How important was the Wall Street crash to the history of the 1930s in the USA?
Historical arguments about the causes of an economic crash are often dependent upon cognitive biases about the economy. So, for instance, if one was a traditional, non-Keynesian but neoclassical economist, the 1920s boom would be the place to look for the causes of the later depression. This would be because such economists look to oversupply, caused by a glut of malinvestment based around interest rates that are too low, as the cause of recession. Neoclassical economists would then further suggest that the attempts of the Hoover and Roosevelt administrations to restore demand or to encourage large government protection of businesses ‘turned away from the skid’ and made an inevitable inventory correction into a Depression, which was compounded by poor policy choices in 1935 and 1937.. This is certainly the view propounded by Amity Shlaes in her recent works.
On the other hand, Keynesians such as John Kenneth Galbraith have long pointed to the period between 1926/7 and 1933 as one of economic derangements which taken together dealt grievous blows to aggregate demand. In such an analysis, the dustbowl, which pushed up farm prices and pushed farmers off the land alongside Boll Weevil problems in the South, added to mass migration. This in turn complemented the Great migration to drive down wages of workers who were not unionised. Workers who were unionised by the emergence of the UAW and the CIO in the thirties may have contributed to a contrary effect by ‘locking out’ the growing numbers of poor because the union rates were so high that no one from outside could be hired. The Smoot-Hawley Tariff, in this regard, made things worse by driving up raw material prices and encouraging other nations to reciprocate, and this began the collapse of the world monetary system, which was itself predicated upon reparations and loan payments to the USA being recycled in trade purchases. The Stock Market crash, in this regard, was a canary in the mine but ultimately only effective in ruining attitudes. The European Bank Crash of 1931 was thus much more important. The overall picture in this analysis is of low demand, low saving, rising food prices, and job restraint added to a lack of credit which was only addressed by the ‘three new deals’ (1933, 1935 and 1937).
Ten economists laid in a row would not reach a conclusion, as one wit once put it. A simple analysis of the performance of the stock market in New York in 1929-30, however, would buttress the argument that it was only one of a group of factors and even as that not a primary one in the emergence of the Depression. Though the stock market declined from the third quarter of 1929, business activity did not do so until late 1931. Indeed, in April 1930, shares were up 20% on their previous lows. There are stories of great harm having been done by the falls in share values, but another key point to make is that these overwhelmingly affected the rich; only 5% of Americans owned shares. ‘Trickle down’ economics, which posits that a wealth effect exists when the rich feel richer and spend more, has long been discredited; it is almost the case that arguments about the stock market crash killing the American economy are equally flawed examples of ‘trickle up’. Crashes were in fact a regular feature of markets, and in some ways healthy; 1837, 1857, 1873, and even the controlled fall of 1905 were in a sense necessary to remove bad companies.
When considered alongside other economic events and policy choices, the crash of 1929 becomes more sinister. The decade since the recession of 1920-1 was the first full peacetime decade for the newly established Federal Reserve. Production in 1920-1 had fallen in a range of 3.5-7%, whilst prices had fallen by some 13-18% depending on private surveys. That meant that real GDP growth could thereafter have been some 10%, but disguised (because production adjusted for inflation would result in a real figure, c.-4% minus -13% is +9%). The Federal Reserve responded by raising interest rates, which meant that real interest rates, given negative inflation were in fact higher. This stored up investment and savings and future demand. A flight of gold from the European states contributed to this process. The US Government also downsized and thereafter ran small deficits or a near-balance. The surplus money in the system, at a time when purchasing power was deranged because the £ was sinking and the $ rising in global trade, went into land, financial products, and purchases of consumer goods. This caused the 20s boom. When the boom got going, the Federal Reserve did not take action to quiet the boom, and though bonds kept pace with stocks until 1928, the stock market was far too high by 1929. It should have crashed.
Monetary analyses aside, the stock market was meant to reflect the real economy and the real economy was in trouble by 1929. Export pricing was impossible because of tariffs, capital flows were distorted because of loan repayments from Britain to America and reparations from Germany, the world economy had essentially lost Russia, and South American markets (particularly Argentina) had collapsed. The situation was worsened by the confused attitudes of elites in Britain, America and Japan to the Gold Standard, which ought to have stabilised trade and interest rates in the 1920s but which did not because of politically motivated distortion of currency-pegs to gold. Britain, for instance, was overvalued in 1926 as a trade-off for Coalition housing and tax plans that required the appearance of tax cuts and low mortgages for consumers. The flawed Treasury thinking was that inflationary pressures could be balanced by a high £ to gold ratio, which would also help to pay off US loans by keeping the £ high against the $. However, this suppressed UK trade and recovery, and could not be sustained in 1931—leading to a deepening of the panic that emerged when European banks collapsed in that year.
One imponderable is the level of corruption in the USA. In 1933-40, acts were passed that, taken together with Securities and Exchange Commission Enforcement Acts after 1934, suggest that there was systemic corruption, overselling, overborrowing, and confidence-trickery in the American bond, stock and corporate sector of such a degree that a decade-long depression and crisis of confidence may have resulted. The Securities Act of 1933, the SEC act of 1934, the Public Utilities Holding Act of 1935, The Trust Indenture Act of 1939, The Investment Advisers Act of 1940 and the National Bankruptcy Act all emerged from this process. All suggested that the events of 1929-32 may have been worsened not by the stock market crash per se, but by the corruption that washed money into markets and created a boom in the first place. This boom may have been started by Federal Reserve Policy in 1920-1 in response to the earlier recession, because the Fed encouraged the storage of gold and the build-up of future investment by raising interest rates at a time of deflation. This in turn was worsened by a collapse in demand in the real world, borne of a two-tier Labour market and food price inflation, and then met by regulatory gimmicks such as the first new deal’s Blue Eagle scheme of price controls, or the introduction of various measures to further drain demand whilst strengthening government coffers such as the Social Security Act.
In this light, the Wall Street Crash was a very small symptom of much larger underlying problems, rather than a cause of anything except a natural adjustment to a long boom in itself. The question remains of whether the New deal, which of course was a reaction to subsequent events, used the imagery of the crash in order to perpetuate the idea of a banker’s cabal as the cause, or of whether it allowed the Left to do so.