The Great Depression – as explained by Supply Side economics

Today I stumbled on a paper that I first encountered a few years ago. I first saw it just prior to publication when a copy was shared with me by the authors father. The book length document expands on prior work from the Supply Side school of economic thought on the causes of the Great Depression. Given recent economic events I thought it was well worth another look and I thought others might also appreciate it. In my view the Supply Side analysis that it expounds still represents the most coherent explanation for the Great Depression.

History Incognito:
The untold origins of the Roaring Twenties, the Crash, and the Great Depression
By Sean P. Breen
Monday, April 10, 2006

This paper offers an answer to three important unanswered questions regarding the economic history of the 1920’s boom, the Crash of 1929 and the subsequent Great Depression. This paper supports its answers by creating new historical databases and subjecting the historical data to rigorous modern statistical analysis.
The three questions are: what caused the boom of the 1920’s, what caused the Crash of 1929 and what caused the ensuing Great Depression of 1930’s? The answer, which is detailed in the following pages, is that the antecedent cause for all three questions was the transformation of the United States into the world’s creditor as a result of World War One. This War and the reversal of the Unite States from a debtor nation to become the world’s only remaining banker, created a fragile world economy that demanded continued U.S. lending to support a level of international commerce that could allow repayment of War debts. The Mellon Treasury was masterful in managing the economic dislocation of the War Years and returning the U.S. economy to growth through a progressive and scientific reform of the U.S. tax structure and U.S. debt markets. This was the ‘cause’ of the 1920’s boom. The restructuring of lower peacetime tax rates and the lowering of tariffs promoted expanding trade with Europe that was essential if the European nations were to recover from the War and perform on the War debts owed to the U.S. Enabled by the Mellon treasury, the U.S. loaned money to Europe to buy U.S. products so that they could earn enough from the commerce to continue to perform on War debt and reparations that were in turn owed to the U.S. These policies were successful until the late 1920’s when declining agricultural prices, driven down by technological productive innovation, raised political temperament for agricultural tariffs. The politics of the agricultural tariff movement blossomed into a general tariff movement as all sectors of the economy sought to share in the political largesse. Unfortunately, the resulting Smoot-Hawley tariff destroyed the precarious basis under which the fragile international financial structure functioned. This was the ‘cause’ that resulted in the Crash of 1929. As international tariffs reduced international commerce the international financial system collapsed and the U.S. stock marked crashed. In reaction to the economic collapse U.S. policy retreated from the paradigm of low taxes and open markets to high taxes and closed markets which prevented recovery and so, ‘caused’ the Great Depression.

11 thoughts on “The Great Depression – as explained by Supply Side economics

  1. Smoot-Hawley was in 1930 though, wasn’t it?

    Also, this fails to take in to account the significant inflation that was occurring in the 1920s.

  2. The simple answer to your first question is yes. However the question makes it clear that you have not read the thesis. It’s a long paper and I’m happy to paraphrase answers if you can be specific about your concern.

    In terms of your second point I’m not sure how this is relevant.

  3. I think I have the same gripes about the literature in general as does the author.

    I think they did very well but of course I was pushing the Austrian view, along with crowding out etc. I am now convinced there was a genuine boom. However, malinvestments can occur at the same time as worthy economic projects. This may have helped to pull the rug from under the carpet so to speak. Sectoral analysis would have also been good. The uncertainty factor of Smoot Hawley, money and fiscal policy also plays into the Austrian theory – no proper economic valuation could be made with so much uncertainty. Sure, there are risk quantifying procedures, but the policy was uncoordinated and the Fed was, as the author puts it, amorphous.

    My take on the paper is that it identifies a global financial system and global trade system where the global trade system got a spanner thrown in it. This affected valuations and therefore financial flows, on top of the millstone of tariffs on the real economy.

    I like this thesis.

    I would still however back the idea of war financing through inflation as a major problem for the 1920s economy.

    Furthermore, I think it is important to view the short run effects of monetary policy with fixed or sticky prices. A central bank and a fixed rate seem like a very volatile mix. The impact on slowly or never adjusting prices with rapid changes in money market liquidity can have large and serious impacts elsewhere.

  4. Terje – also note the dynamics of bank asset liability management we have seen again in the 1980s and now. On top of falling real GDP and rising unemployment, an inflationary environment can make asset-liability management very difficult to get on top of. This is a major cause of the Savings & Loans crisis (on top of continuing bailouts and moral hazard problems).

  5. The changes in quality and quantity of money and credit are sufficient as a root cause driver to account for major mis-pricing, mis-allocation and Mal-investment. We still have the idiotic ant-realist Keynesian conception of money, credit, capital and prices.

    We need better quality money and credit but the jerks feel that they have to do the opposite. They busily try making band aids(more review mirror inspired regulations) to put on a cancer (bad money/lawless lack of property and contract) that they keep feeding.

  6. I think the first step to a solution is capitalizing on the general populist resentment building against the Goldman Sach’s and bankster bailouts.

    It needs also to be pointed out that our emerging elite ruling carbon priest class of UN cronies, Al Gores, Rothchilds and Rockefellers are one and the same.

    Once the majority fully psychologically buy into the mentality of serving the earth via the elite it’s game over dark ages time.

  7. I still haven’t read it all, its quite detailed and brings up some points I have never seen raised before. Of what I have read so far I recommend it. However I do not like they way it attributes its sources, some of the claims seems questionable and its not easy to track them down.

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