The Great Depression Part 5 - The Federal Reserve

Good day to each reading the columns on the Great Depression and the I pact this had in the United States and throughout the world.

We left the last column with President Herbert Hoover providing too little help too late by refusing to use federal money for direct aid to citizens. But wait, the blame should not be placed solely on Herbert Hoover for the Federal Reserve has played a major role in the Great Depression.

Here’s an excerpt from: John H. Wood, Ph.D., Economics, Wake Forest University, 1834 Wake Forest Road, Winston-Salem, NC 27106

Monetary Policy In The Great Depression
Wake Forest University
Abstract
The Federal Reserve is generally believed to have caused or at least worsened the Great Depression of 1929-33. Its tight-money stance at the end of the ’20s and into the next decade caused or contributed to the large and prolonged declines in money and prices. However, there is little agreement on why the Fed behaved as it did. Its policy guide, depending on the writer, was the fallacious real-bills doctrine, a confusion of market and natural rates of interest, desire for the liquidation of speculative excesses, an obsession with the stock boom, misperceived constraints of the gold standard, and a narrow focus on financial stability. These guides are not mutually exclusive, and some are contradictory, but each has been advanced as the principal, or only, explanation of the monetary policies that brought or worsened the Great Depression.
John H. Wood, Ph.D., Economics, Wake Forest University

It is so interesting that many of the sources on the internet skip over the part the Federal Reserve played and yet they played a very large part from their inception.

Here is Aleksandar Tomic, program director of Master of Science in applied economics at Boston College said, “The great depression can be laid at the foot of the Fed.” So why did the Federal Reserve allow their reserves to get so low in the 1920’s? The Federal Reserve not only kept cash reserves low but also interest rates were kept low to assist banks and drive the economy into a robust economy.

The Federal Reserve acted after the Stock Market Crash by raising interest rates and raising interest rates in 1931 to the tune of doubling interest rates from their pre-crash levels. As for the logic, discourage borrowing and lending, but what the Federal Reserve did not expect was deflation due to lack of money.

Deflation, lack of money being circulated, caused interest rates to hit the roof and strangled future pr present companies wishing to expand or invest. Small banks closed up due to lack of money and by 1933, 11,000 small banks had closed and the people who had their money in those small banks were wiped out.

Remember, not all banks went out of business for there were major banks such as Chase who were operating. I use that bank as an example for the president of that bank would later resign and inside trading would be introduced, but until the president had received a very hefty settlement.

Countries around the world felt the great depression for the United States Congress introduced the Smoot-Hawley bill or better known as the US Tariff Act in 1930 which would raise tariffs on foreign products such as agricultural and industrial goods by about 20%.

Does this sound familiar? But it backfired! Multiple countries retaliated and placed tariffs on US Goods showing the United States that two could play that game by reducing or eliminating global trade with the United States. The result—A United States trade meltdown to the tune of 40% in the next two years. OUCH! The United States tariff cause created no demand at home nor abroad causing any and all economic activity to a screeching halt.

Looking back between 1929 and 1934, world trade fell by two-thirds and the United States people were wondering what else could happen and then in the summer of 1931 came the beginning of eight years of the farmer’s worst nightmare, “The Dust Bowl”.

The “Dust Bowl” was the environmental equivalent to the economic disaster facing the United States people. Towns dried up, economies, fell by the wayside and the land, people and animals felt the wrath of dust storms swirling from the panhandle of Texas to southeastern Colorado.

Dust storms for eight years destroyed everything in its path from people to animals to crops causing millions of dollars in damages. Again, the blame was to be laid on the farmer with his lack of soil-preservation techniques and his agricultural practices. This was such an event that John Steinbeck wrote a book named The Grapes of Wrath detailing many events that took place in that fateful area. The result: many, many years before this region would recover.

Here is the question that I propose to you the reader—Will the United States and the World see another depression like the one of 1929- 1939? If so, will we see one that is equal to or greater than the one of 1929? Do you know the warning signs of the depression? Could history repeat itself? Can we respond quickly enough to avoid another depression?

Let’s summarize the factors that caused the Great Depression: