The Great Depression’s Patsy
The culprit responsible for the Crash and the Great Depression can be easily identified: government.
To protect fractional reserve banking and (later) provide a buyer for its debt, government in 1913 created the Federal Reserve System, putting it in charge of the money supply. From about July, 1921 to July, 1929 the Fed inflated the money supply by 62%, with the result being the Crash in late October, 1929. Government, following an aggressive “do something” program for the first time in U.S. history, intervened in numerous ways throughout the 1930s, first under Hoover then much heavier under Roosevelt. The result was not an easing of pain or an acceleration of recovery, but a deepening of the Depression, as Robert Higgs explains in detail.
The preceding is not, of course, the generally accepted explanation. In conventional discourse, one of the main culprits for causing or at least exacerbating the Depression was the international community’s adherence to a gold standard. Economist Barry Eichengreen popularized this view, and the Wikipedia entry for Eichengreen includes Ben Bernanke’s summary of Eichengreen’s thesis:
[T]he proximate cause of the world depression was a structurally flawed and poorly managed international gold standard… For a variety of reasons, including among others a desire of the Federal Reserve to curb the US stock market boom, monetary policy in several major countries turned contractionary in the late 1920’s—a contraction that was transmitted worldwide by the gold standard.
Why would a money policy that turns contractionary be harmful? Because it puts the fractional reserve house of cards at risk. When the inflation is exposed and the gold’s not there, bankers do the Jimmy Stewart scramble. In Bernanke’s words,
What was initially a mild deflationary process began to snowball when the banking and currency crises of 1931 instigated an international “scramble for gold”.
The state’s classical gold standard
The classical gold standard that was in operation throughout the West from the 1870s to 1914 was in fact a fiat gold standard, meaning it operated at the pleasure of the state. When the state was not pleased with its operation, it suspended it, allowing banks to break their promise to redeem paper currency and deposits in gold coin on demand.
But even under the auspices of the state, the classical gold standard kept a lid on inflation. Gold was money, and the national currencies were names for a certain weight of gold — a dollar was a name for 1/20 of an ounce of gold, for example. A dollar was not a money backed by go
Article from LewRockwell