What Caused the Great Depression

“The stock market crash in 1929 and the Great Depression which followed proved the failure of private enterprise and the need for government intervention. This kind of economic pontification may be heard in any gathering of ‘liberals’ and some books have been published in the recent past to give this neurosis intellectual respectability.

“If one really wants to understand the causes of the stock market crash of 1929 and the Great Depression which followed, one should go back to Economics and the Public Welfare by Benjamin M. Anderson, published in 1949. The late Dr. Anderson was in a position to know something about the matter for he bad a grandstand seat as economist for the Chase National Bank of New York during the 1920s and 30s.

“In his book, Dr. Anderson traces the roots of the New Deal, as well as the crash of 1929, to ‘an immense artificial manipulation of the money market’ beginning in 1924. 1n fact, he carries this one step beyond that to the high protective tariff in vogue in the twenties which tariff gave credence to the argument: ‘Manufacturers are protected by tariff, labor is protected by immigration laws, something must be done for the farmer.’ Thus, in 1927, when the Federal Reserve took its final and disastrous plunge into deliberate inflation, the move was justified by the argument that it was ‘to help the farmer.’

“The expansion of bank credit which brought on the crash of 1929 and the ensuing Depression issued from three waves of open market buying of government securities by the Federal Reserve: first in 1922, second in 1924 and third in 1927. As a result or this action, deposits were created in banks which expanded credit so that they were in a position to make larger loans. This unneeded bank credit, Dr. Anderson points out, found its way into real estate mortgages, installment finance paper and the security market. The stock market boomed.

“The third wave of expansion in 1927 was triggered by the financial difficulties of England.” In what follows the writer describes a plan for a cheap money policy to bail England out of her financial difficulties. We now resume our quotation.

“With the new credit expansion of 1927, the stock market took off into the wild blue yonder. The Federal Reserve became alarmed and tried to reverse themselves, but it was too late. They sold securities and raised the rediscount rate, but the boom went on. So much new money had been created since 1922 that all measures of restraint proved ineffective. Idle money in bank deposits rushed to the stock market. The madness mounted until October 24, 1929 when an avalanche of selling marked the end of the boom. The credit expansion was over.

“The Great Depression followed. The New Deal followed. Instead of returning to a policy of sound money and economic equilibrium, the New Deal plunged further down the road of intervention and turned what was a brief depression for Europe into a long and bitter one for America.

“Dr. Anderson points out that the financial crisis of 1929 was mishandled largely because there was no one in a seat of authority who could remember how such a crisis had been handled in the past. This loss of memory among public leaders is a frightening thing. When intellectuals recite that ‘the crash of 1929 and tho Great Depression proves the failure of private enterprise and the need for government intervention’ they prove that either they are suffering from such a loss of memory or that they have never seriously investigated the matter.

“If anything, this bit of history proves the fallacy of thinking we can raise our standard of living by steadily expanding money and credit. This bit of history proves that government intervention in economic affairs can lead to a disequilibrium of the economy with tragic consequences.

Economics and the Public Welfare is shot through with moral lessons. Not that Dr. Anderson preaches. He does not. However, he notes that at the root of many of the mistakes that produced the tragedy of those years was moral failure in high places. – Christian Economics