The Great Depression
Perhaps the most used idea that is expressed by those who have an anti-capitalistic point of view
is that whenever we have a free market, some type of economic disaster ensues.
And to bolster this argument, the Great Depression of the 1930s is usually trotted out and dusted off.
The Great Depression, so called, is only one of a number of recessions, depressions, and panics that we have had in this country from the beginning.
But because it is the one that occurred most recently that had a very, very serious effect upon the economy, it becomes a cause celebe.
Many people are aware of it, many people have lived through it, and they constantly refer back to the Great Depression to point out that if you have a free market, something of this sort will ensue.
As a matter of fact, most people tend to avoid a commitment relating to the free market because of the Depression.
And what they usually say is this, that the Great Depression was caused, on the one hand, by an overproduction on the part of business.
That is to say, businessmen, because they had found out how to mass produce and how to produce cheaply,
simply had created a stockpile of goods that could not be sold quickly.
and thus the inventories were large and the turnover was not as rapid as it
should have been and the consequence was that these businessmen rather than
lowering their prices preferred to close their factories and then work to reduce
their inventories but this meant that many thousands of men were thrown out of
work simply during the process of using up the overproduction that had ensued.
Now, currently we don't hear that argument quite as much as we once did, though at the time of the depression it was a constant argument that was brought out that the depression had in fact occurred because of overproduction.
The second presumed cause of the Great Depression is the idea that the government had failed to carry out its proper function in this instance.
In other words, that the government had stood idly by, as the economy sort of came unglued,
and no intervention had occurred, and therefore the government was at fault, because it did
not do enough.
Notably, what it should have done, according to this belief, it should have provided a
lot more money and credit, if there could have been more money created, and if the credit
Strings could have been loosened, then we might have been able to prevent the Depression.
But unfortunately the government didn't do anything, and the result was this economic
collapse which we think of as the Great Depression, which as we usually think began with the stock
market collapse of October of 1929 and continued primarily through the decade of the 1930s.
Now when we take and examine this period we're going to find a welter of conflicting economic
views even today. I don't know that any kind of consensus has been reached. Some economists
will insist very stoutly on what I have just stated, that the cause of the depression was
overproduction on the part of business and the failure of the government to intervene
to offset some of the excesses that had occurred. Others will point to other matters, and sometimes
you have a complete variation in what will be pointed to. For instance, a part of this
will relate to the period of time preceding the depression which led into it, and this
is this decade that we call the roaring twenties. We think of it now with some nostalgia, realizing
that actually it was a pretty good period. But having lived through it, I can recall that
at the time we didn't think it was so good, and there were many factors that were in conflict.
Some people view the twenties as a period of rapid industrial growth and expansion,
with prices rising, with everything getting better, and in a sense you can sustain that
claim by some of the statistics that are available. Others will look at the 20s as a period of
time in which prices declined, conditions worsened, and there were constant new demands
made for government to intervene. And that's true, too. There's a conflict of reports
that comes out of the 20s that led into the stock market collapse of 1929, and the stock
Stock market collapse, of course, was simply the trigger that fired off the gun that led
into the depression. Don't confuse a stock market collapse with a depression. A depression
goes on for some time. The stock market simply came down very quickly in October of 29, and
it wasn't until a little bit after that that the effects of this and other things began
And to indicate that we were moving into a depression, and for the record we should point
out that the depression continued to worsen from 1930 on to 1936. That was the nadir.
That is as far down as it got. There it seemed to bottom out, and then it began to come up
out of it so that we actually did begin to really emerge from it in 1939, 1940. But that's
What's the period of the Depression is fundamentally the 1930s that was preceded by the roaring
20s. Now, why do these conflicts in evidence appear covering the 20s? Well, it depends
on what you're looking at. You have to keep in mind that most economists tend to follow
price indices. They look at prices to determine whether conditions are good or bad. Now, if
If you examine the price indices relating to the 1920s, you will discover that in certain
areas prices constantly went up. These are notably the speculative areas. Areas in the
stock market. Stock market prices went up pretty steadily through that whole decade.
The same thing would be true of land prices, notably unimproved land, but real estate generally.
But it was particularly observable with unimproved land. In fact, we had a land boom in California
and another one in Florida during this time when the prices of unimproved land simply
went up and up. Now, when you're buying land or when you're buying stock, there's especially
unimproved land and land that is not income producing at the time. You have a kind of
investment that is fundamentally speculative. You don't know what's going to happen. So
So you buy at a price that you trust is a bottom price. It's a low price because you
anticipate that a little further on you'll be able to sell it. At a higher price you
probably don't intend to do anything with your stock or with your land except to hold
it while the market goes up above it and then you'll sell. And during the 1920s that is
The picture that emerges in speculative areas primarily, that prices continued to drift
upwards, and sometimes they didn't drift, they actually shot upwards. And so it was
a good time for people in the speculative arena to take their dollars and put them to
work in buying things which they felt with the passing of time could be sold for more
than they paid for them. But conversely, in another part of the market, prices were going
Looking down, there was a consistent decline in prices in such areas as foods, household
appliances, automotives, and things of this sort. There was a constant steady decline
or depression in these price areas. And so you have a mixed view of the market. If you
look at the 20s, you'll have one curve definitely going up. At the same time, another
Curve is definitely coming down. And your economists take a look at this and some favor
the one chart and some favor the other. They're both there. Both sets of economists are telling
you the truth as they see it. But for a complete view, you should look at both and see what
is happening on a broad scale. And that is, I think if you do that, if you see the whole
If you look at the whole picture, then you begin to realize that the price index alone is not sufficient to understand what is happening in the market.
You see, if you have prices going down, as we did in the market during the 20s, you could presume conditions are getting bad.
But that's not true. Actually, prices can go down as a result of improved efficiency.
And, notably, this is what we were doing in the 1920s. We were engaged in learning how to produce farm products better, to produce household appliances better, and to produce automobiles better than ever.
More and more people were buying more and more things in these areas, but our productive techniques had so improved that we could lower the unit cost.
I can recall my own grandfather during this period who was a farmer, and during the 1920s was the only time in his life that he got out of debt.
And yet during this period of the 20s, he was singing the blues, and the reason was that the price of wheat was dropping every year.
The result was that he was making more money. His net was better. In fact, I think it's
about the only time in his life that he had a net, and it was the best that he'd ever
had during this time. But the unit cost was going down, and so, like many economists, he
looked at it as a negative thing. And many people in the country did. They saw the 20s
as a period of decline, and they wanted the government to intervene. In fact, it was during
During the 20s, many of the farmers began clamoring for the creation of what we later
got and we call the AAA or the Agricultural Administration.
This was in order to give us a protected price area in the farming segment of the market.
One of the things that caused it was the decline in price even while the farmers had never
done any better than they did during the 20s.
This is one of the things that can confuse you when you look only at price. You have
to look at more than price. You have to learn to look at productivity as well as price if
you're going to understand what happened. Actually, one of the major causes of the depression
of the thirties was not the decline in price and not the failure of government to intervene
Nor was it overproduction. What it was, was the fact that the government had already begun
to intervene on a massive scale. Now this is usually not recognized. We tend to suppose
that the government really didn't get into the market to intervene until, oh, possibly the time
of Franklin Delano Roosevelt. Of course, at that time there was a rapid expansion of government
government intervention, and people, some of them, for the first time became aware that
such intervention was occurring. But if you examine the record, you will discover that
the American government began intervening in the economy virtually from 1789. We had
all kinds of interventions, notably in the field of money, banking, credit, and so on,
but also getting into other areas, including agriculture, from a very, very early time.
In the 1930s, the government had begun intervening with the price mechanism long before 1930,
and the inability of the free market to adjust prices was one of the things that contributed
to the depression.
You see, it wasn't that there was an overproduction of goods.
It was that there was an overproduction of goods at a given price.
And it was impossible to cause the price to fluctuate because of certain rigidities that
had already been built into the market as a result of taxation, as a result of unionization
in many industries that create artificial strictures around which the rest of the economy
has to flow. And thus, if the economy had been absolutely flexible so that prices could
have adjusted, then the natural price mechanism of a free market would have tended to prevent
the depression from occurring in the first place. But it was because of price rigidity
caused by government and union intervention in the market that was one of the contributing
factors that brought on the Depression.
Now another cause of the Depression was a large increase, a sudden increase in government
intervention not brought on by Mr. Roosevelt, as most people think, but by Mr. Hoover. Mr.
Mr. Hoover, who we generally think of as a conservative, was actually quite radical in
his thinking as it related to the function of the government in dealing with the economy.
Mr. Hoover had personally assisted in launching about 40 new governmental agencies during
his term of office.
You'll recall he was elected in 1928 and served until 1932, and in that period of time,
which is the period of time in which the Depression got started, Mr. Hoover had been among the
foremost in clamoring for government intervention in order to assist the businessmen from getting
into this decline and stagnation that they seemed to be getting into.
One of the things that Mr. Hoover believed, and it was a belief that was then picked up
up and shared by Mr. Roosevelt, who followed him, was a belief in the Keynesian idea of
how the market works. And those of you who are old enough to remember will recall that
there was a popular notion that the Depression was caused by a lack of spending money, notably
it was called by a lack of effective demand. That is, the market had slowed down because
Because customers weren't able to go to the market to buy all the goods and services
that were there.
And sometimes this was called a surplus in production.
But often it was called an insufficiency of effective demand.
That is, if the customers had more money and more credit to play with, then they would
naturally spend it, and that would cause the market to speed up.
And so Mr. Hoover believed this and his entire practices from the time he took office through
his entire four years was aimed at putting more spending money in the hands of customers.
He had several bank agencies started and certain credit restrictions were relaxed so that more
See, we had had, from the beginning in this country, periodic booms and busts. We had
had recessions and panics, and then we'd had good times, and it seemed that there was
more or less a cyclic operation of the economy. We'd have good times, then they'd be followed
by a recession, and then maybe by a depression or even a panic, and then it would bottom
out and we'd have good times again. And this sort of thing went on. It caused many
Many people, about the turn of the century, coming from the 19th into the 20th, to believe
that the government should take a more active part in the economy and try to figure out
a way of preventing these wild booms or busts. You ought to have an agency that could prevent
a boom from occurring by holding it down if it started to overheat, and then at the same
The Federal Reserve Bank was an agency created in part to accomplish this mission.
Now I'd like to point out to you that many people suppose that since we now have the Federal
Reserve Bank that it would be impossible to have a depression.
And I'd like to point out that the Federal Reserve Bank came into existence by federal
law in 1913, and the Great Depression didn't occur until the 1930s, so obviously the Federal
Reserve Bank did not prevent the Great Depression because it was here, that is, the bank was
here considerably before the Depression.
I'd like to just read a portion of the purposes of the Federal Reserve Bank as they appear
in the Federal Reserve Act, and I quote here, the purposes of the act are, and I'm quoting,
to provide for the establishment of Federal Reserve Banks, to furnish an elastic currency,
to afford means of re-discounting commercial paper, to establish a more effective supervision
of banking in the United States, and for other purposes." Naturally, your mind boggles a
I'd like to direct your attention primarily to the phrase, to furnish an elastic currency.
Now that was the idea, to furnish an elastic currency. Elastic currency, of course, is
rubber money. And the idea was that you would have a kind of money that would stretch out
when you wanted it to, and then would contract when you wanted it to, and by manipulating
The Federal Reserve Bank was created in part for that purpose.
Actually, this came into existence in 1913.
They began working on it in 1914.
But it was in 1914, as you recall, that World War I got started.
We weren't in it at the outset, but we very quickly revealed where our sympathies were.
We tended to side with France and Britain and Belgium, and the result was that although
we didn't become an active combatant until later on, we did lend moral support to the
side of what we call the Allies and against the Central Powers.
And then, as you know, in 1917, in April, we got into World War I, I beg your pardon,
and we stayed in it for 18 months, the ultimate armistice coming in November of 1918. Now,
when that happened, when the armistice came and we knew the war was over, the people in
the money areas, the economists, the bankers, the people who are supposed to be informed
in these areas, immediately drew back and they said, uh-oh, now we're going to have
a depression. Because this is one of the cyclic conditions that has reappeared so frequently.
Our country has been at war periodically all through its history. And during the war times
we usually have a boom because money is loosened up and it flows freely and each dollar is
The money is spent many times in a contracted period of time, but when the war ends, then the money disappears from the market and spending slows down and you have a decline that could be a recession or you lead into even a depression or panic.
So here we had gone through a war, and we had spent a great deal of money, and during the war we had had boom-boom times.
That is, from a financial point of view, from the flow of money and the acceleration of flow, things had gone very well.
Now the war was over, and so we anticipated a recession.
But we were also aware of the fact that the Federal Reserve Bank was in existence, and it wasn't going to permit anything to happen.
And so we watched with bated breath to see what would happen.
and 1918 ran out and there was no depression, and 1919, no problem, 1920, no problem.
We began to wonder what was going on because although the acceleration had tapered off,
we had not gone into a decline.
Business was getting better all the time, 1918, 1920, into 21.
And then, right after the first of the year, in 1921, we got it. There was a real jolt.
It was a very serious moment in the economic history of the country. You could virtually
feel it. The headlines in the papers were full of news of factories closing down, men
being laid off, conditions were going to be very, very bad.
And then, in the midst of this, a very interesting thing occurred. A number of businessmen, and
from personal memory, I recall that Mr. Henry Ford was one of them, took their private money
out and began making investments. In fact, it was during this time that Ford announced
that he was building a new plant in every state in the Union, or in virtually every
state. He was expanding to that degree. And this was while the steel companies were contracting
and everybody was shutting back. Now Ford announced that he was opening up and then in order to supply
the things he would need the steel companies had to open up and suddenly what we had was instead
of a depression we had a six weeks period of a sharp recession and after the six weeks were over
we had regained our equilibrium and were going right up again in a way that led all the way through
through the 20s. And the interesting thing is that people credited the Federal Reserve
Bank for this action. And I cannot find any evidence that the Federal Reserve Bank did
anything. At this particular time, the Federal Reserve Bank was still engaged in trying to
attract local bankers to join it. They didn't have all the banks in it by any means. And
a number of banks didn't want to get into it. And so the Federal Reserve Bank really
Money hadn't done anything, but it got the credit for doing it, because everybody believes
that money is in banks, and when money suddenly appears, it must have come out of banks, and
this couldn't have happened if the Federal Reserve Bank hadn't made it happen, and therefore
we had sort of the attitude during the 1920s that there was only one direction, it was
up, and we had found the money tree, nothing could go wrong, or if it did, the Federal
The Federal Reserve Bank could bail us out. This undoubtedly contributed to the psychology
of the period, which led so many people to engage in speculative things. Because how
could they go wrong? If they made a mistake, well, good old Federal Reserve was right there,
and Uncle Sugar is there, and you're going to be taken care of no matter what happens.
And so we had this feeling of optimism, actually a wild optimism that built up during the 20s.
The stock market, as you know, rose to a point higher than it had ever been in its history
up to that time. And then the rug was pulled out and down we came. Now, an interesting
thing that should be pointed out in respect to this is what happened in the midst of the
1920s. You see, as people began speculating more and putting more and more money into
the market, and of course they did it in the speculative areas, as I've mentioned, in land
and the Stock Market and so on. What they had to do was sometimes to borrow money on
their assets and then, having gotten money borrowed, they would take and use that as
a means of establishing credit so that they could borrow still more. In other words, a
man goes to the bank, borrows $5,000, sends the $5,000, say, to Wall Street and buys,
Let us say $10,000 or $25,000 worth of stock, and he does it on the basis that he's paid
$5,000 down.
Well, he borrowed the $5,000 by putting his house up as security, and then he uses that
money to give himself even greater credit, so on his house he has actually borrowed perhaps
as much as $30,000 or $40,000.
The house probably isn't worth more than fifteen, but by pyramiding this way you can build up
a mountain of credit. And this is what happened. We build up a fantastic amount of credit,
and then the rug was pulled out from under us, and the credit bubble burst, and we came
down to a cash level. And that is what actually happened that caused the depression, and of
Of course, then we found various ways of dealing with it, some of which haven't been too effective
even up till now, but it's a fascinating area and I'd like to recommend real good study
in it.
Thanks very much.