The Cause of the Great Depression

Many like to blame the stock market crash of October 19, 1929, as the cause of the Great Depression. It wasn't. It was just the triggering event.It was what led up to the stock market crash that caused the Great Depression.Let's explore...There was extensive money supply growth...massive supply build up by industry...rampant speculation...ending with a parabolic stock market blow off...all for a presumed demand that was nearly nonexistent.

How could things have gotten so out of whack?

To answer this question, let's look to John Steinbeck...

"The bank is something more than men, I tell you. It's the monster. Men made it, but they can't control it." John Steinbeck, The Grapes of Wrath

That's right, the banks, starting with the Federal Reserve, caused a massive -- credit induced -- spending binge.

The Federal Reserve Governor at the time, Benjamin Strong, administered what he called "a little coup de whiskey to the stock market." He sold the dollar, purchased hefty amounts of Treasuries, and extended cheap credit to the masses.

Unfortunately this "little coup de whiskey" produced a drunkenly distorted economy. And when the bills came due the banks could not recover their loans. And depositors lost their savings forever.

Adolf Miller of the Federal Reserve Board testified to the Senate Banking Committee in 1931 that this episode constituted "the greatest and boldest operation ever undertaken by the Federal Reserve System and, in my judgment resulted in one of the most costly errors committed by it or any other banking system in the last 75 years."

The Great Depression -- including the high poverty and unemployment -- was just the painful hangover from the irresponsible banking practices of the roaring 20's.