A Crash Is a Crash

by Liberty and Power

James Gwartney, president of the Southern Economic Association, recently discussed with some colleagues the nature of the Great Depression and, specifically, the link, if any, between the stock market crash of October 1929 and the Depression.

He pointed out that the Dow Jones Index was around 300 just before the October 29, 1929, crash (301 on October 25--it had been higher earlier in the month, reflecting euphoric expectations). On October 29, the Dow Jones Industrial Average fell 30 points. It fluctuated and then gradually regained strength, reaching 293 on April 12, 1930.

In other words, Wall Street initially recovered from the crash.
Unfortunately, the Depression lay ahead.

Although the Dow Jones average stayed in the 200s for nearly six months in 1930, in October it fell below 200 and declined to a low of 43 in July 1932. The index did not reach 300 again until 1954.

So what caused the Depression? Gwartney and others have related the impacts of the Smoot-Hawley tariff (enacted in 1930), the Hoover tax increases (adopted in 1932), and, of course, the shrinkage of the money supply, famously discussed by Milton Friedman and Anna Schwartz.

And then, when Roosevelt became president, there were the famed destruction of hogs and baby chicks to raise farm prices, the implementation of costly public works projects, and numerous other economic distortions. (For a soft-pedaled overview, see Tyler Cowen’s article today.) There is much to blame the Depression on. But don't blame the stock market crash.

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Mark Brady - 11/29/2008

But how likely is it that, if FDR had lived, the administration would have reverted to the kind of policies that characterized the so-called Second New Deal?

I really don't have an opinion on this and I'm open to be persuaded one way or the other by you or anyone else who cares to comment.

Robert Higgs - 11/29/2008

Many New Dealers wanted to revert to New Deal-type policies when the war ended. The point is that with Roosevelt dead, their chances of achieving this goal were much reduced. Truman's heart was not in the kind of New Deal politics that FDR practiced from 1935 to 1939--class warfare and attacks on the investor class--and the advisers Truman selected were, for the most part, a world apart from those who had Roosevelt's ear during the so-called Second New Deal.

Mark Brady - 11/27/2008

"With the passing of FDR, so ended the New Deal's constant threat of uncertain policies."

In what sense, if any, was the New Deal still extant by the time FDR died on April 12, 1945?

Hans L. Eicholz - 11/25/2008

Tyler states that pre-combat war orders from abroad and expansionary monetary policy took the US out of the Great Depression. I wonder what you or others here really think of that?

Tyler cites Higgs, but skips over the key point: With the passing of FDR, so ended the New Deal's constant threat of uncertain policies. Stability, (even of bad rules, I might add), is preferable to constantly altering the rules, which is what we are seeing again with every new announcement from Washington.

Tyler also cites Anna Schwartz and Friedman. In a most interesting recent interview with Anna at Barron's Online, however, she laments that the only lesson apparently taken from her and Friedman's work was the liquidity point. She is adamant that this was not suppose to be a one size fits all crises prescription. Bad assets have to be wrung out of the system, but to simply peg as Tyler does, "expansionary monetary policy," as one of the means by which we got out of the 1930s, seems to obscure, and not illuminate this point.

And besides, is it that the Fed needs to pursue expansion, or simply curtail contraction in the supply, from a monetarist point of view? The word "expansionary" sounds too much like inflationary, and if Bob, Anna and others are correct, we may yet see the return of high inflation with economic stagnation.