classical economics
for analysis,  forecasting
and policy design

Explain Great Depression

Simply, Factually and Clearly
By Wayne Jett © July 5, 2012

    The Wall Street Journal marked the recent passing of economist Anna J. Schwartz at age 96 by republishing an October, 2008, interview and report of her contributions during a productive career spanning 70 years. In the 2008 interview, Ms. Schwartz emphasized the classical principle that markets must be permitted to punish mistakes if economies are to prosper.

    In the same report, the Journal quoted Federal Reserve Chairman Ben Bernanke as calling A Monetary History of the United States, 1867-1960 (1963), authored by Ms. Schwartz and Milton Friedman, "the leading and most persuasive explanation” of the Great Depression. Bernanke has also written, however, that finding the causes of the Great Depression is akin to a search for the Holy Grail, implying the task is hopeless.

    A Monetary History may have been “the leading and most persuasive explanation” of the Great Depression as of 2008, but still it was not entirely persuasive. Friedman and Schwartz ultimately argued that the Great Depression resulted because the Federal Reserve’s monetary policy in 1928-1929 became “not restrictive enough to halt the bull market yet too restrictive to foster vigorous business expansion.” The premise that monetary liquidity both too loose and too tight simultaneously could produce the worst economic calamity in U. S. history is a bridge too far, at least in the minds of some who examine it.

    This does not mean Chairman Bernanke is correct in either of his assertions that explaining the Great Depression is beyond reach or that A Monetary History remains the most persuasive explanation. To the contrary, a new book published in 2011 provides the long-sought explanation. The Fruits of Graft – Great Depressions Then and Now (Launfal Press, Los Angeles: 2011) tells why the Great Depression occurred. Of course, The Fruits of Graft is my book, so I may be considered biased, but I also know of what I speak.

    Foremost among the causes of the Great Depression was President Franklin Roosevelt’s purchase of 13,185 metric tons of gold for U. S. Treasury vaults during his first two terms, 1933-1940. This prodigious tonnage was 130% of all gold owned by other governments in 1930, and was 210% of holdings of all other governments in 1940.

    Roosevelt sequestered or “sterilized” the acquired gold by placing it outside the gold standard monetary system. By these actions, the U. S. president shrank the money supply dramatically worldwide, especially in the U. S. The artificially created shortage of gold and resulting deflation impoverished populations and forced many nations off the gold standard.

    Roosevelt paid for the gold with tax revenues, doubly hurting Americans with severely high tax burdens and deflation. He pretended to reform financial fraud on Wall Street, but gave the Securities & Exchange Commission discretion over investigations and put the notorious Joseph P. Kennedy in charge of hiring SEC staff. Within six months of 1936-1937, after banks had fully recovered, the “reformed” Federal Reserve cut bank lending capacity by half, forcing merciless liquidations of farms and businesses. The list of causes goes on, but you get the idea. These were not mere unintended consequences of good intentions.

    Finding the causes of economic depressions is a challenge, but bringing the explanations to public attention is no simple matter either. Anna Schwartz and Milton Friedman dealt with such hurdles in their own days and ways. Now the responsibilities to research, report, read and reform are left to us. ~