The Great Depression

Nearly a century ago, our collective soul as fellow Americans was forever scarred by the Great Depression of the 1930s.  Beginning with the stock market crash on Black Thursday, October 24, 1929, and continuing until World War II, the Great Depression economically devastated the United Stated and much of the world.  “Peak to trough, global [gross domestic product] fell 15 percent world-wide from 1929 to 1932.”  Comparing the Great Depression to the Great Recession, from the top to the bottom, global GDP fell less than one percent between 2008 and 2009.

The devastation to the United States cannot be overstated and is ongoing.  From 1929 to 1932, family income dropped over 40 percent.  By 1933, nearly a quarter of America was unemployed.  In addition, about 9,000 banks failed, thus leading to many of those who deposited cash in America’s banks to lose their entire savings.  In 1933, Congress began instituting Franklin D. Roosevelt’s “New Deal” policies and thereby creating scores of new federal agencies in an effort to address the economic wreckage.  These unprecedented federal government programs, enacted in an effort to get the nation’s economy moving forward, never had the desired effect and proved to be job killers instead of job creators thus dragging out the economic wreckage over an entire decade.  Even more importantly, the size and scope of the federal government has continued to grow dramatically ever since the inception of Roosevelt’s New Deal and has turned into the leviathan government our nation has today.  In addition to the dire adversity described above and also in the 1930’s, America suffered through serious Midwestern droughts which great hampered food supply chains as well as the economy as farmers went bankrupt in massive numbers.  Some scholars argued in the past that the Great Depression was caused by the excesses of capitalism, but as argued by Milton Friedman, the general consensus is now that the Great Depression was caused by the failure of the Federal Reserve System to endorse a more expansive monetary policy which could have limited the economic damage done by the Great Depression. 

Pursuant to its power under the U.S. Constitution to coin money and in 1913, Congress created the Federal Reserve System for the specific purpose of creating a more liquid, elastic currency in order to provide greater stability to the American banking system.  Prior to the inception of the Federal Reserve System, bank panics plagued America and was blamed on an “inelastic currency.”  In his book, A Monetary History of the United States, 1867-1960, Friedman explains how the prior system worked.  Like today, depositors would deposit their cash savings with banks or with other financial institutions which in turn would lend the cash in collateralized loans to third-party borrowers.  Occasionally unfortunate events would occur which would lead depositors en masse to attempt to withdraw all their money from the bank all at once.  Because the bank’s cash deposits were tied up in collateralized loans, cash was unavailable to all depositors all at once.  Consequently, the bank would fail thus creating more fear and leading to more runs on the banks and more bank failures.

The Federal Reserve System was enacted to provide liquidity to the banking system in order to limit bank runs and failures.  Member banks were required to deposit their cash reserves with regional Reserve Bank, and if the run on a bank occurred, the regional Reserve Bank could advance the bank cash from the “discount window” in exchange for some collateral, thus theoretically providing more liquidity to the banking system.  That said and on December 11, 1930, when Bank of United States failed, the Federal Reserve System failed to provide the necessary liquidity the Jewish-owned bank, in part, based upon antisemitic reasons as alleged by Friedman.

Friedman argued that Bank of United States was a “sound” bank at the time that was plagued by unfounded rumors which caused a run on the bank.  The New York Reserve Bank devised a plan to save Bank of United States, but “the Clearing House banks of New York refused to adopt it.”  As detailed by Friedman, “Anti-Semitism almost surely played a role in the decision of the Clearing House to reject the New York Reserve Bank’s plan,” and he expounded as follows:

For most members of the Clearing House, the evidence to this effect is indirect.  It is much less so for those members dominated by J. P. Morgan & Co.  We know how John Pierpont Morgan, Jr., the head of the House of Morgan, felt about Jews, thanks to an entry in the diary of Charles Hamlin—a Federal Reserve Board member from 1914 to 1936 and, fortunately, a lover of gossip. Hamlin records that at a board meeting on Jan. 20, 1917, “Gov. [W. P. G.] Harding [chairman of the Fed] said he had had a two-hour talk w. J. P. Morgan at the Met. Club late this p.m., that Morgan…seemed very bitter against Warburg [Paul M. Warburg, a member of the board] evidently thinking he was dominating the board; that he said he did not trust Jews: that they had killed his father (referring I suppose to Untermyer) and that some time he should get even with them!” From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.  The reference is to Samuel Untermyer, a famous Jewish lawyer of the time, who served as counsel to a Congressional committee that investigated “The Money Trust” (the Pujo committee).  In that capacity, Untermyer questioned J. P. Morgan Sr. in December 1912, some months before Morgan’s death.  The son no doubt was referring also to Louis D. Brandeis, who had strongly criticized Morgan and who did much to stimulate and later publicize the Congressional inquiry.  The Morgans presumably felt that Untermyer and Brandeis had unfairly subjected J. P. Morgan Sr. to public obloquy.  J. P. Morgan Jr. finally got “even with them”—but at what a cost to the nation.

As of 1930, Bank of United States was largest commercial bank to ever fail.  In addition, and while not being the official bank of the United States, the name “Bank of United States” gave the bank an air of being the official bank of the country.  Consequently, and as a result of its size and perceived status, the failure of Bank of United States started a cascade of bank failures across the United States.  By 1933, all of the banks in the entire United States (including the Federal Reserve) had to close for a week in order to prevent massive bank failures which changed the severe recession into a catastrophe and “the worst panic the country had ever experienced.”

As such and as concluded by Friedman, the Great Depression was caused by a failure of the Federal Reserve System to utilize policy for which the Federal Reserve System was created to provide liquidity to banks.  That said, and although Bank of United States was the first bank to fail, possibly any other bank could have caused the string of runs on banks as well.