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The 1929 Stock Market Crash: The FED did nothing and Gold Came up Short

By Patrick Eaton

For economists and businessmen, financiers and historians, a great debate continues into contemporary times well beyond that sad and tough period known as the great depression. Life saving vanished in a period of flash sell offs and ‘Black Tuesday’ ushered in a period that would see the United States suffer its darkest economic chapter from 1929 until the late 1930’s.

The great debate as to the cause of the stock market crash is classic in its form: one group of thinkers believes it was monetary policy (monetarist) while the other group thinks it was demand driven (Keynesian). And of course, a third way (heterodox) has emerged. The heterodox argument is the quintessential catch-all; all the outside arguments that either disagree with the monetarist or Keynesian models.

     The New York Stock Exchange Weeks Before the 1929 Collapse.[1]

What all thinking agrees upon is the U.S. stock market experienced a series of shocks, a great sell off occurred, hundreds of thousands of people lost millions and demand evaporated driving prices up.

In A Monetary History of the United States, 1867-1960, by Friedman and Shwartz submit that “The main point of A Monetary History is that ‘money matters’: The quantity of money is an independent and controllable force that strongly influences the economy.”[2]

What historians and economists know is that the 1929 Stock Market Crash was followed by a recession that devolved into a depression. “Notably, an apparent attempt at recovery from the 1929-30 recession was stalled at the time of the first banking crisis (November-December 1930); the incipient recovery degenerated into a new slump during the mid-1931 panics; and the economy and the financial system both reached their respective low points at the time of the bank " holiday" of March 1933.”[3]

The ham-fisted attempts at recovery only prolonged the inevitable as a more insidious fact remained: there just wasn’t enough money, actual printed monetary notes in existence to satisfy the bankers. And the banks went solvent as panic set in from 1929 into 1930.

Economists from past and present don’t agree as to the exact cause of the stock market crash. Many do agree that a series of shocks were experienced in 1929 leading up to the crash and subsequent monetary contractions across the banking industry. In the aftermath of the Great Depression an immediate argument was associated with gold.

     The Great Depression Images: Drought Family from Macalister, Oklahoma. 1936[4]

As early as the 1940’s arguments were immediately linked to the international Gold standard. The Post-World War I years saw several deflation take hold. And countries that remained tied to gold experienced a longer and far more significant depression. But when did the depression begin?

“The Great Depression is typically thought to have started in August 1929, when industrial production in the United States began to fall, or in October, the month of the Wall Street crash," Barry Eichengreen writes.”[5]

But recent analysis suggests that the pre-World War I gold standard and its termination during the Great War, influenced the post-war activities. A decline had already begun in early 1927 from Brazil to the Netherlands East Indies, Argentina and of course, Germany.  Perhaps most alarmingly, in the period leading up to the crash of ’29 were Banks. “Central banks hesitated to expand money in a world of deflation and overvalued exchange rates for fear of depleting their gold reserves.”[6]

    Waiting for Relief Checks. 1937. [7]

One of the single most important observations of the attempts at recovery or more specifically, the lack of action is the Federal Reserve in the period leading up to the Great Depression.  “It is now rather widely accepted that Federal Reserve policy turned contractionary in 1928, in an attempt to curb stock market speculation.”[8]

The establishment of the Federal Reserve, in 1913, was supposed to assist with issues such as runs on currency, banking ratio’s to held gold, U.S. monetary base to reserves, and managing convertability of funds.

The Stock Market Crash was due to a series of shocks for sure. Additionally, issues arose with respect to monetary situations ie cash on hand, gold, and massive withdrawals with a paucity of cash to back those transactions. But the Great Depression, so often associated with the 1929 collapse of the stock market is a dishonest statement. “The Fed is tasked to provide liquidity to America’s financial system” and in the years immediately after the collapse, the Federal Reserve “shockingly engaged in deflationary monetary policy that reduced the nation’s cash supply by nearly one-third, according to Nobel Prize-winning economist Milton Friedman).”[9]

What could have been a short recession devolved into a massive depression the likes the world had never seen. And the FED should have increased the dollars in circulation rather than decreasing those dollars (by a third!)[10]. Instead, the Great Depression was experienced and didn’t really end until the massive spending of the Second World War changed everything in 1941.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


[1] Museum of the City of New York, New York Stock Exchange, Irving Underhill (-1960), Accession number X2010.29.216, Unique identifier M2Y9985, Description: Sept 29, 1929. https://collections.mcny.org/C.aspx?VP3=SearchResult&VBID=24UAYWLXPPAAU&SMLS=1&RW=1440&RH=679.

[2] Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. (Princeton: Princeton University Press (for the National Bureau of Economic Research), 1963), Reviewed by Hugh Rockoff, Department of Economics, Rutgers University. rockoff@econ.rutgers.edu.

[3] Bernanke, Ben, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” The American Economic Review, Jun., 1983, Vol. 73, No. 3 (Jun., 1983), pp. 257- 276 Published by: American Economic Association Stable URL: https://www.jstor.org/stable/1808111.

[4] Lange, Dorothea, photographer. Drought refugee family from McAlester, Oklahoma. Arrived in California October to join the cotton harvest. Near Tulare, California. United States Tulare Tulare County California, 1936. Nov. Photograph. https://www.loc.gov/item/2017763220/.

[5] Mazumder, Sandeep, And John H. Wood. “The Cause of the Great Depression: The Decision to Resume the Gold Standard on Prewar Terms.” Independent Review 26, no. 1 (Summer 2021): 133–51.

[6] Ibid.

[7] Lange, Dorothea, photographer. Waiting for relief checks. Calipatria, California. Imperial County United States California Calipatria, 1937. Mar. Photograph. https://www.loc.gov/item/2017769793/.

[8] Bernanke, Ben, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” The American Economic Review, Jun., 1983, Vol. 73, No. 3 (Jun., 1983), pp. 257- 276 Published by: American Economic Association Stable URL: https://www.jstor.org/stable/1808111.

[9] Dumont, Marvin, “Federal Reserve: The Real Cause Of 1930s Great Depression,” Apollo Fintech, Dec 27, 2018,

https://apollofintech.medium.com/federal-reserve-the-real-cause-of-1930s-great-depression-part-1-164eb3ab18ab.

[10] Ibid.

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