“* * * reckless inflations of credit—the chief cause of all economic malaise * * *”

Alfred Marshall

“* * * the recent world-wide fall of prices is best described as a monetary phenomenon which has occurred as the result of the monetary system failing to solve successfully a problem of unprecedented difficulty and complexity set it by a conjunction of highly intractable non-monetary phenomena.”

The Macmillan Committee Report

The task that is attempted in this book is a contribution to an understanding of the banking and financial events of the War and post-War period as the underlying causes of the Great Depression in the United States. There were many causes which contributed to this collapse; among others, mention might be made of misguided tariff policy, war debts, monopolistic practices.

In 1921, following the upheaval of prices which accompanied the primary post-War deflation, Professor T. E. Gregory, in writing on the situation then prevailing in the foreign exchanges, was moved to lament that:1

Two events occurred in 1914 that were to have profound influence upon subsequent economic developments in the United States. The first of these was external, the outbreak in Europe of the World War; the second was internal, the formal inauguration of the Federal Reserve System. Both were events propagative of an unprecedented orgy of inflation.

One of the necessary evils of a depression, it would seem, is the crop of erroneous explanations of it. Unfortunately, there is as yet no universally accepted explanation of the cause, or causes, of depression. It is common practice, therefore, for all sorts of persons, whether with or without qualifications, to try their hands at theorizing upon the origins of the depression.

No less plausible and even more widely accepted than the theories which are based upon the shortcomings of the gold standard are those which seek to find the solution of our recurring depressions in alleged overproduction of goods and services, or in underconsumption of the same, or in maldistribution of wealth and income. These are fundamentally similar notions, each being a variant of what is commonly known as the underconsumption theory of cycles.

The banking crisis of March, 1933, marked the end of an epoch in American banking—a strange epoch, more puzzling in all of its ramifications than any previous period in American banking history. The beginning of this epoch dates from the passing of the Federal Reserve Act in 1913, its foundations were laid during the period of War inflation, but its most astonishing chapters were written during the approximate decade 1922-1932.

It has been asserted (Chapter IV) that fluctuations in the rate of creation of fixed capital are the dominant feature of the business cycle. It was also stated that the source of fluctuations in the rate of investment was the elasticity of the banking system, what Hawtrey labels “the inherent instability of credit.” A highly important result of an exceptional increase of investment is the misdirection of capital which characterizes a boom period, the setting of the stage for future depression.

The greater part of the discussion centering upon an analysis of the causes of the depression and the development of a theory of business cycles has up to the present been concerned principally with an analysis of the causes of the boom. Little attention has been devoted as yet to the course and nature of the depression proper, or even to the immediate cause of the onset of depression.

It was suggested in Chapter II how the War-time disruption of orderly economic activity eventuated in the loss of the industrial balance necessary to the smooth functioning of our national economy. The assertion was there made that the root causes of the recent depression go back to the War—that the War may be considered the remote cause of the depression.