wage fixing, credit allocations, special tax breaks, etc. Those who reject the trade war as a primary cause of the Great Depression routinely ignore the offensive side of the battle.
  Moreover, their impact was synergistic. The noxious impacts of trade war policies were compounded by the WW-I financial obligations and the steadily increasing levels of other forms of indebtedness. These impacts grew in intensity during the course of the decade after WW-I until protected industries developed gross overcapacity and huge surplus carryovers - the economies of many foreign nations were destroyed - export markets were decimated - prices on international commodity markets collapsed - and vast American agricultural and mining sectors were devastated - with dire consequences for the rest of the economy. See  "K) Cumulative Impacts," below

 Intermediate effects:
   Economic cause and effect, by its nature, is a never ending phenomenon. Intermediate economic impacts become themselves the causes of further developments.

 It is apparent that the '29 Crash was not itself a primary precipitator of events, but was primarily the deliverer of a powerful message, that finally got everyone's attention.


The stock market was repeatedly driven down by commodity price declines, and reductions in railroad car loadings and steel production.


   The list of intermediate effects is divided into two groups. There are those that arose as a result of worldwide economic events prior to the '29 Crash and those that arose after the '29 Crash from worsening economic and financial conditions and from the '29 Crash, itself.
  It is clear from this list that the '29 Crash itself was primarily the messenger of bad economic news, and as such its impact was primarily (but of course not entirely) as an expediter of reactions to the rapidly deteriorating economic and financial conditions. It was not itself a primary precipitator of events, but was a powerful but temporary intermediate force.
  When deteriorating economic conditions forced resumption of the stock market decline in April, 1930, that too became a powerful intermediate factor in the Great Depression. However, market breaks always were driven by disappointing business developments that accumulated to undeniable proportions prior to the market declines. All stock market declines were thus rationally explained by those disappointing economic developments.
  Between September, 1929, and the end of 1930,  stock market declines were initiated predominantly by commodity price declines, reductions in railroad car loadings, and especially reductions in steel production, which slowly forced a shift in market sentiment from the discounting of future growth to the discounting of no growth and, in 1931, to the discounting of continued decline.

Railroad car loadings - a preeminent economic indicator in those days - joined the list of declining business segments during the week before the '29 Crash.

  Intermediate effects prior to the '29 Crash:

  • The German economy was destroyed and generally dull economic and financial conditions existed elsewhere in Europe during the first half of 1929;
  • Europe became dependent on U.S. financing that enabled Germany to maintain reparations payments so that other European nations could maintain war debt payments to the U.S.;
  • U.S. exports boomed through the first four months of 1929, aided by the availability of U.S. financing;
  • The U.S. economy surged, pushing stock market prices higher, and pulling significant sums from Europe as the new wire services provided instant U.S. stock market data to European investors;
  • U.S. stock markets boomed, aided by loose regulation of credit;
  • Interest rates rose due to increasing investment demand and Fed efforts to restrain the speculative boom;
  • Foreign economic activity and financial markets declined, due in part to a lack of capital and continuing limits on international trade. By the summer of 1929, all European nations were in economic decline except for France and the Scandinavian nations;
  • U.S. exports began to decline sharply during the middle months of 1929;
  • Commodity prices began to decline in August, 1929;
  • Stock market expectations of further economic growth were disappointed when important U.S. business sectors - such as exports, autos, farm implements, construction, steel, and commodities - began to decline at different points during the summer, 1929;
  • Stock market prices that were discounting rapid economic growth became suspect and volatile in September, 1929;
  • Steel production kept slipping as October, 1929 progressed, forcing a decline in steel prices;
  • Railroad car loadings - a preeminent economic indicator in those days - joined the list of declining business segments in the second half of October, 1929;
  • The stock market staggered and then crashed;

European wheat acreage had expanded substantially behind protective tariffs, and provided Europe with a bumper crop that more than fulfilled all European needs for 1930. This undermined the entire agricultural segment of the U.S. economy and changed its economic world.

  Intermediate and triggering effects after the '29 Crash:

  • U.S. business dropped off sharply after the Crash.
  • Interest rates declined rapidly.
  • U.S. stock markets recovered, and the bond markets advanced.
  • U.S. business recovered, reaching about 1928 levels for spring 1930 trade. The economy was prosperous in the spring of 1928, but of course not as prosperous as in the spring of 1929.
  • The Soviet Union began substantial grain exports at depressed world prices despite widespread starvation in the Soviet Union.
  • European wheat acreage had expanded substantially behind protective tariffs, and provided Europe with a bumper crop that more than fulfilled all European needs for 1930. This undermined the entire agricultural segment of the U.S. economy and changed its economic world.
  • The federal Farm Board, which supported farm prices, responded by pegging wheat prices to keep them from falling further - but thus destroyed farm exports.
  • There were reports that farmers were responding to the artificially high prices by planning huge crops for 1930.
  • All exports and imports were now in rapid, uninterrupted decline, both as to prices and quantities.
  • Further price declines hit steel and other manufactured items.
  • The spring business revival ended in April, 1930.
  • Huge commodity surpluses overwhelmed the international copper cartel - silver prices collapsed destroying the purchasing power of currencies denominated in silver - and the federal Farm Board was overwhelmed and forced to allow grain and cotton  prices to sink like stones, exposing the U.S. economy to the full impact of its loss of agricultural export markets.
  • Steel and auto production slackened and the stock market declined sharply.
  • The Smoot-Hawley Tariff was enacted in June, 1930, immediately initiating a new and more vicious round of tariff increases all around the world.
  • Huge U.S. crops added to grain surplus carryovers.
  • International credit completely broke down under the weight of huge debts that could not be financed from the earnings of rapidly declining levels of international trade.
  • As usual in any serious downturn, all the weak links in the economic policy chain - both governmental and private - began to break under the strain. In particular, this would prove true of the nation's banking regulations - or actually the lack thereof - that had periodically played important roles in economic panics and depressions since Andrew Jackson prevented the renewal of the charter of the Bank of the United States in the 1830s. Even in the years before the Great Depression, bank failures were common. There were 956 suspensions in 1926, and 662 in 1927, compared to 2,298 in 1931 and 1,453 in 1932. There were over 18,000 banks in the nation during this period.
  • The New Deal rejected efforts to restore international trade. Instead, it resorted to monetary inflation and deficit spending, and redistributionist, cartel-like price and wage fixing policies and other command economy policies, that served only to prolong and even materially worsen the Great Depression.

 Triggering events of the '29 Crash:




















  Most impressive about this next list, especially given the existence of all the major economic and financial weaknesses set forth in the prior lists, is the volume of threatening developments that had to accumulate before the stock market crashed.
  • Short term interest rates - such as those charged on brokers loans - increased to and sometimes considerably above 10% during the first three quarters of 1929, as the Federal Reserve tried to curb speculative excess.
  • Brokers loans on margin stock surged to equal about 10% of the value of the NYSE.
  • The flow of new securities surged almost to $10 billion in the first 10 months of 1929 (equivalent to considerably more than 10% of the total value on the NYSE).
  • A large volatile foreign interest invested in the stock market.
  • Summer declines hit first exports and autos, and then steel.
  • Interest rates on brokers loans declined, but remained at or just below 10%, during September, 1929.
  • The stock market became volatile, moving irregularly lower after the middle of September, 1929.
  • Commodity prices began to fall.
  • The "smart money" began to sell out, as the investment trusts accumulated significant amounts of cash - pushing the stock market irregularly lower.
  • England raised its discount rate to 6 1/2% to stem payments outflows and draw some funds back from New York and Paris.
  • The Hatry scandal broke in England, forcing the repatriation of some funds. The ultimate loss was about $57 million.
  • Despite the market decline in September, brokers loans on margin accounts surged higher, staggering the market.
  • Stop loss orders were triggered, setting off sharp market declines.
  • Traders started to abandon ship.
  • Margin accounts started to get wiped out in large numbers, forcing the market even lower.
  • Economic decline became evident in October, 1929, when substantial declines in construction, auto manufacturing, commodity prices, exports and imports, steel production and, finally, railroad car loadings, were reported. Declining interest rates had no impact.
  • Selling pressure overwhelmed the market.

  These many weaknesses and disruptions certainly indicated that the coming turn in the business cycle - the next depression - would be a bad one. The markets quickly and ruthlessly eliminated all of the economic factors, but they would have to smash governments and bring on WW-II before they could force the elimination of the worst of the political policy blunders that caused the Great Depression.

J) The World War II Recovery

 The futility of deficit spending, monetary expansion, and cartel-like price and wage fixing and other command economy policies:






That the New Deal was complicit in the duration and severity of the Great Depression today looks quite unexceptional - and even obvious.

   Ultimately, the Great Depression ended - without the help of socialist or command economy or Keynesian policies. Indeed, substantial levels of deficit spending and monetary expansion, and a host of government economic activities, including price and wage maintenance schemes and blatant make work projects, notoriously failed to stimulate economic recovery, and actually obviously made matters much worse than they otherwise would have been.
  Recent scholarly analysis by UCLA economists Lee E. Ohanian and Harold L. Cole attributes as much as 60% of the failure of recovery during the New Deal period to New Deal cartel-like price and wage fixing policies.
  Casting blame on the New Deal for condemning the nation and the world to many years of additional Depression would have been ideological anathema just a few decades ago. However, there has since been the obvious failure worldwide of the great and disastrous command economy and socialist experiments which devastated the lives of billions of people during the 20th century.
  The proposition that the New Deal was complicit in the duration and severity of the Great Depression today looks quite unexceptional - and even obvious. The only quibble is the degree to which each major group of policy blunders - such as continued trade war restraints and subsidization policies, cartel-like price and wage fixing policies, and other command economy policies - contributed to the ongoing disaster.

   For the critics of capitalism, government programs are simply never quite big enough - and never have quite enough money to spend - to achieve the promised results.
   Substantial recovery did not really begin until 1939. Not until the U.S. started to fill its Armed Forces with 12 million young men and women did the unemployment problem disappear.
  Thus, the conventional wisdom was that only WW-II saved the world from the Great Depression. Socialists support this view because it appears to demonstrate the utility of and need for large scale government employment. Keynesians support this view because it appears to indicate that we just didn't run large enough deficits in the 1930s or expand the money supply quite enough to overcome the substantial problems caused by the Great Depression.
  For the critics of capitalism, government programs are simply never quite big enough - and never have quite enough money to spend - to achieve the promised results.

The end of the trade war:










After WW II, the U.S. was in a dominating financial position, and could lead the world towards trade liberalization and the end of the trade war.
   To repeat - every one of the causes listed above - including the fundamental causes, intermediate causes, and triggering causes - had run its course, been liquidated, or otherwise been brought to an end, by the summer of 1933 -- except for the trade war -- which had vastly increased its strangle hold on world trade since the enactment of the Smoot-Hawley Tariff.
  WW-II was not needed for recovery. All that was needed was the ending of the trade war. The elimination of protectionist tariffs and other barriers to trade, an end to subsidy programs and other restraints on domestic competition, and the restoration of world trade, was required to remove this one last oppressive obstacle to recovery. To the extent that WW-II provided an excuse and opportunity for the elimination of protectionist trade barriers, it did contribute to the end of the Great Depression and the assurance of economic prosperity after the war.
  The Roosevelt administration didn't start to poke some holes in trade war tariffs and other restrictions until 1935, when it began to negotiate bilateral reciprocal trade agreements. It was not until 1938, however, that this effort reached substantial proportions. Even then, the tariff reductions were relatively small. Not until the start of WW-II in September, 1939, did foreign trade begin to recover.
  The start of WW-II in Europe saved the Roosevelt presidency by opening the door to U.S. trade. The embattled European nations began large scale purchases of war materials from the U.S., and U.S. exporters began to service markets that European suppliers could no longer accommodate.
  After WW-II, the U.S. was in a dominating financial position, and could lead the world towards trade liberalization and the end of the trade war.

 Reality perversely refused to comply with Marxist, socialist, and Keynesian expectations.
   John Maynard Keynes and his followers - to their great credit - played major roles in the political and diplomatic activities that ended the trade war. However, even then, their grand schemes for international stabilization efforts quickly proved impractical and were displaced by a simple system based on the dollar and pound as key reserve currencies.
  The much feared and widely expected return of depression conditions after WW-II became just one more of the numerous occasions during which reality perversely refused to comply with the expectations of Marxists, socialists - and Keynesians.

K) Cumulative Impacts





   That impacts of economic policies are cumulative is so obvious that FUTURECASTS shouldn't have to explain it. Nevertheless, economic propagandists frequently ignore cumulative impacts as part of their ongoing efforts to distort economic reality, and economic theorists often disregard them because they create vast complications that are difficult and often impossible to deal with as matters of theory - and especially as matters of econometric analysis.  This requires a response.

 The '29 Crash and the Great Depression were the cumulative result of WW I and a decade of gross stupidity by government policy makers.

   The American economy is a battleship, not a row boat. It cannot be turned on a dime.
  The real causes of the '29 Crash and the Great Depression run back to WW-I and the economic policies of the entire decade after the war.
  These policies were Republican policies - although they were maintained and even made worse by the New Deal Democrats. However, the Wilson administration had provided one of the few periods of relatively free trade in the nation's history and the Democrats did oppose the tariffs. The public has since rightly punished the Republican party for these huge transgressions by decisively ending their post Civil War reign as the nation's majority party and relegating them to minority status until the end of the 20th century.
  The '29 Crash was not the cause of the Great Depression. Indeed, securities market declines actually played just a minor role among the many cyclical factors driving the Great Depression to ever deeper depths.

 Inflationary problems of the 1970s and the depression of 1980 - 1982 were the cumulative results of two decades of inflationary policies.

  A similar analysis applies to many other major economic developments since the Great Depression. The dozen turbulent years after 1970 - the devaluation of the dollar - the price inflation - the vicious swings of the business cycle - the stagflation and "malaise" - the depression of 1980-1982 - and even the below par economic performance of the next dozen years - were not caused or initiated by the oil embargoes and oil price spikes of the 1970s. The oil embargoes, dollar devaluation, and price inflation problems of the 1970s, and the subsequent depression, were caused by two decades of government economic policy stupidity and the adoption of Keynesian policies.
  The inflationary forces that caused the economic problems of the 1970s were initiated in the 1950s and massively accelerated by the inflationary policies pursued in the 1960s. Price inflation could be repressed only so long as the huge hoard of gold held by the U.S. after WW-II could sustain the value of the dollar. Inflationary policies provide pleasant results until they undermine the value of the currency, after which the tradeoff between inflation and unemployment collapses, and inflation causes unemployment and economic decline.

 Our current prosperity was made possible by policies adopted in the 1980s.

   A similar analysis applies to the economic prosperity of the 1990s. This was sustained and encouraged by beneficial economic policies during the Clinton administration and Republican control of Congress after 1994, but the foundations were put in place by the strengthening of the dollar and the reduction of inflationary pressures under Republican administrations during the prior decade.

 The cumulative impact of economic policy:



    It is a characteristic of many stupid economic policies - both private and governmental - that their negative impacts cumulate over time. This is typical of inflation, noxious tax incentives, socialist schemes, command economy arrangements - and the continuous assumption of large debts for purposes of consumption rather than for investment purposes - and protectionist trade restraints and subsidy policies.



Price support schemes in the major agricultural commodities, and in copper, rubber, steel and silver collapsed as a result of gross overcapacity and the surpluses they produced.


Hoards of agricultural workers lacking non agricultural skills were suddenly thrown into unemployment at a time when there was no employment to be had.


The collapse of agriculture also undermined agricultural implements, shipping, various real estate sectors, and rural banks.







The trade war held down U.S. international trade to perhaps as little as 50% of what it would have been, with obvious implications for agriculture and related economic segments.

   The cumulative effects of the heavy WW-I financial obligations and the trade war of the 1920s slowly undermined the economies of one nation after another - and then hindered and often prevented recovery. As one nation after another declined, American investors lost large sums from the collapse of the affected foreign bonds, and important American exporters lost valuable markets.
  The trade war stimulated wasteful and inefficient over expansion in agriculture and several parts of the mining industry, ultimately resulting in the accumulation of vast surplus carryovers of agricultural and mining commodities. Record and near record U.S. and world crops were harvested in 1928, 1930 and 1931, leaving huge carryovers to depress market prices. Ultimately, price support schemes in the major agricultural commodities, and in copper, silver, rubber, and steel, collapsed as a result of gross overcapacity and the surpluses they produced.
  Without defending the trade war policies - or the reparations and other WW-I financial obligations - many economists play down their impact on the U.S. economy. They point out that foreign trade accounted for only 8% of the U.S. economy at the time of the Great Depression.
  This constitutes a deplorable ignorance
of both basic economics and U.S. economic history.

  • Wheat export ebbs and flows had been the predominant factor for three swings in the business cycle for the entire economy within the prior half century. Failed wheat crops abroad had led to export and economic surges in 18791882, 1891-1893 and 1897-1899 that turned to export declines that were transmitted to the rest of the economy when foreign crops recovered. For a description of the monetary aspects of this economic phenomenon, see, Friedman and Schwartz, "Monetary History of U.S. (1867-1960)" Part I, Greenbacks and Gold (1867-1921)" at segments on "The Adjustment Process of the Gold Standard " (boom of 1879-1882), "End of free silver movement" (boom of 1891-1893) and "Gold inflation" (boom of 1897-1899). The immediate decline in asset values may be even more significant. A similar decline in agricultural exports during 1920 and 1921 following the WW-I surge that peaked in 1919 played a major role in the 1920-1921 depression and was a major factor in the promotion of the 1921 and1922 tariffs.
  • Indeed, wheat prices declining towards $1 per bushel had become recognized on Wall Street as one of its most important bear market economic indicators. Somehow, most economists remain determinedly ignorant of this fact.
  • Moreover, it is hornbook economics that marginal changes in supply and demand move market prices - and the massive sudden loss of agricultural export sales early in 1930 and thereafter was far more than a mere marginal change.

  And this time, wheat was not alone. Exports of cotton bales and cotton textiles were similarly important and similarly affected by the collapse of international markets - especially after the collapse of silver prices in the spring of 1930 and the resulting sharp devaluations of currencies denominated in silver all around the world. By the second half of 1930, all world markets for agricultural and industrial commodities were in a state of collapse
  As stated above, the automotive industry was similarly impacted. The collapse of the vast agricultural sector had an immediate impact on rural banks and domestic sales of autos, agricultural implements, shipping, housing and rural real estate - the "big ticket" consumer items - and just about every other aspect of the consumer economy - critically undermining the promising spring, 1930, business revival.
  Many economists restrict their analysis to the "defensive" trade war measures such as tariffs, quotas, licensing requirements, discriminatory regulations, exchange controls, etc.
  If these economists permitted themselves to recognize the importance of the cumulative impacts of the trade war and the WW-I financial obligations - and if they also included analysis of the "offensive" trade war measures such as subsidies, price supports, credit allocation, favorable tax breaks, refusal to play by gold standard rules, etc. - they would have to blame governments for the Great Depression instead of blaming capitalist instability. This would obviously weaken arguments in favor of enlarged governmental roles in the management of the economy.
  Many economists thus ignore the cumulative impact of the decade of spreading international financial insolvency and trade war restraints and subsidies that destroyed agricultural and mining markets worldwide and in the U.S., and had similar but lesser impacts on U.S. automotive manufacturing, steel, and associated industries. These were not minor parts of any major economy.
  The wheat carryover for 1932 rose to 363 million bushels - about 200 million more than needed. The carryover was 200 million bushels in 1929 after the record 1928 crop. Yearly domestic consumption was about 650 million bushels. Worldwide, the carryover equaled 25% of the annual crop by the end of 1932. The U.S. cotton carryover reached 11 million bales in 1931 and rose to 13.5 million in 1932 - which exceeded the yearly domestic consumption of 13 million bales.
  Agriculture was still a huge factor in the U.S. economy of the period between the world wars. It was still the largest single employer. With the collapse of agricultural markets, hoards of agricultural workers lacking non agricultural skills were suddenly thrown into unemployment at a time when there was no employment to be had. The repeated failure of its vital export component - and the vast additional surplus production that was induced by Federal Farm Board efforts to support agricultural prices - were the major forces that drove down agricultural prices and farm income.  Gross farm income declined by substantially more than 50% between 1929 and 1932, and thus massively contributed to the forces driving the entire economy ever further into the depths of the Great Depression - until many of the farms and the agricultural surpluses themselves became worthless.
  Moreover, foreign trade prior to the Great Depression would certainly have been at least 50% bigger and perhaps even more than twice as big in the absence of the 1920s trade war and the WW-I financial obligations that burdened some of our most important export markets. The implications - especially for U.S. agriculture - are obvious.
  In 1930, the U.S. Government - with incredible stupidity - initiated a new and devastating round of trade war tariff increases. Except for the minor tariff reductions in a few reciprocal trade agreements negotiated after 1935, it determinedly maintained these policies until WW-II - while the world fell apart around it.

L) Crash Facts

Substantial outcome determinative facts:




  Any economic theory of business cycles in general - or of the Great Depression in particular - must include and be able to explain all the substantial outcome determinative facts of the economic events of 1929 and 1930. The facts in the subsequent years of economic decline are set forth in Debate begins (1931), and in the Collapse of international finance (1931), and in the Collapse of WW-I financial obligations (1932), and in the Collapse of governments (1932).

  Both the Crash of '29 and the Great Depression itself were clearly the result of disappointing business conditions caused by policy blunders - indeed, gross policy stupidities - of governments in the U.S. and around the world.

  The chronology of events in the months just before "The Crash of '29," and in the Rebound from the Crash of '29 during the early months of 1930, and in  "The collapse of agriculture (1930)," thereafter, provides evidence that is both clear and convincing - and frequently beyond any reasonable doubt - that:

  • By 1929, the financial aftereffects of WW-I and the Treaty of Versailles, coupled with the trade war restraints and subsidies that grew in intensity throughout the 1920s, had fundamentally undermined economic conditions almost all around the world outside the U.S.;
  • Prosperity in the U.S. coupled with loose credit pushed up stock prices to levels that discounted considerable future growth, and focused speculation on a narrow group of about 50 growth leaders;
  • There was a decline both in total savings and savings accounts for the first time since WW-I, leaving inadequate savings for the investment and speculative demands of surging prosperity;
  • Federal Reserve efforts to stem speculative excess pushed short term rates frequently above 10%, but were limited in their impact by huge flows of private capital that streamed into N.Y. from all over the nation and the world to earn these high rates;
  • However, high interest rates did have several powerful impacts, especially on construction and auto exports, two of the first economic sectors to begin the economic decline during the late spring of 1929. High rates in the U.S. and Federal Reserve System "sterilization" of gold inflows also helped drain capital out of most European nations.
  • The speculative market was undermined by the high interest rates and growing financial leverage, although short term interest rates had already dropped well below their 1929 highs even during the first half of September;
  • It was thus the accumulating indications of trouble in several important business sectors (exports, construction, autos, steel, farm commodities) that (1) cast serious doubt on the continuation of rapid economic growth and (2) cast serious doubts on the wisdom of stock prices that discounted such growth, and (3) made the market vulnerable;
  • With confidence in future economic growth weakened, the markets became vulnerable and were staggered by various "triggering" factors - such as a record tide of new stock offerings - and an increase in English interest rates that drew some equity capital away from the speculative leaders - and a surge in brokers loans and other loans on investment securities that continued upwards even after the market began to decline.
  • Conditions in these weak business sectors continued to worsen during October, 1929, until a drop in railroad car loadings and further slippage in steel production provided proof of actual economic decline that the market could not ignore - even with the benefit of substantial declines in interest rates;
  • Struck by this undeniable proof of actual economic slowdown, the stock market responded with a Crash;
  • The stock markets did not go straight down, but suffered repeated sharp drops interspersed with vigorous but partial recoveries based on continuing optimism about imminent economic recovery;
  • The volatile stock market gyrations helped concentrate the minds of businessmen all around the nation concerning immediate business prospects, and led to substantial cutbacks in inventory orders that hurried the economic decline but succeeded in keeping most business inventories low;
  • European grain crops, encouraged by trade war protections, reached sufficient size to meet all European needs, destroying this important U.S. export market. However, Farm Board price support purchases shielded agricultural commodity prices;
  • Almost all business sectors recovered and reached the good levels of 1928 (but not the boom levels of 1929) during the first quarter of 1930 - except for foreign trade and those farm commodities and metals that were heavily dependent on international commodities markets and foreign trade, and textiles (which were also influenced somewhat by foreign trade conditions);
  • By the beginning of April, 1930, the stock market recovery, coupled with gains in the bond market, trimmed total securities market losses to just about 10% since the September, 19, 1929 highs;
  • Nevertheless, when declines in foreign trade, textiles and commodity prices were joined in early April, 1930, by declines in autos, steel, railroad car loadings, and even retail trade, the stock market resumed its decline;
  • Prices for copper, silver, and agricultural commodities collapsed in May, 1930, carrying stock market prices with them.
  • The stock markets still did not go straight down. Typically, they rebounded vigorously after every selling climax, rose in response to every indication of possible business recovery, then slipped and finally sold off again with the report of disappointing business statistics;
  • Despite price fixing efforts by governmental and private entities, market mechanisms worked as they were supposed to - rapidly driving down prices of commodities and industrial goods in search of new equilibrium points;
  • However, equilibrium points were continuously undermined - sending prices ever lower - by the combination of trade war protectionist and subsidization policies that stimulated vast overcapacity and commodity surpluses. They were also undermined by the heavy levels of international indebtedness that became increasingly burdensome as prices and international trade declined;
  • For the huge agricultural segment of the U.S. economy and for some segments of the mining industry, prices could not stabilize and recovery was impossible as long as the trade war continued. To lesser extents, other major industries, like autos and steel, were similarly impacted;
  • Even as interest rates plummeted, and even during the period before June, 1930, when bond markets rose, there was a continuous and accelerating adverse shift in credit markets as political and economic entities suffered loss of credit worthiness.
  • Weakness in bonds started with the weaker foreign bonds, then the weakened industrials, and finally the railroad bonds (which comprised a major segment of the domestic private bond market), so that, by the end of 1930, only U.S. bonds and the highest quality  corporate bonds continued to thrive;
  • By the end of the year, just about every economic segment - including farm commodities and textiles - had experienced periods of substantial recovery - except for foreign trade, which accelerated its rapid and inexorable decline throughout 1930 and continued rapidly declining, at multiple double digit rates, throughout the first 4 years of the Great Depression.

  Both the Crash of 1929 and the Great Depression itself were clearly the result of disappointing business conditions caused by policy blunders - indeed, gross policy stupidities - of governments all around the world - but with the government of the U.S. especially complicit.

M) Graphic Presentation of

Key Economic Indicators (July, 1929 through Dec., 1930)

Total NYSE values - 50 stock index yields - Steel production (U.S. Steel and Bethlehem Steel production generally ran somewhat higher) - Exports

$$$$$ = Total NYSE values as of first day of month.
____> = Movement highs or lows.
[Dividend Yield of NY Times 50 stock index]
###### = Steel production, % of capacity.

 Exports for quarter,
% change from previous year =

  7/1/29 - Summer Boom
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($77.2 billion)
[Yield - 3.37%]
################################################ (96%)
  Poor crops abroad spur recovery of agricultural commodities - economy booming - commodities and securities markets recover from short sharp May decline - call rate hits 15%.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($84.2 billion)
[Yield - 3.25%]
################################################ (95%)
  Exports, auto production, construction fall - brokers loans rise sharply - call rate hits 12% - large grain surpluses remain a problem.
  9/1/29 - Fall Bust
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($89.7 billion)
____________________________________________> ($90.5 billion on 9/19)
[Yield - 2.98%]
############################################## (92%)
  Brokers loans and other loans on securities rise sharply - call rates down to 8% to 10% - steel production slips - commodity prices join decline - England raises discount rate.
$$$$ (3.8%)
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($86.8 billion)
_____________________________> ($60 billion on 10/29)
[Yield - 3.23%]
########################################## (85%)
  Interest rates drop sharply in first week as brokers loans finally begin to fall - commodity prices fall sharply - steel production and prices slip - railroad car loadings join decline - stocks Crash
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($71.75 billion)
_______________________> ($48 on 11/13)
[Yield - 4.06%]
################################### (69%)
  Railroad car loadings drop 3% in one week - banks and brokers have trouble unloading holdings of distress stocks - brokers loans finally drop sharply, but other types of loans remain sharply higher. Bonds up - stocks crash again.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($63.5 billion)
[Yield - 4.4%]
############################## (59%)
  Retail sales remain good, wages remain high and interest rates are sharply lower, but auto, steel and other manufactures dive, unemployment rises and railroad car loadings remain low - stocks crash again.

(-10%) $$$$$$$$$$

  1/1/30 - Spring Business Revival:
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($64.7 billion)
[Yield - 4.39%]
##################################### (75%)
  Russia plans to sell wheat - subsidized prices induced farmers to plant huge spring crop - agricultural commodity prices dive. stocks up.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($69 billion)
[Yield - 4.29%]
######################################## (80%)
_________________________________________>(82% in mid Feb.)
  Bumper European wheat crop reported, agricultural commodity prices dive - Farm Board pegs wheat prices sharply higher but thus destroys wheat exports - but retail sales, autos and steel push sharply up, railroad car loadings recover, interest rates are down - accelerated steel orders and maintenance projects from railroads and other major industrials - bankers and brokers finally succeed in unloading most distress stock from '29 Crash.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($70.8 billion)
[Yield - 4.17%]
####################################### (78%)
  Real estate prices fall, undermining 2nd mortgages, undermining rural banks. Failures up sharply for small banks and businesses. Commodity prices keep slipping. Textiles drop sharply, but autos, steel and most trade segments recover nicely. Stocks and bonds up.

(-23%) $$$$$$$$$$$$$$$$$$$$$$$

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($76.1 billion)
_______________________________________> ($79 billion on 4/10)
[Yield - 4.00%]
####################################### (78%)
_______________________________________> (80% in mid Apr.)
  Steel prices slip - first quarter earnings are poor - commodity prices plummet. Railroad car loadings fall.  Interest rates continue diving lower (no longer a factor).
  5/1/30 - Disillusionment:
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($75.3 billion)
[Yield - 4.23%]
################################### (70%)
   European copper cartel unable to sustain copper price peg - copper prices plummet. Farm Board unable to sustain wheat prices - broad retreat of commodity prices. Auto sales and production drop - steel prices and production slip - private construction falls - unemployment and business failures sharply higher. Retail volume remains good, with declines due mainly to lower prices. Chinese cease silver purchases - silver prices plummet - purchasing power of silver denominated currencies plummet - cotton and textiles plummet. Stocks down.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($71.4 billion)
[Yield - 4.16%]
############################## (60%)
  Auto sales and production and steel production drop sharply - Smoot-Hawley Tariff enacted - Europe retaliates - commodity prices collapse and retail prices drop - huge grain and cotton carryovers. Stocks whipsaw repeatedly, ending sharply down.

 (-23%) $$$$$$$$$$$$$$$$$$$$$$$

  7/1/30 - Corn Drought and Fall Business Revival:
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($63.9 billion)
[Yield - 4.80%]
########################### (54%)
  Commodity prices continue down, but spring revival supports second quarter auto and steel earnings - corn drought boosts corn above wheat prices - wheat used for cattle feed - all grains sharply higher. Stocks rebound.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($67.25 billion)
[Yield - 4.53%]
############################ (55%)
  Cotton and steel prices continue down. Drought breaks, tumbling corn and grain prices.
  9/1/30 - Business and Agricultural Collapse:
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($67.75 billion)
[Yield - 4.43%]
############################# (58%)
  Autos and railroad car loadings and other trade indices fall at time when trade usually picks up - commodity prices break to new Depression lows. Stock market decline resumes.

 (-25%) $$$$$$$$$$$$$$$$$$$$$$$$$

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($60.14 billion)
[Yield - 4.82%]
######################## (48%)
  Third quarter earnings bad - Russia sells additional 54 million bushels wheat plus cotton and other crops - significant numbers of dividends are omitted or reduced or maintained by dipping into previous earnings - auto sales and steel production plummet - retail sales fall - railroad bonds join decline.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($55 billion)
[Yield - 5.41%]
#################### (39%)
  Small banks and businesses failing in record numbers - business and agriculture collapse.
$$$$$$$$$$$$$$$$$$$$$$$$$$$ ($53.3 billion)
[Yield - 5.40%]
################ (32%)
____________> (24% last week in Dec.)
  First big N.Y.C. bank fails - foreign and domestic bond markets jolted by periodic defaults and rumors of defaults - domestic bonds plummet, stocks continue decline.

  (-30%) $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$





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Copyright 2001 Dan Blatt