5 myths about the Depression
Senior Fellow Robert Bruner sets the record straight
[Read the full article at the Washington Post]
Ninety years ago this fall, the stock market experienced the Great Crash. Shortly thereafter, America’s economy slumped into the Great Depression. Though misconceptions about them abound, these events have had a huge influence on decision-makers ever since. If, as Mark Twain supposedly said, “History does not repeat itself, but it often rhymes,” then right now might be a good time to correct some myths about the Great Depression.
MYTH NO. 1
'Roaring Twenties' excesses caused the Depression.
In his address to the 1932 Democratic National Convention, Franklin D. Roosevelt called the 1920s “a period of loose thinking, descending morals, an era of selfishness.” More recently, economist Mark Skousen argued that “given the fragile nature of the financial system” at the time, the easy credit that spurred a boom of overinvestment “triggered a global earthquake,” making the Depression inevitable. Economist Hans Sennholz attributed the slump to inflation and “the growth of covetousness and envy of great personal wealth and income, the mounting desire for public assistance and favors.”
Indeed, the Roaring Twenties were a time of consumerist excess among a certain moneyed class — think of the lavish parties in “The Great Gatsby.” But the period wasn’t primarily defined by this kind of indulgence or market speculation. Milton Friedman and Anna Jacobson Schwartz’s comprehensive 1963 study, “A Monetary History of the United States, 1867-1960,” shows that the 1920s experienced low price inflation and stable economic growth. Scholar Harold Bierman Jr.’s research on the 1929 crash found that overvalued stocks were isolated to a few sectors and were of relatively short duration. A 2003 study by the Federal Reserve Bank of Minneapolis concluded that in 1929, many stocks were undervalued.
In any case, only a small percentage of the population owned securities at the time. And a culture of excess and careless speculation hardly characterized the entire nation.
MYTH NO. 2
The Great Crash caused the Great Depression.
Writing for TheStreet.com in July, Steve Fiorillo called the October 1929 stock market crash “the most obvious occurrence that portended doom and started the depression.” A Library of Congress teaching guide says, “The Great Depression began in 1929 when, in a period of ten weeks, stocks on the New York Stock Exchange lost 50 percent of their value.”
Modern historians view the crash not as the cause but as an amplifier of macroeconomic forces. The uncertainty it generated helped deepen the Depression, Friedman and Schwartz acknowledge in “The Great Contraction, 1929–1933,” but it was “a symptom of the underlying forces.” The downturn that characterized the Depression—a global phenomenon—was brought about by an almost perfect storm of factors, including Germany, France and Britain returning to the gold standard that they’d abandoned during World War I, which proved unsustainable. In part to boost European economies, the Federal Reserve kept interest rates low. But when it increased rates in 1928 and again abruptly in 1929, lending decreased, as did resulting economic activity. World War I’s vanquished didn’t keep up with reparations payments imposed by the Treaty of Versailles, which made it harder for the victors to repay their war debts to the United States.