The Fed’s Role in the Great Depression: A Forgotten History?
Table of Contents
A new examination of the 1929 stock market crash and the ensuing Great Depression suggests the Federal Reserve, not simply market forces, bears significant duty for the decade-long economic hardship. A review of Andrew Ross Sorkin’s history of 1929 highlights a critical omission: the role of monetary policy in transforming a stock market correction into a global catastrophe.
The Panic of 1929: A Week That Shook Wall Street
Sorkin’s book vividly details the tumultuous final week of October 1929, dedicating roughly 50 pages to the “war-like attacks on stock values” between October 24th and 30th. Black Thursday (October 24th) saw the Dow Jones Industrial Average plummet 11% in early trading, creating a sense of panic described by one observer in the Saturday Evening Post as “dying men counting their own last pulse beats.” A temporary reprieve arrived thanks to a dramatic intervention by Richard Whitney, Vice President of the NYSE and a J.P. Morgan broker,who purchased 10,000 shares of Steel at a price $10 above the current bid,temporarily halting the slide.
Though, the relief was short-lived. Monday and Tuesday brought further de
The primary driver of the prolonged economic suffering, but rather the actions – or inactions – of the Federal Reserve.
The argument, championed by Gary Alexander, is that similar market declines in the past – including the Panic of 1907 (a 48.5% drop) and the 1920-21 depression (a 46.6% drop) – did not result in prolonged depressions. More recently, the market experienced drops of 49% between 2000-2002 and 57% between 2007-2009, followed by robust recoveries, and even a short Covid-19 crash in early 2020. The key difference, Alexander contends, lies in the Fed’s relative inexperience and flawed response in the 1930s.
Founded only 15 years prior to the 1929 crash,the federal Reserve was still finding its footing. While its first Governor, Benjamin Strong, successfully navigated a similar crisis in 1920, leading to the Roaring Twenties, his death in 1928 left a void. His successors, it is argued, initially fueled market speculation and then drastically reduced the money supply, stifling any potential for recovery.
The Great Contraction and a Historic Apology
The consequences were devastating. Milton Friedman and Anna Schwartz, in their seminal 1962 work, A Monetary History of the United States, documented a staggering one-third decline in the U.S. money supply between 1929 and 1933, triggering a “Great Contraction” and widespread bank failures. This policy led to deflation,increased debt burdens,and a sharp contraction in economic activity. Specifically, the money supply fell from $45 billion in June 1930 to $29 billion in March 1933. The Federal Reserve itself acknowledges this, stating that the declining money supply “reduced average prices by an equivalent amount,” exacerbating economic hardship.
The gravity of the Fed’s missteps was not lost on later generations of economists. In 2002, then-Fed Governor Ben Bernanke publicly acknowledged the Fed’s role in the Depression, stating in a tribute to Milton Friedman: “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you,we won’t do it again.”
Lessons unlearned?
Sorkin’s book,while comprehensive in its coverage of the crash itself,reportedly fails to adequately address the crucial link between the Fed’s policies and the severity of the Depression. This omission is significant, as understanding the mistakes of the past is vital to preventing similar crises in the future. Some, like Friedman, have even suggested replacing the Fed with a system governed by a predictable algorithm, perhaps even leveraging artificial intelligence to maintain stable monetary policy.
The story of the 1929 crash and the Great Depression serves as a stark reminder that market corrections, while painful, do not inevitably lead to economic catastrophe. It was, according to this analysis, the actions of policymakers – specifically, the Federal Reserve – that transformed a financial crisis into a decade of unprecedented hardship.
