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Calvin Coolidge and the Great Depression

Image Credit: Wikimedia Commons via the Library of Congress

Image Credit: Wikimedia Commons via the Library of Congress

In a Bloomberg column, my friend Amity Shlaes ably defends Calvin Coolidge, the subject of her new biography, from the charge of having caused the Great Depression:

 … can one assign Coolidge any blame for the Great Depression? Some, especially when it came to tariffs, which Coolidge’s Republican Party supported. But the greater culprits are Coolidge’s successors, Hoover, a more progressive Republican, and Democrat Franklin D. Roosevelt. Hoover raised taxes, signed the Smoot-Hawley Tariff Act and strong-armed businesses into wage increases they could ill afford. In addition, Hoover sent a general signal of government activism, which chilled markets. Roosevelt exacerbated the uncertainty with arbitrary interventions into policy in all areas.

To her credit, she does acknowledge earlier in the piece the work of Milton Friedman and Anna Schwartz whose “A Monetary History of the United States, 1867-1960” put the blame squarely on monetary policy. Here’s a nice summary of the familiar story from Uncle Miltie himself:

What you had was that in 1929 the United States was in a boom. It hit a relative high point. And the stock market crashed in October 1929. But that was not the cause of what caused the Great Depression. It was, in my opinion, a very minor element of it. What happened was that from 1929 to 1933 you had a major contraction which, in my opinion, was caused primarily by the failure of the Federal Reserve System, to follow the course of action for which it was set up. It was set up to prevent exactly what happened from 1929 to 1933. But instead of preventing it, they facilitated it. The Depression, I may say, which started in 1929 was rather mild from 1929 to 1930. And, indeed, in my opinion would have been over in 1931 at the latest had it not been that the Federal Reserve followed a policy which led to bank failures, widespread bank failures, and led to a reduction in the quantity of money.

The Fed was the greatest culprit behind what Friedman and Schwartz called the Great Contraction just as Fed errors in 2008 created the Lesser Contraction, or Great Recession. But I am afraid readers will more likely draw the incomplete conclusion that the problems plaguing the US economy today are strictly fiscal and psychological rather than also monetary. Certainty most of Washington seems unaware of this.

6 thoughts on “Calvin Coolidge and the Great Depression

  1. The Crash of ’29 was caused by the Federal Reserve almost doubling the money supply, making everybody think it was Christmas so they spent, spent, spent, which drove stocks so high that people risked RISKY INVESTMENTS tied to Margin Calls. Well, when the Banksters figured it was time, the made the margin calls, which required the selling of stocks, and the Elites would not buy the stocks and nobody was buying, so they plummeted. Then when at rock bottom, the Wall Street predators/banksters/elites bought stocks back for pennies on the dollar, exacerbating the difference between Rulers and peasants.

  2. The Fed did not recognize in 2008 how far real estate could fall. It had much company in that regard. http://money.usnews.com/money/blogs/capital-commerce/2008/06/09/why-the-economy-is-better-than-you-think
    But to say that the Fed did it is like blaming Mrs. O’Leary’s cow — true perhaps but not the reason we remember the Chicago Fire.

    Friedman himself abandoned M2 as a reliable indicator. How fast money turns over is as important as how much is out there. Velocity introduces the fiscal, specifically the embattled state of household balance sheets, and perhaps soon the psychological, or why I hoard dollars.

  3. The Fed was the greatest culprit behind what Friedman and Schwartz called the Great Contraction just as Fed errors in 2008 created the Lesser Contraction, or Great Recession. But I am afraid readers will more likely draw the incomplete conclusion that the problems plaguing the US economy today are strictly fiscal and psychological rather than also monetary. Certainty most of Washington seems unaware of this.

    Somehow Friedman and Schwartz forgot to account for the massive increase in credit that the Fed was responsible for in the latter part of the the 1920s. The Fed created a massive bubble that burst. The solution was not inflating as Jimmy suggests but doing what Harding did when he inherited a collapsing economy; cut taxes and cut spending. Let the markets liquidate the bad investments and let those that are capable of deploying resources most effectively take over the failed investments as those that were not efficient are allowed to fail.

  4. Somehow Vangel misses the easy pickings in the post WWI budget cuts by Harding and the focus of those savings (defense.) Happily Harding was no longer among us when WWII raised the issue of readiness.

    • Somehow Vangel misses the easy pickings in the post WWI budget cuts by Harding and the focus of those savings (defense.) Happily Harding was no longer among us when WWII raised the issue of readiness.

      There are easy pickings now. The US spends more than the next 40 countries combined and its taxpayers pay for the defence of Japan, Germany, Korea, and a great deal of the EU. Why should they? Who is your big enemy that will invade the country? And why would they spend $1.5 trillion on a new plane that does not perform as well as the one that it replaces? Why spend $2 billion on a bomber that does not fly very well and is vulnerable to attack? Why have military related activities consume around $1 trillion a year, which is about $0.70 out of every dollar of tax revenue from individual taxpayers?

      No, what the country needs is a man who has the convictions and courage of Harding. A man who does what is right and what should be done rather than what is popular and will get him reelected.

  5. History seems to show in the US economy that most booms end badly.Maybe due to the fact the booms are built on weak or false prosperity.Debt,over extended credit,spending beyond ones wealth can only take an economy so far before the bill comes due.

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