Causes of the Great Depression 

Many like to blame the stock market crash of October 19, 1929, as one of the main causes of the Great Depression.  It wasn't.  It was just the triggering event.

It was what led up to the stock market crash that caused the Great Depression.

Let's explore...

There was extensive money supply growth...massive supply build up by industry...rampant speculation...ending with a parabolic stock market blow off...all for a presumed demand that was nearly nonexistent.

How could things have gotten so out of whack?

To answer this question, let's look to John Steinbeck...

"The bank is something more than men, I tell you.  It's the monster.  Men made it, but they can't control it."  John Steinbeck, The Grapes of Wrath

That's right, the banks, starting with the Federal Reserve, caused a massive -- credit induced -- spending binge. 

The Federal Reserve Governor at the time, Benjamin Strong, administered what he called "a little coup de whiskey to the stock market."  He sold the dollar, purchased hefty amounts of Treasuries, and extended cheap credit to the masses.

Unfortunately this "little coup de whiskey" produced a drunkenly distorted economy.  And when the bills came due the banks could not recover their loans.  And depositors lost their savings forever.

Adolf Miller of the Federal Reserve Board testified to the Senate Banking Committee in 1931 that this episode constituted "the greatest and boldest operation ever undertaken by the Federal Reserve System and, in my judgment resulted in one of the most costly errors committed by it or any other banking system in the last 75 years." 

The Great Depression -- including the high poverty and unemployment  -- was just the painful hangover from the irresponsible banking practices of the roaring 20's.

Yet no one saw it coming...

With the length and magnitude of the Great Depression -- and the rampant speculation leading up to it -- it is remarkable that no one saw it coming.

But the fact is...  No one did see it coming. 

Here are some quotes from the leading economists and authorities of the time. 

1927:

"We will not have any more crashes in our time" --John Maynard Keynes.

January 12, 1928:

"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future." --E.H.H. Simmons, President New York Stock Exchange.

December 4, 1928:

"No Congress of the United States ever assembled, on surveying the state of the Union, has met a more pleasing prospect than that which appears at the present time.  In the domestic field there is tranquility and contentment...and the highest record of years of prosperity.  In the foreign field there is peace, the goodwill which comes from mutual understanding." --President Calvin Coolidge.

September 5, 1929:

"There may be a recession in stock prices, but not anything in the nature of a crash" --Irving Fisher, PhD, professor of economics at Yale University.

October 24, 1929:

"This crash is not going to have much effect on business." --Arthur Reynolds, chairman of Continental Illinois Bank of Chicago.

October 25, 1929, "Black Friday":

"There will be no repetition of the break of yesterday...  I have no fear of another comparable decline." --Arthur W. Loasby, president of the Equitable Trust Company.

November, 1929:

"The end of the decline of the Stock Market will probably not be long, only a few more days at most." --Irving Fisher.

December, 1929:

"I see nothing in the present situation that is either menacing or warrants pessimism....  I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." --Andrew W. Mellon, U.S. Secretary of the Treasury.

May, 1930:

"While the crash only took place six months ago, I am convinced we have now passed through the worst--and with continued unity of effort we shall rapidly recover.  There has been no significant bank or industrial failure.  That danger, too, is safely behind us." --President Herbert Hoover.

Notice how these leading economists and authorities failed to see it coming and failed to appreciate the gravity of the situation during its initial onset.

Despite what you may hear from today's leading economists and authorities...

It could happen again!

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