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” The Federal Reserve — — caused the 1929 crash with its easy credit “

That assertion is not exactly established fact. The sole school that comes close to making the claim is the Austrian school which would argue that short term interest rates had been set too low throughout the 20s, a situation leading to malinvestment and an unsustainable boom.

Moreover there may not be a direct link between the stock market crash of 1929 and the Great Depression. Post hoc propter hoc reasoning leads us to think so but it may not be the case at all. The stock market collapse affected a small part of the American public and economy.

The much greater calamity resulted from the lesser known banking collapse that occurred between 1930 and 1933 when a full one third of American banks failed, shrinking the money supply by 30%. This monetary collapse was peculiar to America. European banks, nor Canadian banks for that matter, didn’t fail in large numbers. It’s something that Joseph Schumpeter targets as a significant factor causing the Great Depression, which was much worse in American than elsewhere.

Milton Friedman and Anna Schwartz don’t find the Fed responsible the 1929 crash but they do fault the Fed for failing to backstop the banking system and allowing the Depression to feed on itself. The Fed’s first chairman died one week before the stock market crash and the Fed was rudderless at a critical time. As a result no one was willing to make the decision to buy large quantities of paper from banks to provide them with liquidity.

Hoover and FDR’s meddling get a lot of attention but the government’s percentage of the GDP during their administrations was about half of what we have accepted as normal during the entire post WWII era. Their spending looked big to Americans of that time because it was bigger than what had gone before. But it’s surprisingly small compared to what the norm has been for over 60 years.