Causes of the depression of 1929

 Hey, I'm sure you guys see this topic all the time, so I will apologize in advance.  I am in my Junior year of High-School.  I have to write an 8-10 page research paper in my history class about any topic in history.  (This paper will ensure that get college credit for the course)  I chose the Great Depression.  I am taking a free-market perspective.  When I told my history teacher this i got the usual leftist response of, "That is a very radical stance."  I know it will be very hard to convince him that government is not the answer.  This brings me to my question.  I am using Rothbard's America's Great Depression but I have not read all of it.  Can anyone help me as to why the Fed started inflating the money as such a rapid rate in 1921? Also, i know that capital goods were hit the hardest during the depression becasue of the wasteful malinvestment in them.  However, what was causing people to invest their money in unsound captial goods?

Any help would be greatly appreciated.

thanks

 edit

I have until April 11th to turn in my paper, so if anybody has any ideas as to different books to read that may help answer my questions, I still have time to do so. 

I would definitely point out, early on in the paper, that the victors of history tend to write it, and that this usually ends up skewing many events that have occurred.  The Great Depression is no exception; nay, it might be the poster-child for such revisionism and white-washing.  Worse, still, it's being taught in government schools without any radically different views being applied.  If your lucky, he may agree with you concerning going back to a gold backed dollar, but I doubt he'll relent unless you give a through analysis.  Even so, I doubt he'll abandon his views of central banking.

As for your question, I would point out that what they were investing in isn't so much as important as the fact that a recession occurs naturally as a result of unsound investments.  A recession is an  important part of a cycle that allows for people to re-analyze their investments & strategies, which leads to corrections, which leads to the market correcting itself and life goes on.  I would point also dig up examples of 'scares' that happened in the past that would've been on par with the great depression if there were no Federal Reserve established about 17 years before the great depression hit. 

However, I'm just really kind of dipping my toe into the economic waters; I'm sure someone else could give a better explanation and/or a more correct explanation. 

I would however, mention this site and/or use it for research: http://www.dailyreckoning.com/index.html, as it gives fairly detailed info.  It might seem like a more official source to your teacher as well, which sadly, might matter more instead of correct logic. 

I would also, since you're dealing with a Leftist, try to use more emotional arguments for the consequences of central banking, verses laissez fare.  I remember doing that a few times myself in one of my history classes in discussions, and while my economics knowledge was vague, I still got a pretty good response from my professor for being able to question the common conceptions of central banking, despite herself admiting she was a progressive.

Also, I would recommend reading anything on the recommended reading list concerning economics;  I myself have been skimming through De Soto's Money, Bank Credit, and Economic Cycles (http://www.mises.org/books/desoto.pdf), as of late.

 Nitro, thanks for the help.  I am also not very learned in economics, relatively speaking.  (I have a only a macro and half of a micro course under my belt thus far, however I am hoping to get more.).  I will definetly take your advice on De Soto's work.

 During the 1920's the root cause for the mal investments was monetary policy.  To stimulate the economy, the Fed believed by controlling the interest rates they could control the emotions and actions of the market place.  Loose credit and bad fundamentals created mal investment.  Because the main stream follows the policies of Keynesian economics, the Fed believed they could avoid a recession or any contraction of the market by intervening and increasing the money supply.  The consequences of these actions was the root cause of the Great Depression.  Ludwig von Mises summed up the situation perfectly when he stated, "There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."  In the situation of the Great Depression, the crisis came as result of the abandoment of further credit expansion.  When lenders don't want to lend and borrowers don't want to borrow, deflation occurs as a result.

I would recommend reading The Causes of the Economic Crisis by Ludwig von Mises.  Although it is a difficult read, he provides a great deal of knowledge.

I think Rothbard has written a book about it - if you look around this website you'll probably find it in PDF.

Sorry, I didn't realize you've already read that :)

BTW do you happen to know why did the Great Depression cause a deflation in America and a hyperinflation in Germany? This is what I'm trying to figure out as I don't know whether to expect deflation or hyperinflation here in the UK. If hyperinflation, I'll invest in gold. If deflation, I should just hold cash.

 Gold is win situation in both cases of hyperinflation and deflation.  If we face hyperinflation, commodities/metals/energy and basically anything that is tangible will be the best places to put your money.  If we face a deflationary depression, cash/gold/gold stocks are the best places to park your wealth.  During the Great Depression, gold and gold stocks along with cash increased in value.  Hope that helped you out a little bit. I'm no expert on finance and economics but I do read a lot.

Thanks Jon. But I don't understand why does gold win in a deflationary environment. If the purchasing power of fiat money goes UP, doesn't it mean it goes up against gold too?

You'll have to read any explanation here, so perhaps you should continue reading http://www.mises.org/rothbard/agd as well.

You might note that there was a big money push out of NYC Fed Res by banker Strong as part of trying to strengthen the British pound (along with the standard govt/fed increase of money stateside).


Googled "depression 1929" @ misis.org:

Prelude to Depression: Mr. Hoover and Laissez-Faire
[31] The success of this battle made it much easier later on to persuade business men to go along with his labor policies during the 1929 depression. ...
http://www.mises.org/rothbard/agd/chapter7.asp

Deflation and Depression: Where's the Link? - Joseph T. Salerno ...
... the years of the Great Depression (1929–1933) and the depression of 1921–22 ... The study also finds that the relation between deflation and depression ...
http://www.mises.org/story/1583

Friedman for Government Intervention: The Case of the Great ...
Jan 23, 2007 ... Despite the fact that the great Chicago economist proposed essentially a statist solution to the depression of 1929–33, the economic ...
http://www.mises.org/story/2442

Did Capitalism Cause the Great Depression? - Murray N. Rothbard ...
Lionel Robbins's The Great Depression (Macmillan, 1934) is one of the great .... Causes of the depression of 1929 4/4/2008 6:11:38 AM by mr_anonymous ...
http://www.mises.org/story/2845

 Gold has been in existence since the beginning of civilization.  It has been a safe haven for many during times of crisis.  Not only does it hold value and preserve wealth but it gives assurance to many during tough times.  During the Great Depression, many lost faith in the system and ran to gold for security and safety.  I hope I helped answer your question. 

Times like we are facing right now are perfect reasons to own gold.  In my honest opinion, I think we are going to face a hyperinflationary depression.  Unless the Federal Reserve shows signs of contracting credit and the money supply, I think we will continue to face an inflationary environment.

 Thank you everybody for the information.  I turned my paper in yesterday.

How'd it go?

Besides the Fed, there was the tariff that was passed at the end of the Hoover administration. While this may not have been a direct cause of the depression, it certainly prolonged it as the impact that it had on farmers was devastating.

As a result, we were hung with the socialist policies of farm subsidies that we have today.

It was a perfect storm of sorts. The money bubble that started the reckless speculation, the tarrifs that restricted trade and subsequent fall in farm prices, and the resulting government regulations that prolonged the economic corrections.

It's a great example of government creating a problem, and then creating more problems trying to fix the one(s) the they created.

I wish I had gotten in on this thread early enough to contribute these Ideas for your paper. Sorry.

Incidentally, tariffs had a lot to do with causing the divide between the north and the south which lead to the "War to end succession" (The Civil War).

 I got my paper back a couple days ago and I got an A on it, which was very suprising.  He said that I argued the points well even though he did not agree with it.  He also threw in some ignorance about how he didnt know how credible the Austrian School and the Mises Institute are, but whatever.  He is the one who is wrong, not me ; ) 

Thanks a lot for the help everybody!

It's too late, since your paper is done (congrats on the A), but for the record I wanted to throw out two points:

1.  The stage for the Great Depression was set by money expansion, but we should recall the circumstances.  In any war, the first thing to go is the gold standard, as it limits the amount of munitions the government can produce (confiscate).  In WWI, all the European nations went off the gold standard, while the US remained on it.  This set up a solid flow of gold from EU to US, in exchange for munitions.  By 1920, the US had almost all the gold in the world, while the EU nations suffered from hyperinflation.  After the war, the EU nations went back to the gold standard BUT AT THE PRE-WAR RATE OF EXCHANGE -- a tremendous mistake that Mises warned them against.  Because of the preceding 10 years of inflation, the price structure was tremendously altered, and going back to gold at the pre-war parities put incredible deflationary pressure the currencies that did so (i.e. since they set the price of money too low, all other prices had to adjust downwards).  However, unions fought to keep the wage where it was (i.e. too high given the deflation), resulting in mass unemployment.  The fact that the US had all the gold also gave them an opportunity to set up the dollar as the center of the world's monetary system (EU central banks wanted to buy gold back, we refused and sent them dollars instead), resulting in the twisted fiat currencies we currently live with.

2.  The importance of the Smoot-Hawley Tariff Bill of 1930 (passed in 1929) cannot be overstated.  Jude Wanniski's The Way the World Works provides a daily timeline of the passage of the bill compared to the stock market, and it matches up perfectly.  The malinvestment blew up the bubble, but the SHT was the pin that popped it.

 How did the US inflate the supply of money by 60% during the 20's if it was on a gold standard?