{"id":842,"date":"2019-06-30T09:56:24","date_gmt":"2019-06-30T16:56:24","guid":{"rendered":"http:\/\/bruceramsey.net\/?page_id=842"},"modified":"2025-07-20T13:43:50","modified_gmt":"2025-07-20T20:43:50","slug":"what-caused-the-depression","status":"publish","type":"page","link":"https:\/\/bruceramsey.net\/index.php\/what-caused-the-depression\/","title":{"rendered":"What Caused the Depression? (2019)"},"content":{"rendered":"\t\t
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This piece is comes out of my research for the book that became Seattle in the Great Depression (WSU Press, 2025). In this piece, I’m addressing a libertarian audience. \u00a0It was posted on the Liberty website<\/a>, June 13, 2019.<\/em><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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More than most people, libertarians have beliefs about the Great Depression. Having spent several\u00a0years studying the matter,\u00a0I have some conclusions about four such beliefs: first, that what caused the depression was the Federal Reserve allowing a drop in the money supply; second, that what made it terrible was the passage of the Smoot-Hawley Tariff, which collapsed America\u2019s foreign trade; third, that the New Deal really began under Herbert Hoover; and fourth, that what lengthened the Depression was fear of what the New Deal government would do.<\/p>

In addressing these questions, I am relying heavily on my hometown newspapers \u2014 the\u00a0Seattle Times<\/i>,\u00a0Seattle<\/i>\u00a0Post-Intelligencer<\/i>\u00a0and\u00a0Seattle<\/i>\u00a0Star<\/i>\u00a0\u2014 because newspapers are \u201cthe raw material of history.\u201d They are not the only sources available, and they have their mistakes, omissions, and biases. But they are broader than politicians\u2019 collected personal papers and broader, in a different sense, than the economists\u2019 statistical tables. As sources for general research about a period, I like newspapers best. I know newspapers. I spent 37 years working for newspapers and magazines, about half that time on the business and financial pages.<\/p>

The first of the four beliefs, associated with Milton Friedman and the Chicago School, is that the Federal Reserve was responsible for turning a recession into a depression \u2014 the deepest and longest in American history \u2014 by shrinking the money supply. It\u2019s true that there was less money in people\u2019s pockets. But when economists talk about the Fed shrinking the money supply, they mean shrinking the money\u00a0available to the banks<\/i>\u00a0\u2014 and during most of the Depression banks were loaded to the gunwales with money. With few willing and qualified borrowers, they simply parked depositors\u2019 money in US Treasury bonds and local bonds and warrants (thereby helping to finance their local governments and the New Deal). Bankers talked about this on the business pages, and showed it in the year-end bank balance sheets presented in newspaper display ads. For those reasons I find it difficult to indict the Fed for starving the banking system of money.<\/p>

A variant of this argument is that the Fed mistakenly turned a recession into a depression by raising interest rates.<\/p>

Overall the Fed\u00a0lowered<\/i>\u00a0interest rates in the depression. In the two years following the Crash of 1929, the Fed cut its rate on short-term loans to banks, going down from 6% to 1.5%. But to stop the outflow of the Treasury\u2019s gold during the currency crisis of September 1931, the Fed temporarily raised the rate to 3.5%. This 2% bump is the \u201cmistake\u201d that the economists holler about. At the time the Fed did this, critics said it would retard recovery, and when recovery didn\u2019t come, the critics pronounced themselves right. But at the time, the financial editor of the\u00a0Seattle Times<\/i>\u00a0noted that the Fed\u2019s supposedly stimulative 1.5% interest rate hadn\u2019t done anything to stimulate recovery. (The Keynesians would later say the Fed was \u201cpushing on a string.\u201d) Investors weren\u2019t holding back because of two percentage points. They were holding back because they were afraid to borrow at all.<\/p>

I\u2019m not a historian of the Fed, and am not claiming the Fed made no mistakes. But pinning the depression on the stinginess of the Fed to the banks doesn\u2019t seem right. If it were true, the interest rates would have been higher. Also, there would have been furious complaints in the newspapers, even in Seattle. And I didn\u2019t see it.<\/p>

The second belief is that the Smoot-Hawley Tariff caused the Depression by posting the highest taxes on imports in the 20th century. The figure usually cited is that the average tariff rate under Smoot-Hawley was 59% \u2014 a horrible rate. This, however, was the rate on\u00a0dutiable<\/i>\u00a0goods<\/i>, and excludes the many goods on the free list. The average rate on all goods was 19.8% \u2014 still bad, but something less than torture.<\/p>

Free traders always reach for the Smoot-Hawley argument. I have heard it not only from libertarians but from supporters of the WTO, TPP, NAFTA, and the promoters of trade in my hometown. And politically, I am on the free traders\u2019 side. I agree that the Smoot-Hawley Tariff, signed in June 1930 by Herbert Hoover, was bad medicine. And in this case, there was protest in the newspapers, with voices saying it was a terrible, self-defeating law, and predicting that other countries would retaliate. The newspapers ran stories when the other countries did retaliate.<\/p>

Smoot-Hawley was also a contributing cause of the collapse in the international bond market in 1931, because it made it more difficult for America\u2019s debtors \u2014 Britain, France, Germany, Brazil, Bolivia, Peru, and others \u2014 to earn the dollars to repay their debts. But this one bad law cannot bear all the blame for the subsequent implosion of America\u2019s imports and exports.<\/p>

I can think of four reasons why. First, the Depression was already on, so that by June 1930 imports and exports were already headed downward. Second, if you want to blame tariffs, put two-thirds of the blame on the tariffs in place before Smoot-Hawley was signed, which were an average of 13.5% on all goods. Third, in 1930 exports made up only about 5% of US output (versus 12.5% today), so that the shrinkage in trade, though dramatic in itself, was only two or three percentage points of the overall economy.<\/p>

Finally, in September 1931, the British Commonwealth went off the gold standard. The British, Australian, and Canadian currencies were immediately devalued by 15 to 20%. Austria, Germany, Japan, and Sweden also went off gold, effectively devaluing their own currencies. The products of these fiat-money countries immediately dropped in price relative to the products of the United States. One example: Swedish wood pulp pushed US pulp out of world markets, so that almost all the pulp mills in Washington state shut down.<\/p>

When Franklin Roosevelt came into office in March 1933, he ended the convertibility of the dollar into gold at the old rate of $20.67 an ounce. The reason for doing this was\u00a0not<\/i>\u00a0a shortage of gold; the Treasury had stacks of it. The reason was to match the foreign devaluations and make American goods competitive again. And it did. Trade, the stock market, and the real economy jumped immediately when the dollar went off gold. From April to July 1933 there was a kind of boom, even though Smoot-Hawley was still in effect. (The boom ended because of the National Industrial Recovery Act and some other things, but that is another story.)<\/p>

The third belief, that Herbert Hoover was an interventionist and implemented a kind of proto-New Deal, is a thesis of Murray Rothbard in\u00a0America\u2019s Great Depression<\/i>. Rothbard recounts that after the Crash of 1929, Hoover called leaders of industry to the White House and made them promise not to cut wages. The theory at the time was that this would maintain \u201cpurchasing power\u201d and thereby prevent a depression. That\u00a0was<\/i>\u00a0a precedent for the New Deal. It was noted at the time by business columnist Merryle Rukeyser (father of Louis Rukeyser, host of PBS-TV\u2019s \u201cWall Street Week\u201d from 1970 to 2002). Merryle Rukeyser wrote in December 1929 of the Hoover meetings, \u201cThe old-fashioned idea of leaving such matters to the individualism of business leaders \u2014 known as the doctrine of laissez faire among economists \u2014 has been formally laid to rest and buried.\u201d<\/p>

So Rothbard had a point: in principle, Hoover was an interventionist. But if you focus on principles, which libertarians like to do, you can lose sight of magnitudes and proportions that matter more. The larger fact is that the Hoover and Roosevelt regimes were hugely different in what the federal government undertook to do, what constitutional precedents they set, how many people they employed, how much money they spent, and how much they affected the world we still live in.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t

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The fourth belief, that the New Deal prolonged the depression by frightening investors, is the thesis of libertarian historian Robert Higgs in his essay, \u201cRegime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War.\u201d (Reprinted in\u00a0Depression, War and Cold War<\/i>, Independent Institute, 2006.) Higgs argues that the Depression lasted for more than ten years because of \u201ca pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns\u201d during the later New Deal of 1935\u20131940.<\/p>

I can\u2019t comment on much past the beginning of 1935, because that\u2019s where I am in my reading. But I can verify that \u201cregime uncertainty\u201d was real, and that I saw evidence of it beginning in mid-1933, when the initial Roosevelt boom faltered.<\/p>

In the newspapers I read, the best barometer of this is B.C. Forbes\u2019 business-page column. Forbes \u2014 the founder of the eponymous magazine \u2014 was very much a pro-capitalist guy. (The magazine calls itself a \u201ccapitalist tool.\u201d) Forbes once wrote that his job as a newspaper columnist was to explain the economy to ordinary readers by interviewing industrialists and bankers. Much of the time Forbes was a transmission belt of their doings, thoughts, and feelings along with his own.<\/p>

It was predictable that Forbes would not like the New Deal. At first he advised his business readers to swallow it and said he was loyally swallowing it himself. But he quickly began choking on the two principal \u201crecovery\u201d programs, the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA). The NRA\u2019s boss, Gen. Hugh Johnson, was a loud, imperious man who had been President Wilson\u2019s boss of military conscription during World War I.\u00a0During the early New Deal, Johnson helped to popularize two expressions:\u00a0to chisel,<\/i>\u00a0meaning to lower one\u2019s price below the government minimum, and\u00a0to crack down<\/i>, meaning to punish. In July 1933, Johnson went right to work, cracking down on the chiselers in American industry.<\/p>

\u00a0In August 1933, Forbes called him \u201ca Vesuvius, in epochal, thundering eruption . . . Not even Teddy Roosevelt in his most explosive days matched General Johnson\u2019s Titanic energy and action \u2014 or his wielding of the big stick.\u201d<\/p>

And: \u201cMussolini has nothing on him in readiness to undertake multitudinous tasks and to swing the Big Stick.\u201d (This was when Italy\u2019s dictator, Benito Mussolini, was popular with many Americans.)<\/p>

General Johnson was the closest that peacetime American business ever had to a military dictator.<\/p>

In the fall of 1934, when Gen. Johnson was replaced by labor attorney Donald Richberg, Forbes wrote: \u201cReason is expected to replace ranting swashbucklerism.\u201d Forbes loved to publicize good omens, but during these years he was repeatedly disappointed.<\/p>

In March 1934, Forbes quoted an anonymous industrialist (probably Charles Schwab of Bethlehem Steel, whom he named elsewhere in the column): \u201cNo, don\u2019t quote me as saying anything that would sound like criticism of the administration or any branch of it. It\u2019s too dangerous. I don\u2019t want to be cracked down on at this time when Washington has unlimited power to do what it likes.\u201d<\/p>

Later in the same month Forbes wrote, \u201cThe fear today is\u00a0not of the law\u00a0but of bureaucrats. Few employers regard themselves as in a position to stand up against dictation as Henry Ford has done.\u201d (Ford had refused to accept the NRA\u2019s \u201cvoluntary\u201d price and production controls, and was not allowed to display the Blue Eagle and its motto \u201cWe Do Our Part.\u201d)<\/p>

One of Forbes\u2019 October 1934 columns was an open letter to Franklin Roosevelt, titled in the\u00a0Seattle Post-Intelligencer<\/i>\u00a0\u201cMr. President, All Employers Aren\u2019t Crooks.\u201d<\/p>

Forbes is not the only wellspring of business angst. Here is Merryle Rukeyser, a man more sympathetic to the New Deal, in September 1934: \u201cBusiness men are in a timid mood because of lack of assurance as to their tax liability and as to the attitude of the powers that be toward business profits.\u201d<\/p>

A doubter might argue that a handful of newspaper columns aren\u2019t enough to prove Higgs\u2019 thesis. I suppose so; but how would you prove it? It is about a state of mind \u2014 \u201cconfidence\u201d \u2014 and how do you demonstrate\u00a0that<\/i>\u00a0except by considering what people say and do? In fact, investors talked and acted as if they lacked confidence; statistics show a shortage of long-term investment. And in fact, there were statements by Roosevelt and by Hugh Johnson, Harold Ickes, Henry Wallace, Rexford Tugwell, and other New Dealers that might very well cause investors to lack confidence. And it was not only the New Dealers, but also their opponents on the left: Dr. Francis Townsend, who wanted every American over 60 to have $200 a month of government money (about $3000 in today\u2019s terms); Upton Sinclair, the Democratic nominee for governor who wanted to set up a socialist economy in California; Father Coughlin, a radio priest who ranted against the rich; and Sen. Huey Long, the \u201cKingfish\u201d of Louisiana who called his program \u201cShare the Wealth,\u201d and who was stopped only by an assassin\u2019s bullet. This was a different time \u2014 and newspapers give you a flavor of it.<\/p>

Of the four beliefs about the Depression I mentioned at the beginning, I think Robert Higgs\u2019 \u201cregime uncertainty\u201d is most clearly verified. (Read his essay!) The crucial fact about the Depression of the 1930s is not that America got out of it; it had always gotten out of depressions. It\u2019s that in the 1930s, the getting out took more than ten years, which was longer any other depression in US history. Also that Canada, Britain, Germany, and most other countries got out sooner, and that it took a worldwide war and the eclipse of the New Dealers for America to get all the way out.<\/p>

But I don\u2019t think the depression of the 1930s \u2014 the onset of it, the depth of it, the duration of it \u2014 was caused by any single thing. The commercial world is more complicated than that. I think the Austrian theory of overinvestment, or \u201cmal-investment,\u201d explains much of the setup of the crash, because in the late 1920s and into 1930 there were a lot of bad investments in real estate, commercial buildings, holding companies, and junky stocks. The Crash of 1929 shrank people\u2019s assets and, more important, their confidence \u2014 for years. The Dow Jones Industrials went down almost\u00a090%<\/i>. The reparations owed by Germany to Britain and France, the sovereign debts owed to the United States by Germany, Britain, and France, as well as by Brazil and other South American republics, all had something to do with it, because in 1931 this grand edifice of debt went down in a heap. The bond market was so thoroughly wrecked that counties, cities, school districts, and corporations were locked out of long-term borrowing for several years. Smoot-Hawley and the whole movement toward economic nationalism had a bad effect.\u00a0The gold standard deepened the Depression because it imposed a discipline on government finances \u2014 heavy spending cuts \u2014 at a time when they were painful,\u00a0and when some countries freed themselves of that discipline by shifting the pain to the other ones. Finally, the anti-capitalist political currents and the ad hoc<\/i>, experimental, extralegal character of the New Deal frightened investors, whose long-term commitments were needed for economic recovery.<\/p>

That\u2019s the best I can do. I\u2019m still reading old newspapers.<\/p>

\u00a9 2019 by Bruce Ramsey<\/em><\/p>

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This piece is comes out of my research for the book that became Seattle in the Great Depression (WSU Press, 2025). In this piece, I’m addressing a libertarian audience. \u00a0It was posted on the Liberty website, June 13, 2019. More than most people, libertarians have beliefs about the Great Depression. Having spent several\u00a0years studying the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"class_list":["post-842","page","type-page","status-publish","hentry"],"_links":{"self":[{"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/pages\/842","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/comments?post=842"}],"version-history":[{"count":14,"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/pages\/842\/revisions"}],"predecessor-version":[{"id":1516,"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/pages\/842\/revisions\/1516"}],"wp:attachment":[{"href":"https:\/\/bruceramsey.net\/index.php\/wp-json\/wp\/v2\/media?parent=842"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}