The GDP trend tells a familiar story: peaks at 1929, troughs at 1933, and we all live happily ever after.
But consider this time line:
- In 1913 the Federal Reserve was created to "never allow another panic"
- Spring 1930 the Dow Jones had rebounded. As the graph below shows the Wall Street Crash corresponded with a fall from about 340 to 200. By April 1930 it was almost back up to 300.
- The Smoot-Hawley tariffs came in June 1930. There is wide academic consensus that these prolonged the Great Depression, they certainly reduced global trade
- December 1932 Herbert Hoover raised the top rate of income tax from 25% - 63% (and the lowest rate by 400%) amongst a large range of policies (they were New Deal in all but name: "practically the whole New Deal was extrapolated from programs that Hoover started" Rex Tugwell)
- The relationship between the money supply (i.e. the Fed) and the economic activity outweighs the political coincidences. (visual). According to Bernanke, Friedman & Schwartz identify 4 mistakes:
- the tightening of monetary policy that began in the spring of 1928 and continued until the stock market crash of October 1929... The market crash of October 1929 showed, if anyone doubted it, that a concerted effort by the Fed can bring down stock prices. But the cost of this "victory" was very high.
- In September 1931... Great Britain was forced to leave the gold standard...speculators turned their attention to the U.S. dollar, which (given the economic difficulties the United States was experiencing in the fall of 1931) looked to many to be the next currency in line for devaluation. Central banks as well as private investors converted a substantial quantity of dollar assets to gold in September and October of 1931, reducing the Federal Reserve's gold reserves...the Fed decided to ignore the plight of the banking system and to focus only on stopping the loss of gold reserves to protect the dollar. To stabilize the dollar, the Fed once again raised interest rates sharply, on the view that currency speculators would be less willing to liquidate dollar assets if they could earn a higher rate of return on them.
- By the spring of that year , the Depression was well advanced, and Congress began to place considerable pressure on the Federal Reserve to ease monetary policy. The Board was quite reluctant to comply, but in response to the ongoing pressure the Board conducted open-market operations between April and June of 1932 designed to increase the national money supply and thus ease policy. These policy actions reduced interest rates on government bonds and corporate debt and appeared to arrest the decline in prices and economic activity. However, Fed officials remained ambivalent about their policy of monetary expansion.
- The Fed's ongoing neglect of problems in the U.S. banking sector... Between December 1930 and March 1933, when President Roosevelt declared a "banking holiday" that shut down the entire U.S. banking system, about half of U.S. banks either closed or merged with other banks. Surviving banks, rather than expanding their deposits and loans to replace those of the banks lost to panics, retrenched sharply.
- The over-stimulated economic euphoria of the 1920s.
- The draconian monetary policy pursued by the Federal Reserve Bank from 1930-1933.
- The sudden rise of global protectionism leading to the collapse of world trade. The dramatic rise of income taxes in 1932 may have also prolonged the downturn.