The Stock Market Crash didn't cause the Great Depression

By Mike Pukmel

 Contrary to popular belief, the stock market crash actually had nothing to do with the Great Depression of 1930.  Neither did people pulling cash out of their bank accounts.   Nor did the Smoot Hawley tariff act, have any affect. 

The great depression had only one cause: the Federal Reserve governors decreased the amount of available credit, by the means they had available, and they kept reducing the money supply it until the economy broke.   Once the economy collapsed below a certain point, the Federal Reserve began to increase the money supply, but at that point, both lenders and borrowers were unwilling to engage.  It didn't just happen, it was caused.

Recall that at that time, the stock market was not every man and woman's retirement and investment vehicle.  The stock market was controlled by a very small group compared to today.   Most companies didn't rely on constantly issuing new stock to fund day to day operations, and growth.  That was, as it is today, done by bonds, and what became commercial paper. 

The Federal Reserve timed the sharp contraction of the money supply with the stock market crash.  In those days, most traders relied heavily on margin money.   Someone picked up the phone, no one knows who, called the exchanges, and called in the margin money.  That was *the* cause of the crash. 

Many educated and well read people assumed that the stock market crash caused the depression.  It did no such thing.    It could not have.  The stock market could not decrease credit.  It surely decreased value of investments, but those were not used to fund day to day operations of business, and expansion.

The point is, it's not at all that the money supply decreased by market means.   It was intentional actions of the Federal Reserve that caused the contraction.    The contraction of the money supply caused the depression, and caused the ensuing deflation. 

There are, at least currently, no comparison with today's events to those of the 1930's.   What is most disconcerting is the true reason for the Federal Reserve discontinuing publishing of M3 numbers.   See the article Goodbye M3 .   What is more interesting is that, since about the beginning of 2008, the rate of increase of M3 has changed direction.    I.e., M3 was growing at about 17% annually, a cusp appeared on the graph early in 2008, and it began a sharp decline in the rate of increase, and has continued throughout most of the year  See M3 is Back- (Sort Of)  and Predicting Deflation.

What is most interesting is why the decrease in the rate of increase in M3, what are the root causes, and why is no one talking about this very significant event!    Clearly, the only possible cause is that the Federal Reserve is decreasing the rate of increase of the money supply.    It is, as of today anyway, far from zero, but approaching rapidly.   If the rate of decrease continues at its current pace, the money supply will begin to actually contract in about 1 year, sometime late in 2009.    We could see some interesting events occur in the United States around mid 2009 if the current trend is continued by the Federal Reserve.
 

Reduce Risk to Supercharge Your Stock Investments

Is Your Retirement Portfolio being Eaten by a Tyrannosaurus Rex?

Keep up with the latest Trends and Inflation information
Subscribe to our FREE 
 Monthly E-zine "E-Trends" 
And You will receive a Free copy of
"15 Ways to Beat 95% of Investors"