What Actually Caused The Great Depression

Most people continuously blame Calvin Coolidge's laissez-faire policies for the Great Depression. Those who do not are usually "Reagan" Republicans who follow Coolidge simply because Reagan did, without reading much of a word beyond that, causing unnecessary bias to spread. However, the people who do blame Coolidge’s policies are biased, too - and incorrect. “If Calvin Coolidge didn’t start the Great Depression, who did?”

Primarily, the combined forces of the misuse and overuse of credit and speculation in the stock market. During the 1920s, America saw a dramatic increase in the economy, as well as in the standard of living. Everyone wanted to enjoy all the newest and most popular goods - in part due to the rise of celebrity in popular culture, as well as the automations and inventions that were popularized in the decade - such as the radio and an increase in popularity of the automobile, among other things. You add the creation of the advertisement business on top of that, and you get a surge of consumerism previously unseen. Calvin Coolidge and his administration, primarily Andrew Mellon, helped increase business performance with supply-side economic theories. By cutting taxes on the rich, the average wage increased for everyone, both skilled and unskilled workers of both genders.

And it wasn't just the rich Coolidge focused on cutting taxes for, but everyone, as he firmly believed that he wanted "taxes to be less, that the people may have more."

Not only would the people have more from lessened taxes and increased wages, but more people could actually enjoy the prosperity, as unemployment went down as well.

However, Coolidge's lessened taxes sadly didn't stop people from purchasing stocks and goods with credit or on margin, a brand new way to purchase those stocks and goods where a down payment would be made, usually with cash to ensure some true profit, and the rest on credit to be paid back over time. Sadly, many people were consumed by consumerism and ignored the fact that credit is debt, which would eventually build up to the point where an economic recession would brutally hurt anyone with that much debt on them, causing the Great Depression to be a lot worse than it should have been, as well as helping it come about in the first place. It's also not as if Coolidge didn't see the evil of credit, as he emphasized and encouraged thrift in these times of prosperity, even stating in his autobiography, “I contended that the only sure method of relieving [The Depression of 1920-21] was for the country to follow the advice of Benjamin Franklin and begin to work and save. Our productive capacity is sufficient to maintain us all in a state of prosperity if we give sufficient attention to thrift and industry” (152). However, Coolidge was one of the largest supporters of limited government, thus he didn’t think he could force men to stop behaving like men, despite his stance on thrift. Similarly, speculation, which creates a “bubble,” was a major cause of the Great Depression. Speculation is stock picking and market timing to attempt to "beat the market" for an abnormal gain of wealth. A good example today may be buying Pepsi stocks around the Super Bowl or buying stocks of a specific company either because it's been doing extremely well, or because it just took a big hit, expecting it to only be able to go back up. This doesn't always work, and there can be huge consequences when it doesn’t. Most recently, the housing crash in the Great Recession around 2009 was caused by speculation in the housing market. In the 1920s, people were buying stocks just to buy them because of how much business was booming, and it's not too much of an exaggeration to say that everyone was trying to make some dough that way. This market timing in order to try and get a large secondary income is easily speculation and none of Coolidge's responsibility or doing, and it surely wasn't helped by buying stocks on margin, the opposite of the thrift Coolidge preached. In November of 1929, soon after Herbert Hoover became president, the speculation in the stock market finally took a turn for the worse, causing the stock market to crash. Some economists compare speculation to a bubble, with the crash being the bubble popping. "But Coolidge could have done something to stop it."

The truth is, Warren G. Harding and Calvin Coolidge did stop it with their laissez-faire policies. There was a massive recession in 1920-21, as you may have been able to tell from the earlier charts and graphs. However, it ended by the time 1922 came around, only the second year Harding was able to institute his "normalcy" and laissez-faire policies, enough time for them to truly take effect. And it worked. 1922-29 were very prosperous years, and it only increased in prosperity when Coolidge took the reigns in 1923. What was that recession caused by? Needless wartime spending and the creation of the Federal Reserve. However, the Great Depression could have been prevented if the Federal Reserve set interest rates higher, making borrowing credit seem less exciting and investing money in banks more so. However, the overuse of credit would be much less of a problem altogether if Wilson hadn't created the central bank, effectively socializing the banking system. Private banks would have been less likely to even grant credit because of personal business interests and uncertainty it would ever make that money back. "Laissez-faire policies made it possible for increased credit expenditure and speculation."

Actually, the lack of the Federal Reserve would be true laissez-faire. Again, without it, credit would be a lot less less easy to come by, encouraging thrift even more directly than what Coolidge was doing. If anything, he should have abolished the Federal Reserve, especially if he could foresee the near future. And again, laissez-faire policies ended the recession of the early 20s and helped prevent the Great Depression from happening a decade earlier. Speculation would have happened anywhere besides total socialism or communism, evidenced by the USSR’s absence of the Great Depression. "Is there anything else to blame for the Great Depression?"

Yes, there is something else to blame. After WWI, we kind of set up a money merry-go-round with Europe. Since the Allied countries of France and Britain still owed us large sums of money and Germany owed them money, Germany had to get back on its feet so they could pay the Allies, allowing them to pay us. We put money into Germany to help rebuild its economy, which ultimately didn't work. As an effect, Europe's economy became very much connected with ours, sending them into the Great Depression with us. This helped lead to the rise of Adolf Hitler, who promised to help change Germany for the better. The changes admittedly worked economically. Actually, the U.S. never really getting paid for their WWI investments was just another series of speculations which helped lead to the Great Depression. Thus, the laissez-faire policies of Coolidge actually helped end a recession and prevent the Great Depression from starting much earlier than it did. Instead, most of the blame falls upon the shoulders of the individual for over-reliance on credit and speculation in multiple investments. The Federal Reserve effectively socialized the banking industry and helped lead to the increase in credit usage. Both credit and speculation would have happened in progressive and Keynesian systems regardless, and the Federal Reserve was a product of progressivism, furthering the point that progressives were more at blame for the Great Depression than anyone else.

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Sources

1. Smiley, Gene. “The U.S. Economy in the 1920s.” EHnet, Economic History Association, eh.net/encyclopedia/the-u-s-economy-in-the-1920s/. Accessed 3 Sept. 2017.

2. Coolidge, John Calvin. The Autobiography of Calvin Coolidge. Chatsworth, CA, National Notary Association, 2006.

3. “What is the difference between investing and speculating?” Investopedia, 1 Sept. 2017, www.investopedia.com/ask/answers/09/difference-between-investing-speculating.asp. Accessed 3 Sept. 2017.

The tables and graph belong to Source 1, the quote from Coolidge’s autobiography is from Source 2, the definition used for speculation is paraphrased from Source 3, all other evidence is supplied from prior knowledge.

If you have any questions, e-mail me at nimrodcreed@gmail.com.