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A little internet education

Please ask David L. Richter (Letters, 2-9-2000 "Depression’s Villian") how, exactly, the Smoot-Hawley Tariff Act could have caused the Great Depression, et al, when the Great Depression began with the stock market crash of October 1929, and the Smoot-Hawley Act became law in 1930? And if tariffs caused the Depression, why did the Fordney-McCumber Tariff Act of 1922 in which customs levels were increased to the highest levels in US history instead act as part of the greatest boom of prosperity the nation had ever seen, the Roaring Twenties?

No, the real cause of the great depression was the policies of the Federal Reserve and Benjamin Strong, head of the New York Reserve Bank. Few western and southern banks had elected to become members of the Fed, so Strong enacted a plan to force them. The plan was to lure the farmers and tycoons of the west and south into easy credit loans, and then call them in en masse to cause a recession and the failure of the non-Fed banks. This contraction of credit was the first of several too many straws for the economy.

Another manipulation was the promotion of banker’s acceptances. The Fed set the discount rate artificially low and pledged to buy any unsold acceptances that were offered. Banks came in as buyers, knowing they could sell to the Fed. This unstable scheme was the second straw.

By 1920, Congress was getting suspicious of the Fed’s actions, but the expansion of the money supply by this time was so great that there would have been a popular uproar had the money supply been contracted, so Congress could do nothing. The roaring twenties ensued.

The last straw was the war bonds issued for WWI, which the government did not pay off. They couldn’t, actually - and here a short lesson might be in order. The Fed creates money out of thin air and loans it to the US government at interest - that is the where the whole concept of bonds come from. Bonds are debt the US owes to the holders of the bonds. The treasury receives the amount from the Fed and prints the Federal Reserve Notes (i.e. US dollars) and puts them into circulation. (This is why I am so amused when people think we can pay off the US debt. We can’t. If we did, US dollars would disappear into the void from which they sprang. And since all of the US dollars are created as debt, where do the interest payments come from? They don’t exist! - but that’s another letter.) By making it possible to borrow American dollars at one rate and invest them elsewhere at a higher rate, the Fed was deliberately moving money out of the US, with the gold reserves following. This was the contraction of the money supply that Congress had wished to avoid. Also, by the end of WWI, Congress had figured out they could use the Fed to obtain revenue without raising taxes, so the number of treasury bonds increased dramatically.

Now, the consequences of purchasing treasury bonds and other securities is that they end up in commercial banks and are used to expand bank credit. In 1910, consumer credit was only 10% of the nation’s retail sales - by 1929 credit transactions were 50%. The artificially low interest rates set by the Fed to push the acceptances fueled this trend.

Also from 1920 to 1929 there were three separate major business cycles, and several minor ones. In 1926, the Florida land boom collapsed. Real estate investment plummeted and stock investment soared. In 1928, the Fed, alarmed, tried to pull the plug by shifting their reserves to Time Deposits. In August 1929, the Fed decided to completely reverse its expansionist policy by selling Treasury Bonds on the open market and raising interest rates. The money supply contracted violently, and the bubble burst.

Unfortunately, Banks themselves had become great speculators in the market by this time, confident that "the permanently high plateau" had been reached. Previously, on February 6th 1929, the Federal Reserve issued a statement to its member banks that they should liquidate their holdings in the stock market. Analysis showed the likely result of the Fed’s policies, but many big banks did not listen and almost no smaller ones did.

So when August 1929 rolled around and the selling of Treasury Bonds began, most banks were unprepared, and the man-on-the-street had never had any clue at all. The crash wiped out banks and fortunes across the country.

Had the Fed reacted by easing the money crunch at this point, the Great Depression would never have occurred. Everything else that happened subsequently could have been avoided if the Federal Reserve had acted properly and loosened credit. Instead, it did just the opposite of these things, and millions of hapless loan holders lost everything as commercial banks, desperate for cash, called in loans on anything and everything all over the country. The years it took for these small businesses and families to pull themselves up by their bootstraps and start all over again were the Great Depression. There was no money available for them, and no means of obtaining loans. The Fed caused this - not trade. Instead of doing the right things, the Fed launched a series of "banking reforms" designed to force every bank to become a member and further entrench its control over the money supply. The government, seeing tax revenues disappear, forced more companies and families into bankruptcy through taxes and regulatory agencies. Unemployment began to spread, and the Great Depression didn’t end until WWII came along to put people back to work, expand credit, and infuse cash into the economy (through government deficit spending) - the very things the Fed should have done in the first place.

This is the true story of the Great Depression. This information is available to any objective researcher in any public library. As previously mentioned, in the Fordney-McCumber Tariff Act of 1922 customs levels were increased to the highest levels in US history, yet this helped lead to the economic success of the Roaring Twenties. The Smoot-Hawley Tariff Act of 1930 did not and could not have caused the Great Depression. It played no part whatsoever in the credit crunch and scarcity of money that were the true factors.