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Was the Great Depression an inevitable consequence of the Wall Street Crash?

It is guaranteed that when a student produces work that includes explaining the negative

aspects of the 1930s, particularly the rise of Hitler, they will refer to the economic hardships,

such as that of American unemployment rising to ‘25 percent’1 that depicts the Great

Depression. They will then link this directly back to the Wall Street Crash of 1929 as though

the two episodes are bound together in one large event. This essay is to examine whether this

is fair and valid. Analysing four of the focal themes that historians have provided as causing

the Depression, the 1960s argument on Federal monetarism in the late 1920s; the poor

condition of the American economy in the 1920s, the 1970s historiographical movement

towards analysis of the poor world financial condition; and lastly the psychology of

Americans after the 1929 financial collapse, this essay will argue that the Great Depression

was not an inevitable consequence of the Wall Street Crash in itself. The poor condition of

the American and global economies provided settings that were bound to cause much longer

term deterioration in world finance. The Wall Street Cash for the most part was only the

trigger for things to come. The poor conditions pre-Wall Street Crash fused with the failure of

federal economic policy and the psychology of the American people, post-the crash, to make

the Great Depression.

It was not the Wall Street Crash by itself that caused the Great Depression of the 1930s.

Instead it was the monetary policies initiated by the Federal Reserve (the central bank of

America) before and after the Great Crash that turned a recession into a long term depression.

This argument comes from the two pioneer supporters of monetarism policy for the cause of

the Great Depression- Milton Friedman and Anna Schwartz. These two historians argued that

the Federal Reserve, because of its acknowledgement in 1928 and 1929 that the American

stock market was floating too high, and was therefore inclined to collapse, wished to curb

speculation and calm things down. In their attempt to achieve this, the Federal Reserve

undertook a policy of reducing the supply of money to the American people. Naturally, this

resulted in a demand for currency from the public. However, this high demand from the

American people resulted in fear of the effects of deflation, unemployment, and lower wages.

As a result the public started to undertake hoarding. This action meant that the idea of 1 ‘Monetary Policy in the Great Depression: What the Fed Did, and Why’, Federal Reserve Bank of St. Louis Review, http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf; consulted 06/01/2014

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consumption which represents the ‘Roaring Twenties’ came to an end. Schwartz and

Friedman supported their argument by providing a figure of ‘13 per cent’2 in the reduction of

velocity of money (the frequency at which one certain currency is used to buy products

produced in nation where the currency is used). For both, this reduction in consumption

resulted in a contraction of employment and production because, the need for employees for

businesses reduced. The negative impact on the American economy, through this reduction of

wages or complete employment, spread through all sectors of society. Friedman and

Schwartz’s conclusion therefore was that the Federal Reserve far too aggressive contraction

policy, rather than the Wall Street Crash on its own, caused the Great Depression.

The monetarist argument has faced a huge amount of revision. Dietmar Rothermund claims

that ‘big government’, whereby the state has a strong involvement and influence in the

function of the national economy, did not exist in the late 1920s and early 1930s. This

argument is supported with the statistic showing that the Federal Government claimed only

‘2.5 per cent’3 of the Gross National product (the total market value of all products produced

in a certain country in a single year), whereas a larger figure of ‘7.5 per cent’4 of GDP was

claimed by local level government. This brings into doubt the willingness of the Federal

Reserve and the American government to largely influence the American economy through

contraction. This critique continues with Friedman’s most acclaimed reviewer, Peter Temin.

Temin criticises the work of Friedman and Schmitz by arguing that monetarist failure by the

Federal Reserve, through causing a contraction in the currency velocity, would have resulted

in a sudden quick spike in short-term interest rates. He further adds that if monetarist policy

had caused the contraction that eventually caused the chaos of the Great Depression then this

spike would have been exponentially large, and as a result easily noticeable. Interest levels

through the inter-war period show short-term American interest rates increased from ‘3 per

cent’5 in 1927, when the monetarists argue the contraction of money supply began, to a peak

of ‘less than 5 per cent’6 at the end of 1929. Long-term rates, peaking in 1929 and 1932,

generally remained at a constant level of ‘about 3 per cent from 1927 and 1935.7 Temin’s

2 Milton. Friedman, The Great Contraction 1929-1933 (Princeton University Press, 1964), p. 233 Dietmar. Rothermund, The Global Impact of the Great Depression (Routledge, 1996), p.494 Dietmar. Rothermund., The Global Impact of the Great Depression (Routledge, 1996)5 ‘Monetary Policy in the Great Depression http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf6 Monetary Policy in the Great Depression http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf7 Monetary Policy in the Great Depression http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf

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critique that interest rates did not spike does have support with these figures, and the

argument of the Great Depression being caused by monetarism contraction is weakened.

 Though there are problems for the monetarist historians, their argument is still relevant.

Support for their argument is provided in the form of a graph from David Wheelock’s

work, Monetary Policy in the Great Depression (1992). Wheelock’s graph presents the level

of real GDP (the total market value of all the recognised goods and services in a single year)

and the money supply in the United States between 1900 and 1945. The 1929 crash shows a

huge drop in American GDP, which is matched with a drop in the American money supply.

This contrasts to the 1920-21 recession, which is significant because this economic bump did

not turn into depression. Though the 1921 recession created a drop in GDP, by 1923 the level

was once again on the increase. This matches a general constant of ‘3.6 billion dollars’8 kept

in circulation in the American economy. Though not showing absolute proof a direct

causation, it does show a strong correlation between keeping the American economy out of

depression whilst being in the critical period of a recession, and keeping a large supply of

money in the economy. The contraction of the American money supply after 1928 did

contribute to the Great Depression of the 1930s, but it did not cause the Great Depression in

itself.

As well as being critiqued from the 1970s, the monetarist argument has been developed by

historians in the decades since, such as Temin, Ben Bernanke and Dietmar Rothermund. This

review has rightly focused on the support for the claim that a focal part of the cause of the

Great Depression was because of the continued use of the Gold Standard in America. The

Gold Standard, which was the policy by which nations fixed their currency to the price of

gold, resulted in a strong level for each currency; and the promise of fixed international

exchange rates, which were expected to remove uncertainty in trade. The problem was that

this economic policy required countries to keep interest rates at a high level, whilst keeping

the currency level to the amount of gold in the country. Bernanke particularly argues that this

forced America away from initiating expansionary economic initiatives that could have

meant the beginning of early prosperity for the United States, not depression. This modern

monetarist analysis does have weight, with data showing a comparison between nations that

were forced to leave the standard and the time it took them to start on the path towards

financial recovery. Countries, such as Britain and Japan, that left the Gold Standard in 1931 8 ‘Monetary Policy in the Great Depression http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf;

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showed near immediate improvement in their economies. Directly in 1931 Japan showed

rapid increase in its industrial production, so that by 1932 it had reached its 1929 level.

Britain, though slightly slower compared to Japan, started an early recovery and reached its

pre-1929 industrial production level by 1934. The United States left the Gold Standard in

1932 and, like the other two nations, began an immediate recovery; though its late movement

off meant that its industrial production did not reach its 1929 levels even in 1937.9 However,

it must be remembered that the Gold Standard would not have caused the Great Depression

by itself. If it could have then America’s depression would have dominated the 1920s.

Rather, the other factors which united with monetarism, and particularly the Gold Standard,

to cause the Great Depression need to be analysed.

So far this essay has examined the 1960s monetarism argument and the Gold Standard

revision of the 1970s. This essay has argued that the Federal Reserve economic policy of the

late 1920s and early 1930s, and the continuation of America on the Gold Standard, were not

the sole causes of the Great Depression. Instead poor monetarist actions interacted with other

sources to cause the Great Depression. This essay is to now look at one of these other causes,

the poor condition of the American economy before the Wall Street Crash.

A group that gains large attention from historians, such as Derek Aldcroft; Christina Romer,

Reis Ronald and Brian Duignan, when revising the condition of the American economy in the

1920s is that of those involved in agriculture. These historians explained the problems in

agriculture as resulting from the effects of First World War. The conflict, resulting in nation’s

having a high demand for agricultural goods, caused high prices in this sector of America.

With belief of future prosperity, farmers took out loans to invest in more land and improved

technology for the benefit of increased production and even better incomes. The problem

arose when the post-war world did not follow this expectation, motivated by the recovery of

European and Russian agricultural production. The demand for American agriculture

reduced, and along with this the price for agricultural goods dropped ‘50 percent from June

1920 through 1921, and stayed low throughout the decade’10. With this surprising reduction

in income, farmers found it difficult to pay back the loans they had taken out, and as a result

faced economic hardship. Mark Tauger highlights this hardship in the American south, where

farmers sometimes earned only ‘14 cents a day’11. This argument is emphasised when

9 Milton. Friedman, The Great Contraction, p. 15210Mark. Trauger, Agriculture in World History (Routledge, 2010) p.226 11 Mark. Trauger, Agriculture in World History, p.226

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remembered that ‘20 per cent’12 of the American labour force was directly involved in the

agricultural industry. To have such a high percentage of people within such a weak industry

supports the idea of a weak American economy in the 1920s. Therefore it could easily be

argued that the Great Depression, for a good proportion of the American people, had already

started by the mid-1920s. This would weaken the role of the Wall Street Crash’s role as

forcing the Great Depression in the 1930s.

 Barry Eichengreen presents an argument that even those in the 1920s who were not involved

in agriculture, but in the new industries, faced financial problems. There is no doubt that the

1920s marked the growth of the importance for consumer goods. This statement is supported

with the statistic of the growth of sales in vehicles. In 1919 the number of motorcars sold was

‘2 million’13. By the time of the crash in 1929 the number increased to more than ‘5

million’14. The number of trucks bought between 1920 and 1928 increased from ‘1 million’15

to ‘3 million’16. This consumer culture could mean difficulties for the economy as a whole if

the demand for consumer goods quickly declined. This argument is illustrated with a good

representation of economies: industrial production. The year 1927 showed a short stagnation

in production with only 2.6 in Logarithms, whereas 1929 showed a peak of 2.8.17 This

coincided with Henry Ford’s decision to close his automobile production line for 6 months

for preparation for the beginning of production of the Model-A. Eichengreen argues that it is

only natural that in times of uncertainty towards the economy consumers wish to take more

care on their spending and cut back first on the things they believe are luxuries, primarily

consumer goods, whilst focusing on food goods and others that are always required.

Thus Eichengreen’s argument that the American market of the 1920s was not stable and

likely to leave to mass contraction of spending, and thus unemployment, seems a valid

one. Here the common conception of the 1920s American economy as not just strong but

booming before the crash of 1929 has been reviewed towards more of a pessimistic picture.

This argument further weakens the role that the Wall Street Crash played in making the Great

Depression an inevitable event. Instead the Great Depression is an inevitable period

12 Peter. Temin., Did Monetary Forces Cause the Great Depression? (W.W. Norton & Company, 1975), p. 17213 Barry. Eichengreen, ‘The Origins and Nature of the Great Slump Revisited’, The Economic History Review, vol. 45, no.2 (1992)14 Barry. Eichengreen, ‘The Origins and Nature’, The Economic History Review, p.21515 Dietmar. Rothermund, The Global Impact of the Great Depression (Routledge, 1996), p. 4916Dietmar. Rothermund, The Global Impact, p. 2117 Christina. D. Romer, ‘The Nation in Depression’, Journal of Economic Perspectives, vol. 7, no. 2 (1993), p. 21

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generating largely from this poor 1920s financial condition. The Wall Street Crash acts as a

trigger, along with the monetarist policy, to cause the Great Depression.

 Studies, particularly by Peter Fearon and Derek Aldcroft, have stopped focussing solely on

America as the cause of the Depression, and have moved to looking at the world economy as

a whole, particularly the European economies during the 1920s and into the early-1930s.

What is pictured is a more pessimistic view of the 1920s that contrasts to the ideas of

American general excitement and prosperity that generally comes to mind when thinking of

the period. Aldcroft’s focal argument is that the Great Depression was going to happen once

the crash of 1929 occurred because of the continued policy of contraction; but more

importantly because of the fragile condition of the world economies before 1929. For

Aldcroft, there was not as big financial boom as has traditionally been argued. He supports

this claim with high figures of ‘2.5 million’18 unemployed respectably in Britain, Germany

and Italy at the end of 1925, and the inability for European nations to keep inflation low.

Additionally, France, as an example, had structural problems with ‘1:3 of Frenchmen’19

linked to agricultural work but receiving only ‘18 per cent’20of the total national income,

suggesting that too many resources were focused towards too low productive areas. Even

where there was slight prosperity it was, for the most part, fragile, emphasising the part that

borrowing of American money to the rest of the world took. In total America, by the

beginning of the 1930s, credited ‘3.3’21 billion dollars to economically desperate countries,

the German Republic being the most famous taking ‘800 million marks’22 throughout the

1920s, however there were other countries. Hungary, is an example, that in 1928 produced

out payments on capital services of ‘40 per cent’23 of the total capital inflow, and Estonia

where the figure was ‘70 per cent’24. Aldcroft’s well-founded central conclusion is that the

borrowing to large parts of the world in the 1920s, which did help Europe, for example in

increasing its industrial production after 1925 by more than ‘20 per cent’25, created ‘an

illusion of soundness and stability which did not exist in reality.’26The world was secure, and

the cracks kept hidden, as long as the borrowing continued. With the economic failure in

18 Derek. Aldcroft, From Versailles to Wall Street, 1919-1929 (Allen Lane, 1977), p. 10119 Derek. Aldcroft, From Versailles, p. 420 Derek. Aldcroft, From Versailles, p.1021 Derek. Aldcroft, From Versailles, p.21722 Eberhard. Kolb, The Weimar Republic (Routeledge, 1984), p. 6023 Derek. Aldcroft, From Versailles, p.25424 Derek. Aldcroft, From Versailles, p.25425 Derek. Aldcroft, From Versailles, p.18826 Derek. Aldcroft, From Versailles, p.245

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1929, when lending was forced to cease, the foreign economies were left to fight for

themselves, whilst repaying all they had borrowed from America. Naturally this caused

situations such as in Germany, where unemployment enlarged to ‘5 million’27 by 1931. This

process was generally the same for many other countries in Europe.

This movement from solely looking at the events of the inter-war period in America to

looking more at the global economic conditions has again revaluated the traditional,

responsible, part that the Wall Street Crash has played . Instead a larger picture of long-term

poor finance seems valid for making the Great Depression near to inevitable. The crash of

1929, for the most part, represents only the possibility as a trigger for these poor conditions to

take effect, and for the Great Depression to take hold.

 So far this essay has examined three themes around what caused the Great Depression, of

monetarist policy around the Wall Street Crash, the fragile condition of the American

economy in the 1920s and the temperamental world economy in the 1920s. For the most part

this essay has focused on those in power and their responsibility for the Great Depression,

and weakened the role that the Wall Street Crash had in making the Great Depression an

inevitable event. Despite this, it must not be forgotten that individuals do have some part to

play in financial crisis. This last section will examine the psychology of the American people

after the 1929 crash, and its importance for causing the Great Depression. Reis Ronald

provides a statistic that ‘9 out of 10 Americans’28 were not affected directly by the 1929

financial stock collapse, because they did not own stock. Rather, as Duignan argues, it was a

fear by the public to spend. The crash, though not largely affecting people directly, gave

people shock and fear for the security of their prosperity. As a result, people wished to hold

onto their wealth and this led to a decline in demand of goods, employment, and production.

This in turn produced more fear, and a negative economic spiral developed. This argument

does have strength with Schwartz’s data showing industrial production, money income, real

income and consumerism levels all dramatically decreasing in early 1930. This suggests that

the Wall Street Crash was, though only a part of a combination of conditions that resulted in

the Great Depression, still a cause.

27 Anthony. Nicholls, Weimar and the Rise of Hitler (Palgrave Macmillan, 1969), p.15128Reis. Ronald, The Great Depression and the New Deal: America’s Economy in Crisis, (Chelsea House Publications, 2011), p. 21

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 This essay has examined the main historiographical debates over what caused the Great

Depression during the 1930s. First looking at the 1960s monetarist argument of Friedman and

Schwartz, then analysing the conditions of the American economy and the global economy,

this essay finished with a look at the more traditional view of the Great Depression: that it

was caused by a lack of consumerism resulting from the Wall Street Crash. The argument

produced is that fragility in both the 1920s American and European economies, alongside the

lack of spending from the psychology of fear, and the Federal Reserve financial policy, made

the perfect combination for a depression that would impact America, and the world, in the

1930s. The Great Depression would not have occurred without all these conditions working

together; alone they were too weak of an influence. The key was when, at the end of 1929

and until the early 1930s, they were all included.

Bibliography:

Aldcroft. Derek, From Versailles to Wall Street, 1919-1929 (Allen Lane, 1977)

9 Brian Haines

Bernanke. Ben, The Macroeconomics of the Great Depression: A Comparative Approach (National Bureau of Economic Research, 1994)

Duignan, Brian, The Great Depression (Rosen Education Service, 2012)

Eichengreen. Barry, ‘The Origins and Nature of the Great Slump Revisited’, The Economic History Review, vol. 45, no.2 (1992)

Galbraith. John Kenneth, The Great Crash of 1929, (Mariner Books, 1997)

Kindleberger. Charles, The World in Depression 1929-1939 (University of California Press, 1986)

Kolb. Eberhard, The Weimar Republic (Routeledge, 1984)

Milton. Friedman, The Great Contraction 1929-1933 (Princeton University Press, 1964)

Nicholls. Anthony, Weimar and the Rise of Hitler (Palgrave Macmillan, 1969)

Ronald. Reis, The Great Depression and the New Deal: America’s Economy in Crisis, (Chelsea House Publications, 2011)

Romer. Christina D., ‘The Nation in Depression’, Journal of Economic Perspectives, vol. 7, no. 2 (1993)

Rothermund. Dietmar, The Global Impact of the Great Depression (Routledge, 1996)

Temin. Peter, Did Monetary Forces Cause the Great Depression? (W.W. Norton & Company, 1975)

Temin. Peter, ‘Transmission of the Great Depression’, The Journal of Economic Perspectives, vol. 7, no.2 (1993)

Trauger. Mark, Agriculture in World History (Routledge, 2010)

‘Causes of the Great Depression’, Forthcoming in the Encyclopaedia Britannica, http://elsa.berkeley.edu/~cromer/great_depression.pdf; consulted 06/01/2014

‘Monetary Policy in the Great Depression: What the Fed Did, and Why’, Federal Reserve Bank of St. Louis Review, http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf; consulted 06/01/2014

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