Great Depression Not Caused by “the Unequal Distribution of Wealth”

By editor, 22 October, 2010, No Comment

Question: Was the Depression caused by “the unequal distribution of wealth” combined with unregulated business practices?

What do the textbooks say? Created Equal (Prentice Hall, 3rd ed.) fails to mention any government complicity in causing the Depression, pointing solely at irresponsible stock purchasers (before mentioning that the 2008 crash was “similar” in that “irresponsible, unregulated business practices led to an economic catastrophe.”)  The unequal distribution of wealth, though not mentioned as a cause of the crash, was nevertheless revealed by it, according to the text, and “national leaders promoted business interests and paid little attention to social welfare, the environment, or the need to regulate the economy” (p.507-8). America: Pathways to the Present (Pearson Prentice Hall, 2007) blames “inflated stock prices” and the Stock Market Crash of 1929–plus the “uneven economy of the 1920s” (i.e. the unequal distribution of wealth). American Anthem (Holt, 2007) underscores “the poor distribution of wealth,” irresponsible stock market investment practices, and the Fed’s policy of encouraging margin buying. America Past and Present (Longman, 9th ed.) points to, among other things, the Federal Reserve’s lowering of the discount rate, charging banks less for loans in an attempt to stimulate the economy–a move that simply led to malinvestment (mostly in the stock market)…before explaining that the “economic system” of the time “had failed to distribute wealth more broadly.”

Answer: Many economists would reply with a wholehearted “no,” at least in response to the first part of this question.  Richard Maybury asserts that the Depression was caused by the Federal Reserve’s inflation of the money supply during the 1920s, which spurred “massive amounts of malinvestment.”  But the “unequal distribution of wealth” had nothing to do with bringing on the Depression.

After the stock market crash of 1929, the economy was in bad shape, for sure.  ”But it was only in 1931,” as economist Thomas Woods, Jr. points out, “after a year of government intervention, that the situation seriously deteriorated.”  Hoover implored business leaders to pay higher wages, and big business, for the most part, honored that request.  ”The result,” as Woods explains, “was sadly predictable: mass unemployment.” Hoover intervened heavily in the realm of agriculture, spent huge amounts on public-works projects, and increased taxes and tariff rates.  All of this intervention led to a worsening of the economic situation; FDR would pick up where Hoover left off, stalling a recovery until the end of World War II. These actions, combined with the primary role of the central bank (the Fed), were the real culprits behind the Great Depression.

The government’s primary role (in league with the cartel of banking institutions it sponsors) in causing the Depression is thus often obscured or completely omitted from the textbooks–though its supposed role in ending the Depression (another highly disputed assertion) is, not surprisingly, underscored by the same textbooks.

What “social welfare” or “the environment” could have had to do with causing the Great Depression remains unexplained…

For further reading, see Richard Maybury, Evaluating Books: What would Thomas Jefferson Think About This? (Bluestocking Press, 2004), especially Chapter 1 (called “Issue #1: The Great Depression”); Robert Murphy, The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009); and Murray Rothbard, America’s Great Depression (Ludwig von Mises Institute, 2000).

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