the Great Depression
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Audio Podcasts about the Great Depression

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Lessons from the 1929 Crash and the Great Depression
How to to avoid a Remake of the Keynesian Debacle
"There will be no further Crash in our Lifetime", John Maynard Keynes


Calvin Coolidge

Republican President

historical recording
of a speach in which

Coolidge announces
public spending cuts

roaring 20s1920-1929: an Era of exceptional Prosperity
The post war period was an era of great prosperity generally referred to as the roaring twenties. US President Coolige was an advocate of "small government" and his supply side economics proved a real success  story.  Under his presidency, the top marginal tax rates were gradually reduced from 73% in 1922 to 24% in 1929. These "Mellon tax cuts" restored the incentives to work, save and invest and generated an atmosphere of great dynamism. The reduction of top tax rates particularly motivated the entrepreneurs to engage in the risky business of innovation with an unprecedented series of great discoveries and inventions as the logical consequence. Electrification, radio, phonograph and telephone date from this era and brought a wide range of new machinery and consumer goods. New tools and processes (Ford's assembly line) drastically increased productivity. All these brand new technologies boosted productivity and prosperity all over the world.

Living-Standard--before-depressionIn the Soviet Union, the communist experiment  was still young and initially looked like a success story. Many considered the economic model organised by central planners as a modern and rational alternative for the "irrational anarchy" of free markets.  In Europe as well as in the U.S., the economic dispute between the socialist - interventionist ideas of J.M Keynes' and the classic liberal ideas of the "Austrian school" of  Von Mises  and  Hayek  was at the centre of the political debate.
Easy access to cheap credit
By the end of the decade the economic boom culminated in a general euphoria, particularly in the U.S. Asset prices  skyrocketed. Prior to the euphoria a long period of easy access to cheap credit had caused the money supply to grow at a much faster pace than the real economy. 

1929-folliesFrom 1921 to 1929 the US money supply increased by 61 percent. In Europe the fast money supply was exacerbated by the massive German compensations for war damages. English repayment of war loans  inflated the US money supply even further. As a consequence inflationary pressures increasingly built up in Europe as well as in de U.S. 

Between 1928 and 1929, the easy access to cheap credit caused reckless speculation on stock markets and on assets in general. Prices gradually inflated to an unsustainable asset bubble. In the 30 months from March 1926 to September 1929 the Dow Jones rose 230% from 166  to 381. A correction had become inevitable, but turned into a severe crash due to calamitous government intervention.

stock market crash

Political Blunders
Hoping to control the speculation, the political authorities and inexperienced Federal Reserve (°1913)  took some most unfortunate anticyclic measures. Today Most economists consider these as overdone. For free market economists the interventions were superfluous absurdities. 

In an effort to control speculation, US government first banned bank loans for margin trades. Moreover the FED drastically raised its discount rate from 3.5% (Jan 1928) to 6% (Aug 1929). It caused an unexpectedly contraction of the money supply by a massive one third in the six months from August '29 till March '30. Markets reacted most vigorously. Stocks plummeted and asset prices crashed, causing a dramatic contraction of the real economy. 

marginal-income-tax-rate-1925-1945In an effort to remedy the accelerating recession the US Government then relied on protectionism. In the Smoot-Hawley act of 1930, the US raised import duties on 25.000 articles to an average rate of 65%. The American protectionism caused reprisal protective measures by most trading partners. The trade war that followed just killed international trade, with devastating effects on productivity and boosting unemployment to unprecedented levels.

Facing budget deficits as a result of declining revenues and increasing welfare demands President Hoover then decided to double income taxes. The 1932 Revenue act increased top tax rates from 25% to 63%. President Roosevelt later increased these rates even further to 79% and at one point even proposed a top tax rate of 99.5%. Moreover drastic reduction of most tax exemptions did particularly hurt middle income groups.

The 1932 landslide election victory of the democrats had sparked a true panic among savers. About three weeks before Roosevelt's inauguration, alarmed customers rushed to their banks to empty their accounts. These bank runs ruined numerous banks. On the day before Roosevelt took office, more than 5000 banks went under.

In an effort to halt the panic,
Roosevelt two days after his inauguration declared a "bank holiday". For four days the nation's banks were closed and all financial transactions were halted. In the meantime the new president pushed the Emergency Banking Act through the legislative chain.
podcast   Roosevelt's Radio announcement of the bank holiday  great depression 1Policy Unpredictability created a climate of fear.
Passed by Congress on March 9 1933, the Emergency Banking Act handed the president a far-reaching grip over bank dealings and foreign transactions.  The act also allowed Roosevelt to seize peoples gold holdings, and devalue the dollar with 40%. The American devaluation set in motion a downward spiral of competitive depreciations by the trade partners all over the world, ruining the world trade and American exports even further.  Only two months later the Agricultural Adjustment Act (AAA) was passed. In an effort to stabilise the depressed farming market and support food prices the act encouraged farmers to grow fewer crops and to destroy crops and cattle. As the crisis deepened ever further, panic spread to the political leaders. In an ever faster pace they declared new emergency measures.

The rapid succession and unpredictability of government interventions created a climate of legal uncertainty and
deteriorated the poor business climate even further. Rapidly changing tax rates and subsidy regimes, regulations of wages, prices, interests and production were all government interventions on a scale the world had not known till then. The interventions created a general sence of uncertainty and fear. Faced with so much incalculable risk most industrialists decided to  postpone investments till things had settled.

New Deal, bad Deal, with devastating Social Damage
It was in deed not free market failure which produced the 1929 depression. It was interventionism and political bungling on a grand scale, with the one policy blunder succeeding the other: trade crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops, coercive labor laws and not in the least the FED's mismanagement of the money supply.

roosevelt-new-dealThe social cost of the political blunders was the severest crisis in history. Stocks fell to 10% of their pre-crash value, income fell by 28%, car sales fell by 75%, banks failed in record numbers, dragging down hundreds of thousands of customers. 13 million unemployed in the US causing poverty and rumors of revolt. 

great_depression-unemployed Conclusion
The specialists on the matter Murray Rothbard, Laurence Reed, Amity Shlaes unanimously agree: the great depression was not a crisis of capitalism but merely a crisis of interventionism. Politicians completely mishandled a mild recession. It was not market failure but the combined mistakes of Central Banks and Central Government. Irrational fear for deflation led them to distort the healing price mechanism. They prevented prices and wages from falling, hindering markets from adjusting to the new situation and finding a new equilibrium.  The interventions caused  such distortions that they lead to massive misallocation of scarce resources ultimately turning the natural slowdown of the business cycle into the deep depression.

Politicians and the FED would much better have left markets to themselves. The price mechanism guided by the collective wisdom of millions of individuals such as expressed in billions of free economic choices would have lead markets to a new equilibrium and stable prices in just a few quarters.  

In his analysis "Great Myths of the Great Depression", Lawrence Reed convincingly demonstrates that Roosevelt's deficit spending did not boost demand at all. The massive resourses spent in low productive public investments was merely outcrowding productive business investment as well as private consumption.  In this way Roosevelt's Keynesian remedies of the socialist-style New Deal  and the and excessive (near fascist) dirgism in the National Recovery Act (NRA) rather than remedying the 1929 crisis, prolonged it well into the 40's.

Paul Vreymans  


Audio Podcasts on the great Depression

The Great Depression, Political Economy, and the Expansion of the State (Nye on EconTalk)
How the monetary impact of the Smoot-Hawley import tax aggravated the 1929 depression (Liberty fund)
Bubble Economies | How easy money leads to irrational Exuberance (Mises Institute)
Monetary Policy & Trade Wars caused the Great Depression| Keynesian vs Austrian Analysis   (Liberty fund)
Did Frensh Mercantilism cause the Great Depression?   (Douglas Irwin @ Econtalk)

Recepies for a Great Depression ( Mises Institute)
How the 1920 Depresion came to an end without any intervention (Mises Institute)
The Great Depresson and the New Deal  (Eric Rauchway | Econtalk) 
Higgs on the Great Depression  (Higgs & Russ Roberts |  Econtalk )
The forgotten Man | A New History of the Great Depression ( Amity Shlaes )  (Liberty Fund)

Austrian Theory of the Business Cycle (Lew Rockwell )
How the Federal government caused economic collapse in the 1930s  By Stefan Molyneux @
Did Roosevelt's New Deal ease or prolongue the Great Depression? (Cato)
Why Keynesian Policy failed in the30s, failed in Japan, and will fail in 2009 (Cato-Mitchell)
The Great Depression as the Rationale for the Welfare State (Amity Shlaes)

Some Basic Statistics during the Great Depression
The Contraction of the American Money supply
(M2) clearly came AFTER
the the real economy was allready in a deep recession. More in this podcast:
How France & US caused a Global Monetary contraction and the Great Depression ( Cato )

Year Nominal GNP % change Real GNP % Change CPI % Change M1 % Change  M2 % Change Bank Failures Fail Deposits Interest rate Real Rate
  (1)   (2)   (3)   (4)   (5)   (6) (7) (8) (9)
1920 88.9 11,93 73.3 -1.22 85.7 14.68 23592 9.80 34708 13.52 167 5.42 -9.26  
1921 74.0 -18.34 71.6 -2.35 76.4 .11.49 20955 -11.85 32212 -7.46 505 172188 4.83 16.32
1922 74.0 0.00 75.8 5.70 71.6 -6.49 21618 3.11 33646 4.36 366 91182 3.47 9.96
1923 86.1 15.14 85.8 12.39 72.9 1.80 22653 4.68 36411 7.90 646 149601 3.93 2.13
1924 87.6 1.73 88.4 2.99 73.1 0.27 23226 2.50 37992 4.25 775 210151 2.77 2.50
1925 91.3 4.14 90.5 2.35 75.0 2.57 25362 8.80 41691 9.29 618 167555 3.03 0.46
1926 97.7 6.78 96.4 6,32 75.6 0.80 26082 2.80 43539 4.34 976 260378 3.23 2.43
1927 96.3 -1.44 97.3 0.93 74.2 -1.87 25796 -1.10 44384 1.92 669 199329 3.10 4,97
1928 98.2 1,95 98.5 1.23 73.3 -1.22 25761 -0.14 45861 3.27 498 142386 3.97 5.19
1929 104.4 6.12 104.4 5.82 73.3 0.00 26189 1.65 45918 0.12 659 230643 4.42 4.42
1930 91.1 -13.63 95.1 -9.33 71.4 -2.63 25293 -3.48 45303 -1.35 1350 837096 2.23 4.86
1931 76.3 -17.73 89.5 -6.07 65.0 -9.39 23883 -5.74 42598 -6.16 2293 1690232 1.15 10.54
1932 58.5 -26.56 76.4 -15.83 58.4 -10.71 20449 -15.52 34480 -21.14 1453 706188 0.78 11.49
1933 56.0 -4.37 74.2 -2,92 55.3 -5.45 19232 -6.14 30087 -13.63 4000 3596698 0.26 5.71
1934 65.0 14.90 80.8 8.52 57.2 3.38 21068 9.12 33073 9.46 57 36937 0.26 -3.12
1935 72.5 10.92 91.4 12.33 58.7 2.59 25199 17.90 38049 14.02 34 10015 0.14 -2.45
1936 82.7 13.16 100.9 9.89 59.3 1.02 29630 16.20 43341 13.02 44 11306 0.14 -0.88
1937 90.8 9.34 109.1 7.81 61.4 3.48 30587 3.18 45195 4.19 59 19723 0.45 -3.03
1938 85.2 -6.37 103.2 -5.56 60.3 -1.81 29173 -4.73 44100 -2.45 54 10532 0.05 1.86
1939 91.1 6.70 111.0 7.29 59.4 -1.50 32586 11.06 47681 7.81 42 34998 0.02 1.52
1940 100.6 9.92 121 8.63 59.9 0.84 38763 17.36 54328 13.05 22 5943 0.01 -0.83
1941 125.8 22.35 138.7 13.65 62.9 4.89 45349 15.69 61296 12.07 8 3726 0.10 -4.79

(1) $ billions (Historical Statistics, Fl)
(2) $ billions, 1929 prices (Historical Statistics, F3)
(3) 1947-49=100 (Historical Statistics, El 13)
(4) $ millions, June figure (Friedman and Schwartz, 1963, Appendix Al)
(5) $ millions, June figure (Friedman and Schwartz, 1963, Appendix Al)
(6) suspended banks (Board ofGovernors, 1943, p. 283)
(7) deposits insuspended banks (Board ofGovernors, 1943, p. 283)
(8) yearly average yield on 3-6 month Treasury notes and certificates (1919-33) and bills (1934-41)
(Board ofGovernors, 1943, p. 460)
(9) short-term Government yield less CPI inflation rate insame year
    %change refers to year-to-year differences in the logs of the series to the left


more information from the FEDERAL RESERVE BANK OF ST. LOUIS

Lawrence W. Reed, president of FEE
(Foundation for Economic Education)
Lawrence Reed's lecture
on the Great Depression
  The Future of Freedom Foundation on Vimeo


Listen to Lawrence W. Reed discuss the
"Great Myths" on the Mike Rosen Show (mp3)

America's Great Depression 

by Murray N. Rothbard.   

Since it first appeared in 1963, it has been the definitive treatment of the causes of the depression. The book remains canonical today because the debate is still very alive. Rothbard opens with a theoretical treatment of business cycle theory, showing how an expansive monetary policy generates imbalances between investment and consumption. He proceeds to examine the Fed's policies of the 1920s, demonstrating that it was quite inflationary even if the effects did not show up in the price of goods and services. He showed that the stock market correction was merely one symptom of the investment boom that led inevitably to a bust. 

The Great Depression was not a crisis for capitalism but merely an example of the downturn part of the business cycle, which in turn was generated by government intervention in the economy. Had the book appeared in the 1940s, it might have spared the world much grief. Even so, its appearance in 1963 meant that free-market advocates had their first full-scale treatment of this crucial subject. The damage to the intellectual world inflicted by Keynesian- and socialist-style treatments would be limited from that day forward.

Free pdf Download here

Eric Rauchway -   Hosted by Russ Roberts

Eric Rauchway of the University of California at Davis and the author of The Great Depression and the New Deal: A Very Short Introduction,  talks with EconTalk host Russ Roberts about the 1920s and the lead-up to the Great Depression, Hoover's policies, and the New Deal.  They discuss which policies remained after the recovery and what we might learn today from the policies of the past.
No economic myth these days is more pernicious than the myth that the free market caused the Great Depression and the New Deal got us out of it. That, as economist Robert P. Murphy points out is flat-out false. In The Politically Incorrect Guide to the Great Depression and the New Deal he provides irrefutable evidence that not only did government interference with the market cause the Great Depression (and our current economic collapse), but Herbert Hoover’s and Franklin Delano Roosevelt’s big government policies afterwards made it much longer and much worse (just as President Barack Obama’s extraordinary expansion of government promises to do today). Perhaps even more compelling, Murphy exposes the untold story behind the New Deal—how it operated by force, and why what’s really at stake is not only our economy but our liberty. The real “lessons of the Great Depression” are not what you’ve been taught.
Robert Higgs, of the Independent Institute, talks with EconTalk host Russ Roberts about the Great Depression, the New Deal, and the effect of World War II on the American economy. Using survey results, financial data, and the pattern of investment in the 1930s, Higgs argues that New Deal policies created a climate of uncertainty that prolonged the Great Depression. Using consumption data, he argues that prosperity did not return during wartime, but rather after the war when government intervention in the economy subsided.
The forgotten Man
A New History of the Great Depression 

Amity Shlaes, Bloomberg columnist and visiting senior fellow at the Council on Foreign Relations, talks about her new book, The Forgotten Man: A New History of the Great Depression. She and EconTalk host Russ Roberts discuss Herbert Hoover, Franklin Delano Roosevelt, the economics of the New Deal and the class warfare of the 1930s.  Amity Shlaes uncovers how big Government prolongued the depression till late in the '30s, even '50s, and how we still suffer the legacy of Roosevelt"s  National Recovery Act and big government idea's today. A great 60 minutes podcast.

Austrian Theory of the Business Cycle 
By Lew Rockwell and  Jörg Guido Hülsmann
The role of Fractional and Central Banking in the devellopment of financial crisis

Freedom and the Great Depression:  
How the Federal government caused economic collapse in the 1930s
By Stefan Molyneux

This book, originally published in 1932, presents a cosmology of a mass delusion which affects the mentality of the world. This takes place following World War I where the Federal Reserve System, for the first time, allowed flexible currency. This book blows away the conventional interpretations of the crash of 1929, not only in its contents but that this book exists at all. . He ascribes the crash to the pile of up debt, which in turn was made possible by the Fed printing machine. This created distorations in the production structure that cried out for correction. So what is the answer? Let the correction happen and learn from our mistakes.

Such is the thesis of the great Garet Garrett. This book It was written in 1931. Two years before FDR arrived with his destructive New Deal, ascribing the depression to captialism and spectulation, Garrett had already explained what was really behind the correction.  It took Murray Rothbard to resurrect these truths decades later, and when he wrote this in 1963, it was a shock and we are still fighting an uphill battle to explain the true causes of the crash and following depression. But here in this wonderful book is an actual contemporary account that spelled it out plainly for the world to see.  No more can we say that people back then could not have understood. Garrett told them. And thanks to this new edition of this classic and important work, he is telling us again today.

Images of the 1929 Recession here   

 Cartoons here

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