Your public school indoctrination has mislead you. GOVERNMENT CAUSED THE GREAT DEPRESSION!!!
At their peak, stocks in the Dow Jones Industrial Average were selling for 19 times earnings - somewhat high, but hardly what stock market analysts regard as a sign of inordinate speculation. The distortions in the economy promoted by the Fed's monetary policy had set the country up for a recession, but other impositions to come would soon turn the recession into a full-scale disaster. As stocks took a beating, Congress was playing with fire: On the very morning of Black Thursday, the nation's newspapers reported that the political forces for higher trade-damaging tariffs were making gains on Capitol Hill.
The stock market crash was only a reflection - not the direct cause - of the destructive government policies that would ultimately produce the Great Depression. The market rose and fell in almost direct synchronization with what the Fed and Congress were doing. And what they did in the 1930s ranks way up there in the annals of history's greatest follies.
There was already a long history of margin lending on stock exchanges, and margin requirements (the share of the purchase price paid in cash) were no lower in the late twenties than in the early twenties or in previous decades. In fact, in the fall of 1928 margin requirements began to rise, and borrowers were required to pay a larger share of the purchase price of the stocks.
The free market excess margin lending argument doesn't hold much water. Government intervention with money, credit supply, trade & labor, however, is another story.
The government inflated the money and credit supply, interest rates fell. Businesses invested this "easy money" in new production projects and a boom took place. As the boom matured, business costs rose, interest rates readjust upward, and profits were squeezed. The easy-money effects thus wear off and the Fed's monetary authorities, fearing price inflation, contracted, the money supply. In either case, the governments manipulation was enough to tank the economy.
Using a broad measure that includes currency, demand and time deposits, and other ingredients, the Fed bloated the money supply by more than 60 percent from 1916 to 1928. This expansion of money and credit drove interest rates down, pushed stocks, & asset prices to dizzy heights which gave birth to the "Roaring Twenties. Then by 1929, the Federal Reserve was raising interest rates and choking off the money supply until 1933.
The crowning folly of government intervention was the Smoot-Hawley Tariff, passed in June 1930. It was the most protectionist legislation in U.S. history. It virtually closed the borders and ignited a vicious international trade war. This put American business & agriculture into a tailspin for the preceding decade.
With a stroke of the presidential pen, farmers in this country lost nearly a third of their markets. Grain prices plummeted by 70% & tens of thousands of farmers went bankrupt. This created un-planted, fallow & neglected farms that caused the "Dust Bowl" which further destroyed the economy. With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers. Nine thousand banks closed their doors in the United States between 1930 and 1933. The stock market, which had regained much of the ground it had lost since the previous October, tumbled on the day Hoover signed Smoot-Hawley into law, and fell almost without respite for the next two years.
The Smoot-Hawley Tariffs by itself should lay to rest the myth that Hoover was a free market practitioner. Hoover's "high-wage" policy & the trade unions succeeded only in pricing workers out of the labor market, generating an increasing circle of unemployment. His Reconstruction Finance Corporation ladled out billions more in business & farm subsidies.
Hoover signed the Revenue Act of 1932. The largest tax increase in peacetime history, it doubled the income tax. The top bracket soared from 24 percent to 63 percent. Exemptions were lowered; the earned income credit was abolished; corporate and estate taxes were raised; new gift, gasoline and auto taxes were imposed; and postal rates were sharply hiked. Hoover even taxed bank checks, which accelerated the decline in the multiplier of available money & slowed the velocity of money by penalizing people for writing checks.
In the space of one year alone, from 1930 to 1931, under Hoover the federal government's share of GNP soared from 16.4 percent to 21.5 percent. Can any serious scholar observe the Hoover administration's massive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets?
The shrinkage in world trade brought on by the tariff wars helped set the stage for World War-II a few years later. When tariffs made it nearly impossible for foreign businessmen to sell their goods in American markets, the burden of their debts became massively heavier and emboldened demagogues like Adolf Hitler. "When goods don't cross frontiers, armies will".
