Use access key #2 to skip to page content.

Causes of the Great Depression



June 24, 2009 – Comments (23)

The Great Depression has become one of the most misunderstood events in U.S. history. Many people believe the free market to be culprit that caused the incredible economic downturn, that the government didn’t do enough to stop it, and that it was largely President Hoover’s fault for not intervening enough into the economy. Today, to my best ability, I hope to dismiss these false assumptions.

Herbert Hoover was elected President of the United States in 1928, and from the beginning it was clear he was not a supporter of laissez-faire, nonintervention economic policies. Hoover preferred regulation, government involvement, and over the course of his presidency he greatly expanded the role of the federal government in the economy. During his presidential campaign he spoke of helping the agriculture industry by raising tariffs and discouraging agriculture imports.

Hoover’s intervention began in 1929 with the Mexican Repatriation, leading to the “voluntary and involuntary” migration of approximately half a million Mexicans. The reasons primarily being high unemployment in the U.S. and the incentives welfare created for Mexicans. Rather than look at the root reason for the Mexicans wanting to be here (jobs and welfare), Hoover ignored the cause and instead only dealt with the effect; not too far off from the immigration policies the U.S. has employed with Mexico ever since. The Mexican exodus would last through 1937.

The Repatriation was not too unreasonable compared to the other policies put into action by Hoover. On June 17, 1930, the President signed into the law the Smoot-Hawley Tariff Act. The Act raised tariffs on more than 20,000 goods imported into the U.S. to historically record levels. Prior to the bill’s passing, 1,028 American economists signed a petition urging Congress and President Hoover to not support or pass the act, explaining that it would force consumers to pay higher prices on countless items.

The reasoning behind the bill was that it would encourage people to buy American products, by greatly increasing the prices of imported goods. It was also assumed that it would lead to greater revenue for the federal government. This turned out to be terribly misguided thinking, as it led to slice American imports by 66% and exports by 61%, between 1929 and 1933. Exports declined sharply because many countries increased their own tariffs on American goods in particular, as a result of Smoot-Hawley, leading to a period of reduced trade and economic isolationism and protectionism.

There is a good possibility that the passage of Smoot-Hawley may have played a good sized part in the collapse and decline of the stock market starting in 1929. As the Wall Street Journal explains:

Though many associate the Great Depression with the stock market crash on Oct. 29, 1929, the market actually rallied during the six months following Black Tuesday, while the defeat of Smoot-Hawley appeared likely. The market turned south again in April 1930 as those hopes of defeat gradually dimmed.

The Dow Jones Industrial Average sank a full 8%, from 250 to 230, over just two trading days in June 1930, in direct response to the Senate’s passage of Smoot-Hawley and Hoover’s announcement that he would sign it. Exacerbated by other flawed governmental policies, an international trade war continued to drive the market down until the Dow hit a low of 41 on July 8, 1932, having lost 89% of its value from its September, 1929 high.

The initial and continuing effects of the bill certainly did not help revive the U.S. economy as originally intended. This was not the end of the list of legislation, signed into law by Hoover, heightening government interference in the market.

As a result of the faltering economy, revenue from the corporate tax dropped to $550 million in 1932 from $1.1 billion in 1930, and income tax revenue fell to $370 million from $1 billion over the same period. This made way for a growing budget deficit of more than $2 billion in 1932. In response to the government’s financial problems, Congress enacted the Revenue Act of 1932, which Hoover signed into law on June 6, 1932.

Among other things, the Revenue Act increased the top income tax rate to 63% from 25%, doubled the estate tax, increased corporate tax rates nearly 15%, and added new and increased excise taxes on goods such as tires, lubricating oil, refrigerators, chewing gum, soft drinks, electricity, and many other items.

Government looked at its revenue problem in 1932 and seemed to see increased taxes as the only solution. Cutting the increased federal programs and spending, for some reason, did not appear to be a viable option. Rather than even considering the federal government might be unnecessarily involved in areas that it shouldn’t have been, creating new taxes and increasing current ones was seen as the only reasonable solution.

Amazingly, Franklin Roosevelt actually attacked the President on this issue while campaigning, explaining that Hoover had spent money in a “reckless and extravagant” manner that the U.S. had never before seen. John Nance Garner, Roosevelt’s running mate in 1932, said Hoover was “leading the country down the path of socialism.” While these accusations may very well have been true, it is laughable to compare these words coming from Roosevelt and Garner, to the New Deal policies they implemented once in power. The New Deal that the Roosevelt administration pushed and championed was nothing more than a continuation and escalation of the policies pursued by Herbert Hoover, the same ones Roosevelt had blasted while on the campaign trail.

Both Hoover and Roosevelt tried to push economic beliefs and theories that helped prolong and worsen the Great Depression. They both believed the federal government should manipulate the economy, and stimulate it out of a correction through spending, and government involvement. The two presidents subscribed to the same flawed, short-term focused, interventionist, Keynesian belief in economics. The failure of their philosophy is evident in the performance of the economy during the period in which they tried their shenanigans. The country’s unemployment rate in 1939, despite all the efforts from Hoover and Roosevelt, was still higher than it was in 1931.

The free market does not come without its own flaws. Humans are not perfect, but with a free market system it is the individuals making the calls; not an elevated, select few who regulate and control society. In whatever economic model you choose, humans will always be behind the system.

It is not through more laws, regulation, and intervention that we find the right path to a prosperous society. Only by learning freely from our mistakes and failures can we expect to grow stronger, smarter, and more sustainable over the long-term.

23 Comments – Post Your Own

#1) On June 24, 2009 at 4:27 PM, Londamania (48.41) wrote:

Great post, but the last paragraph does not derive from the preceeding material.  Apply that same thinking to our civil laws and we would have anarchy and chaos - because although you and I may learn from our mistakes, the person next to us may not, and you and I should not have to keep paying for it. 

 The same applies to our economy.  I do not want to pay the price for someone elses mistakes and failures, and we need rules and regulations - just like we do in the civil area of our society - to keep people within certain bounds and safety parameters.  Like say selling junk bonds as AAA using mystery math.

There is room for that, and still allow for innovative growth and a prosperous society,  Without these laws you are giving a license to steal to the wealthy elite, and everyone else will pay for it over and over.  The rules and regulations need to concentratre on keeping a transparent and level playing field, and we need to keep growing them as needed to keep enforcing that as more and more creative ways are found to try and get around them.

Report this comment
#2) On June 24, 2009 at 4:34 PM, outoffocus (23.73) wrote:

Like say selling junk bonds as AAA using mystery math.

We are still doing that. They are called US treasuries.

Report this comment
#3) On June 24, 2009 at 4:40 PM, tonylogan1 (27.69) wrote:

There are plenty of regs out there. Of course we should work to improve existing ones and maybe add a few here and there. No one is arguing for anarchy as a solution.

If fraud was prosecuted instead of rewarded, I bet there would be more regulatory compliance.How many people can you think of that made over $10 Million dollars by directly contributing to this collapse, and likely violating at least a few EXISTING regulations/laws?

Report this comment
#4) On June 24, 2009 at 4:47 PM, Varchild2008 (83.80) wrote:

Londamania, I believe you have it backwards.

You claim regulation is needed to fix your neighbor's mistakes.  But the entire point of this article showcased that increasing regulation on your neighbor to prevent a future or current mistake he might make or made only results in punishing everyone across the board (including yourself).

I am not an advocate of ZERO regulation laws.... But, I am an advocate that a more hands-off Government versus a Baby Sitter is what works best as it allows the American Individiual to be free to make his/her wealth or his/her own mistakes.

Too often.. Regulations only achieve the opposite effect for which they are intended.  Thinking that we need to restrict RISK in the market place because "So and So" screwed up, punishes everyone that has used that same RISK level to generate wealth and job creation for all...

A healthy balance in regulation is needed.... But that can't happen if we continue to have a Bail Out Driven society that thinks that those who screw up must be saved at the expense of those who don't screw up.

Report this comment
#5) On June 24, 2009 at 5:11 PM, binve (< 20) wrote:

pencils2, Fantastic post! Thank you for your thoughts and analysis. Well done and I agree with all of it. And not only was Hoover a central planning advocate, the roaring 20s was a time of huge financial speculation and a huge run up in the valuation of a large number of asset classes (especially equities). It sounds like a number of themes are being repeated currently with eerie similarities. Thanks man!

Report this comment
#6) On June 24, 2009 at 5:17 PM, n6532l (< 20) wrote:

Blaming Smoot-Hawley is a misreading of history.  Smoot-Hawley was not a shift to protection but a continuation of long standing trade protection.  At the time it was proposed the US was already the world’s most trade protectionist nation and had been for more than a hundred very prosperous years.  The Smoot-Hawley tariffs were not the highest tariffs the US ever had.  Nor did they last very long.  Passed in the summer of 1930 they became effective the following year and began to be reduced after 1932 by the Roosevelt administration.   When the Depression got worse in 1937 tariffs were already back to the pre Smoot-Hawley levels.  While trade did decline by two-thirds it was two-thirds of a small number.  Trade declined from 6 percent of GNP to 2 percent while the nation remained a net exporter.  Smoot-Hawley did what it was intended to do.  It kept us a net exporter throughout the Great Depression and protected jobs from the dumping of foreign goods.


During that long period of trade protection, contrary to the theory of free traders, the US had higher real wages, lower prices, and more innovation than the rest of the world. 


During that long period of protection the US ascended to the economic high from which it has descended during a short period of free trade. Report this comment
#7) On June 24, 2009 at 5:29 PM, leohaas (30.16) wrote:

Masterful mixture of facts and opinions!

Great attempt at rewriting history!

No doubt this will be well-received by the vocal doom- and naysayer minority here at CAPS.

Report this comment
#8) On June 24, 2009 at 5:49 PM, TigerPack1 (33.54) wrote:

I could add many comments to this one, but here's the only one I will post:  I wrote a lengthy research paper for most of my grade in senior English in high school during the spring of 1987 about the causes of the Great Depression, and I warned quite accurately that there were parallels to the 1982-1987 stock market situation that should lead to a stock market crash in mid to late-1987.  I argued with my college Economics professor that we were destined for another Depression in October 1987, but alas I was dead wrong, and his long experience-based arguments won the day.

I might add there are more differences today vs. 1933 or 1934 than similarities, and I would point economic history buffs to the 1974-75 period as having a GREATER NUMBER of similarities to the 2008-2009 situation.  For clues about our economic future, look at the markets and patterns of 1975-1976 to get a better feel for where we are headed in the stock market this year and next.  History rhymes remember, it does not repeat itself.  As such, the current experience has a very long list of firsts tied to it, in terms of political change, money creation and global trade, that make this animal quite unique.

-Tiger Out

Report this comment
#9) On June 24, 2009 at 6:09 PM, TigerPack1 (33.54) wrote:

I love your libertarian bent and laissez faire attitude toward the markets.

The facts of the matter are we will never have such a situation EVER for a host of real world, common sense reasons.

My investing advice would be don't let your feelings about the way things SHOULD BE overrun your thinking about HOW THE WAY THINGS ARE.  For example, Warren Buffett is a master at investing in "the way the world works," and not bending reality to fit his personality.  He uses tons of common sense, and logic based in flat-out unbiased statistics to make a decision.

For example, the emotion in markets is very evident in gold prices, right now.  If you take out a supply/demand calculator and truly understand the implications of the negative lease rates, short-term on gold, an unemotional computer would spit out that gold may be the worst investment to own the next 6 months.  How many have the guts to take the facts at face value and avoid it or sell it right now?  You can find tons of sentiment that today argues gold SHOULD be priced much higher already, say $1500 or $2000+ an ounce.  Why isn't?  Investigate how the major players are betting in gold, and where/why they stand with their positions, and how their thinking will change in the near future based on one scenario or another.  This process is based more on real world indications than on predicting where things SHOULD BE.  (This gold paragraph is me preaching to those in the audience out there, not you Pencils2, by the way!)

-Tiger Out, Again

Report this comment
#10) On June 24, 2009 at 8:57 PM, ttboydxb (28.65) wrote:



Probably the best comment I have seen on Caps!  :)

Report this comment
#11) On June 24, 2009 at 11:02 PM, OneLegged (< 20) wrote:

I was hoping for an unbiased "report".  This is not it.

Report this comment
#12) On June 24, 2009 at 11:27 PM, booyahh (< 20) wrote:

So what about the century of trade protectionism before 1929? We kept lower priced European goods out of the US. We did quite fine as a nation. And what about all the trade protectionism  in the 1940s, 1950s, 1960s, and 1970s? America did quite fine then as well. We were certainly better off than we are now - flooded with cheap goods that lead to more and more unemployment. America has historically been isolationist and protectionist. Fortress America.

Report this comment
#13) On June 25, 2009 at 10:32 AM, JtHExperimental (20.26) wrote:

Just another one-sided, dogmatic bashing of FDR from a market fundamentalist perspective. 

I agree with a lot of the points in this article but it also ignores the SEC Acts of '33 and '34 and the fact that those two acts made America the safest financial market in the world to invest in.  Decreasing risk was a huge benefit for the American system of capital.  It's also the best example you can find of a regulation that dramatically improved the business environment in America.   It's completely arguable that America's prosperity from the '50s onward would not have been possible with those two acts.

The analysis also ignores the fact that the single biggest reason why America got stuck in a depression was not government intervention, but rather a deflationary spiral that resulted from a combination of reckless lending practices, rampant market  speculation, and Americas immobile gold standard.  I am actually a proponent of backing currency with commodities, but the problem wasn't that the USD was backed by gold --- rather, it was the fixed rate of exchange.  

I don't like to dismiss thoughtful analysis as 'just more Keynesian and FDR bashing' because there are some valid points in here.  I don't disagree that Hoover and FDR bumbled quite a bit of things.  But it's just too one-sided to me. 

As with most contemporary Liberal analysis, it also completely ignores the basic idea behind Keynesian theory, which had more to do with suppressed demand from excess savings than 'government spending and programs'.  Yet, any time you hear the word "Keynesian", people are simply using it as a substitute for 'government programs', despite the fact that this had little to do with underlying Keynesian critique.  

Keynes, better than most economists of his day, understood the devastating effects of deflation on an economy.  He also understood that once deflation and fear reached a certain point, a downward spiral would result.  Most of his ideas were meant to combat that and re-create natural inflation.  

It is also an extreme stretch to call Hoover a "Keynesian."  Hoover was a moderate Liberal (i.e. supporter of laissez-faire), but like most American conservatives of the day, he was also a protectionist.  

Report this comment
#14) On June 25, 2009 at 11:55 AM, TMFPencils (99.90) wrote:

As usual, people ignore the root causes of the crisis and instead look at the effects. The Fed played a major role in the 1920s of preventing prices from falling as they usually do when production is increasing. The money supply was increasing, preventing prices from falling, and when the bust came Hoover and FDR continued to prevent prices from falling.

"Deflation" in a monetary sense would not be destructive in a free market. As you say the problem indeed was goverment's fixed ratios of gold and silver that led to some problems. The problem is that politicians thought it was falling prices that caused the problem, leading to monstrosities of programs such as the Agriculture Adjustment Act of 1933 that paid large farmers to plow under crops and kill cattle.

You cannot ignore the role the central bank had in creating this mess. People forget about the rough economic collapse in 1920 because government and the Fed actually chose to do nothing. Government actually shrunk its size and budget during the rough times, and the Fed didn't manipulate money nearly as much as it does now. The recession was quick and the economy was soon on its way. The market was allowed to allocate capital to productive areas of the economy from the unproductive areas.

In the Great Depression the New Deal programs merely prolonged the correction because the market was not allowed to correct itself. Government bureaucrats actually thought they could manage the economy better than the market itself. 

Report this comment
#15) On June 25, 2009 at 12:14 PM, JakilaTheHun (99.92) wrote:


Deflation would be destructive in any type of market.  Your use of the term "free market" is arbitrary to begin with because you obviously support certain government regulations, but you don't question those.  Currency itself would not exist without the government.  Does that mean "free markets" are an impossibility? 

I haven't ignored anything.  I flat out stated I agree with some of the author's arguments.  But it's extremely one-sided, just as your response is. 

You also conveniently ignore everything going on in the world at the time including extereme nationalism, rampant protectionism, uncertainty in Europe over the growing Fascist menace, a major war in Asia, etc, etc, etc. 

I don't disagree that many of FDR's programs were harmful.  But not *all* were and I question the agenda of anyone who ignores everything else going on in the world at the time and focuses solely on a handful for FDR's programs and claims that the entire economy was sunk by those.  I call BS!  This is free market fundamentalist garbage and nothing more. 

I'd really like to see more rationale discussion of FDR's New Deal programs, but I don't think it'll ever happen because you have one camp that idolizes him and another one that is convinced that FDR was the anti-Christ and the entire Great Depression was his fault.  Why is it impossible to discuss FDR without greatly exaggerating the affects of relative minor actions on the global economy (while completely ignoring the more major dynamics going on in the world)?

Report this comment
#16) On June 25, 2009 at 1:22 PM, davejh23 (< 20) wrote:

Jakila - Bernanke acknowleges that Hoover and FDR were both responsible for prolonging and deepening The Great Depression.  He doesn't believe he is following the same course.  While he does feel that massive intervention is necessary, he is taking a very different approach.  However, the policies we are adopting have been proven to fail in other countries in recent history.

Report this comment
#17) On June 25, 2009 at 1:23 PM, whereaminow (< 20) wrote:

There is a reason that Gore Vidal's fictional books chronicling American history contain more truth than any history textbook and most scholarly works ever written.

About two decades ago, a man named Peter Novick posed a question to fellow historians.  How do we remain objective, when it is evident that all historical "facts" must be selected and arranged by imperfect humans?

There has been no suitable answer to that question.  The publication of Vidal's works were only the beginning.  It was Peter Zinn's A People's History of the United States of America that forever tainted what was left of the old American historical community.

While Zinn's History and the history you are familiar with in textbooks both contain facts.  The importance and arrangement are the crucial aspects of the works.  After reading Zinn, and finally being offered a historical work that did not sugar coat the history of American big government, big business, racism, murder, and theft; and American can no longer view his old textbooks and his old teachers the same.  They are forever discredited.  

Why? Because they never told the whole story.  It is a betrayal.

Libertarian revisionists have followed the path of the Left revisionists, hoping to show yet another whole story that was left out.  Among the most prominent today are Thomas DiLorenzo, Thomas Woods, Robert Murphy, Jeff Riggenbach, and Robert Higgs.  

One of the most significant contributions to this field however, came from Murray N. Rothbard, whose book America's Great Depression exploded the myth that Hoover was a do-nothing free market worshipper.  On the contrary, Rothbard showed that Hoover was an interventionist of the highest order, and those facts are irrefutable.

Armed with this information, it is hard for Libertarians to take anyone seriously who basis their analysis on the Great Depression on laissez-faire gone wrong and a do-nothing President.  The historical record is filled selected and arranged "facts" that have conveniently left out a very important fact - that Hoover and the Federal Reserve intervened before the crash and intervened on a grand scale afterward.

This type of selection of "facts" is used extensively by the Republican party as well. Book after book details the horrors of terrorists and Middle East dictators.  Other "facts" that may be useful in gaining a complete picture are left out completely.  The authors don't deem them important.

History is not objective.  Sad, but true.

David in Qatar


Report this comment
#18) On June 25, 2009 at 2:02 PM, DaretothREdux (55.13) wrote:


Currency itself would not exist without the government.


Think about what you are mean to tell me that you believe that without the gov't printing money we would stop exchanging goods and services?

No. I know that not what you mean, but if you think about it for one second you would realize that there has and always will be MONEY.

We don't need the gov't or the fed to print it backed by nothing. The free market would create a currency (multiple currencies in fact) and you would be able to choose the one that could not be inflated/deflated at the whim of politicians. i.e. a 100% reserve currency (could be gold or silver or something else that holds it value). But I promise you one thing is certain. If we had competition in currencies, all fiat currency would be worthless overnight.


Report this comment
#19) On June 25, 2009 at 6:01 PM, leohaas (30.16) wrote:


What keeps you from accepting a cow in exchange for the car you want to get rid of?

Go ahead, and compete with the US$. Nothing keeping you from doing that. Just pay your taxes in greenbacks, for the rest of your life, feel free to use whatever you want as currency...


Report this comment
#20) On June 26, 2009 at 1:24 PM, JakilaTheHun (99.92) wrote:


I've met Communists that were more in tune with reality than you.

Leohaas is exactly right.  There's nothing stopping you from bartering for goods and services right now.  You choose not to because you appreciate the convenience and transferability of United States currency. 

You are free market fundamentalist.  Your idealistic utopia would be just as disasterous as the one created in Russia in 1917.  And I'll tell you how it ends: with Mafia henchman running the economy.  Bye bye protections --- hello survival of the fittest; hello survival of the most ruthless.

Report this comment
#21) On June 26, 2009 at 1:35 PM, JakilaTheHun (99.92) wrote:

By the way Dare, answer this question --- what gives "currency" value? 


If you're bartering, its the intrinsic value of the item you are trading, correct?  

Ok, but what if you are exchanging "currency"?  What gives it value?  

There's really only one answer: force. 

So if force is involved, you basically have de facto governments.  


Given the fact that "Libertarians" are often worshipful of the Founding Fathers, I do find it amusing that the most extreme ones, such as yourself, are completely opposed to the system they set up.

The Founders believed government was a "necessary evil."  You believe government is unnecessary.  There is a huge difference and you don't quite grasp it. (Nor do you grasp the impossibility of it --- removing power structures results in new power structures.)

Report this comment
#22) On June 26, 2009 at 2:51 PM, TMFPencils (99.90) wrote:

JakilaTheHun, I don't anyone here is calling for anarchy. Because we oppose many government programs, you assume we oppose government completely.

First, your comment about the Founders. Many of those who value Jeffersonian libertarian principles do strongly support the ideals they put in place through the Constitution. They gave Congress the power to create and value money, but they don't not give that authority to a central bank like we have today with the Federal Reserve. Nor did they give Congress the authority to force a currency on the people or prevent the people from making their own currencies.

Money does not get its value through "force." Throughout history government has never been the first entity to create money. It is the people who want a representation of value (not force) that began using common, sturdy items such as copper, silver, and gold as currency. Currency is never originally brought about by force. 

Historically government has gotten involved in currency for one reason: greed. Kings would debase the metals that the market once used. Kings would inflate the currency that was once stable when the market was in control. It has been governments who forcefully monopolize money in order to expand the state, control the people, and support political buddies. The U.S. is no different. 

The Founders did not give the federal government the ability to monopolize currency and force it on the people. If that was the case, they wouldn't have given the states the ability to create currency. Today, however, we accept the legal tender laws as a legimate role of Congress, when in reality they do nothing but force a worthless currency on the people. 

Report this comment
#23) On June 26, 2009 at 4:50 PM, TMFPencils (99.90) wrote:

My apologies, I meant to say banks instead of the states, constitutionally states cannot create currency. But in the 1800s numerous private and bank currencies were able to freely operate.

Report this comment

Featured Broker Partners