The Great Depression was a global event that has challenged historical interpretations for the past sixty years. No single cause adequately explains the economic downturn of the 1930s; there is no historical “smoking gun”. Ascertaining the reasons for the Depression is challenging and many theses have arisen over the past decades, but some carry more explanatory power than others. Of these, the work by economists such as Milton Friedman and Thomas Sowell have gained in influence over the past thirty years and seem to offer the best analysis yet. In short, several factors influenced the course of the Great Depression in the United States but paramount among these was the catastrophic mismanagement by the federal government. In a 1985 essay, economic historian Robert Higgs described a process termed “ratcheting” whereby governments expand their powers to meet a crisis, but this expansion is often in excess of what is necessary. Higgs pointed to the Great Depression as a prime example of this phenomenon and noted that this power was not relinquished when the crisis abated.[1] Accordingly, economists such as Friedman, Sowell and later Ben Bernanke argued that the government’s authoritarian actions, regardless of how well intentioned, exacerbated the problems and prolonged economic uncertainty, both of which retarded recovery and growth.
In many American historical texts, the Great Depression begins with the Stock Market crash of 1929. Excessive investor speculation and poor banking practices caused a nationwide financial panic when stock values tumbled, and loans used to purchase those stocks could not be recovered. Banks no longer had sufficient funds to cover deposits and “ruptured” when deposit holders rushed to withdraw their savings before their institution collapsed. The result was a cascading failure in the financial system that saw financial activity such as lending dry up; businesses and citizens suffered alike due to the lack of fiscal responsibility.[2] For many socialists, fascists, and communists, the Stock Market crash was part of the historically predictable collapse of Classical Liberalism and its inherent free market system, usually referred to as capitalism.
The Depression was proof that the process which began with World War I was coming to fruition and a new era was about to emerge: the era of the socialist utopia wherein select experts managed the lives of millions to productive ends.[3]
World War II and the Cold War revealed the fallacy of this interpretation, but the notion persists that the Depression was a product of excessive capitalistic practices and inadequate government supervision. Pulitzer-prize winning historian, Arthur Schlesinger, Jr. often made the case that the Depression was only solved by government intervention and Keynesian economics.[4] Howard Zinn’s flawed ideologic history of the United States remains a popular rendition of the leftist interpretation.
However, Milton Friedman, the Nobel Laurette, challenged these views and argued that the Depression’s causes, while complex, were largely due to government inaction and misconstrued actions. Friedman’s work revealed that the Stock Market crash and the subsequent run on the banks had created a problem in the American economy, but the Federal government’s mismanagement of the problems was what turned it into a depression.[5] Specifically, he argued that it was the Federal Reserve Board’s monetary policy that inhibited a successful private sector response to the mounting challenges. By the late 1920s, the Fed, as it is better known, attempted to prevent economic speculation, gross inequities, and dramatic swings in the business cycle of contraction and expansion by curtailing the amount of money in circulation. By reducing the monetary supply, less money was available for loans and investing which would theoretically flatten the overall American economy and promote stability. Both the Hoover and later Roosevelt administrations shared this sentiment and supported the Fed’s strategy. However, Freidman argued that this policy was pursued precisely at a time when banks were running out of money and needed influxes to stay solvent; thus, the situation was made worse. He noted that by 1933, the quantity of money in the United States had been reduced by a third which starved private enterprise of the financial resources it needed to stabilize itself.[6] Friedman did not claim that the Depression was created by a single cause (he noted it was a collusion of factors), but the impulse to use government power to quickly “solve” a host of problems had the opposite effect when a more restrained selected approach was needed.
Economist Thomas Sowell later elaborated on Friedman’s conclusions and demonstrated that government policies before and after the stock market crash as well as during the Depression were a consistent factor negatively influencing events. To be sure, some actions were beneficial but, in the aggregate, more harm than good was done. For example, Sowell noted that, prior to 1930, legal constraints prevented the establishment of large multi-branch banks and promoted small independent local banks, an idea with some merit. However, these smaller banks were geographically dependent and lacked the reserves of larger institutions to deal with financial upheavals. Sowell argued that most of the smaller banks around the nation were not active in the New York Stock Exchange and thus lost very little in the crash, but the panic that banks were closing nevertheless spread nationally. As depositors learned of other banks collapsing, they sought to proactively and, in most cases, prematurely withdraw their funds; the result was an unnecessary depletion of bank deposits.[7] Like Friedman, Sowell argued that the Fed’s tight money policy made the situation worse by robbing institutions of the needed financial resources and resulted in forced closures across the economy. Moreover, Sowell showed that other federal actions also contributed to the decline by intruding into regular market operations. The Smoot-Hawley Tariff Act (1930) sought to protect American industry by limiting foreign imports, but immediately and predictably prompted other nations to retaliate by closing their markets to American goods. Likewise, the National Regulatory Authority sought to protect consumers by controlling prices but only killed employment and productivity when businesses could not balance costs with profits. Friedman and Sowell demonstrated that these actions, regardless of their intentions or merits, simply exacerbated the Depression and prevented recovery.[8]
Friedman and Sowell’s theories on government culpability in the Depression have been expanded by others. Future Federal Reserve chairman Ben Bernanke in a l995 lecture, identified the international return to the gold standard in 1928 as a misguided attempt to promote stability in international trade, but ultimately helped create the Depression. Exchange rates were thrown into turmoil and international trade declined dramatically leading to mass closures and unemployment. To reiterate, none of these economists/historians claim that government bears sole responsibility for the Depression; there were other factors. Nevertheless, to Friedman, Sowell, Higgs, and Bernanke, the government economic policies were a central factor in creating and perpetuating the Great Depression.[9]
Sources
Bernanke, Ben. “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (February 1995): 1 – 28. https://doi.org/10.2307/2077848.
Free To Choose. Episode 3, “Anatomy of a Crisis.” Directed by David Filkin. Featuring Milton Friedman. Aired January 11, 1980, on PBS. https://youtu.be/fKz6KrMGj3I.
Encyclopædia Britannica. “Great Depression: soup kitchen.” The Great Depression. Britannica. Accessed on November 25, 2021. https://www.britannica.com/event/Great-Depression#/media/1/243118/259028.
The Friedman Foundation for Education Choice. “Portrait of Milton Friedman.” Milton Friedman. Wikipedia. September 17, 2004. https://en.wikipedia.org/wiki/Milton_Friedman#/media/File:Portrait_of_Milton_Friedman.jpg.
Friedman, Milton. Capitalism and Freedom. 40th ann. ed. Chicago: University of Chicago Press, 2002. Nook.
Hayek, F. A. “Forward to the 1956 American Paperback Edition.” In The Road to Serfdom: Text and Documents. Vol. 2, The Collected Works of F.A. Hayek, edited by Bruce Caldwell. Chicago: University of Chicago Press, 2007. Nook.
Higgs, Robert. “Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon.” Explorations in Economic History 22, no. 1 (January 1985): 1 – 28. https://www.proquest.com/docview/1305246411/fulltextPDF/F7D5F7617D484B9APQ/1?accountid=12085
Keefe, Joshua R. “Stalin and the Drive to Industrialize the Soviet Union.” Inquiries Journal 1, no. 10 (2009.) http://www.inquiriesjournal.com/articles/1684/stalin-and-the-drive-to-industrialize-the-soviet-union.
Malia, Martin. The Soviet Tragedy: A History of Socialism in Russia, 1917 – 1991. New York: The Free Press, 1994. Nook.
Schlesinger, Arthur, Jr. “The ‘Hundred Days’ of F.D.R.” New York Times, April 10, 1983. https://archive.nytimes.com/www.nytimes.com/books/00/11/26/specials/schlesinger-hundred.html
Sowell, Thomas. Basic Economics: A Common Sense Guide to the Economy. 5th ed. New York: Basic Books, 2015. Nook.
------. “Thomas Sowell on the Housing Boom and Bust.” Interview by Peter Robertson, Uncommon Knowledge, July 2, 2009, podcast, 34.12. https://youtu.be/5GoAGuTIbVY.
White, Eugene N. “The Stock Market Boom and Crash of 1929 Revisited.” Journal of Economic Perspectives 4, no. 2 (Spring 1990): 67 – 83. https://www.jstor.org/stable/1942891.
[1] Robert Higgs, “Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon,” Explorations in Economic History 22, no. 1 (January 1985): 1 – 28. https://www.proquest.com/docview/1305246411/fulltextPDF/F7D5F7617D484B9APQ/1?accountid=12085 [2] Eugene N. White, “The Stock Market Boom and Crash of 1929 Revisited,” Journal of Economic Perspectives 4, no. 2 (Spring 1990): 67 – 83. https://www.jstor.org/stable/1942891. [3] Martin Malia, The Soviet Tragedy: A History of Socialism in Russia, 1917 – 1991 (New York: The Free Press, 1994), chap. 6, Nook.; F. A. Hayek, “Forward to the 1956 American Paperback Edition,” in The Road to Serfdom: Text and Documents, vol. 2, The Collected Works of F.A. Hayek, ed. Bruce Caldwell (Chicago: University of Chicago Press, 2007), Nook. [4] Arthur Schlesinger, Jr. “The ‘Hundred Days’ of F.D.R,” New York Times, April 10, 1983. https://archive.nytimes.com/www.nytimes.com/books/00/11/26/specials/schlesinger-hundred.html [5] Milton Friedman, Capitalism and Freedom, 40th ann. ed. (Chicago: University of Chicago Press, 2002), chap. 3, Nook. [6] Free To Choose, episode 3, “Anatomy of a Crisis,” directed by David Filkin, featuring Milton Friedman, aired January 11, 1980, on PBS. https://youtu.be/fKz6KrMGj3I.
[7] Thomas Sowell, Basic Economics: A Common Sense Guide to the Economy, 5th ed. (New York: Basic Books, 2015), Nook. [8] Sowell, Basic Economics, chap. 3, Nook.; “Thomas Sowell on the Housing Boom and Bust.” Interview by Peter Robertson, Uncommon Knowledge, July 2, 2009, podcast, 34.12. https://youtu.be/5GoAGuTIbVY. [9] Ben Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach,” Journal of Money, Credit and Banking 27, no. 1 (February 1995): 1 – 28. https://doi.org/10.2307/2077848.
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