cause of the great depression

In my WW2 class, the newest party line is that the Great Depression was caused, or at least started, by the failure of some obscure Austrian (g’day mate! :))bank. Unfortunately, the text gives no further info, and if you have been to the univ. to which I am referring, you know that the best way to be dubbed an idiot is to ask a question!
Does anyone have info on this bank failure and it’s ties to the GD?

Er, Austrian, or Australian?


Well, whatever Austrian/Australian bank collapsed may have been the straw that broke the camel’s back, but it’s certainly not as if had the bank not failed, the GD would never have occured.

Huh? Never heard this before. Go to office hours and ask. If the professor thinks you are an idiot, then you are one up on him/her.

When I was in school we were taught that it was allowing the purchase of equities on margins of up to 90 percent, which was itself cheated on, an overproduction of goods and inadequate reserves in the banks, which were then run (everybody taking their money out). At the time the blame was placed squarely on stock market “speculators” who unreasonably drove up the prices.

DPWhite is closer to the real story, but if you must look at a particular bank failure please look up “Bank of the United States.”
This was a small New York City bank with a heck of a name!
When it failed early on it started a seed of fear that took a lot of other banks with it.

If you just search for “Bank of the United States” you may end up with pages of Federal Reserve information. Here’s something that can start you off. Hope it helps.

In A Monetary History of the United States, 1867-1960 (1963), Milton Friedman and Anna Schwartz attributed much of the depression’s severity to four banking crises, or panics. They argued that the crisis of late 1930 and early 1931, in particular, converted a mild recession into a major depression as “a contagion of fear” initiated by crop failures swept the country. Friedman and Schwartz reported the significant increase in the failure rate (761 banks during November 1930 to January 1931, compared with 744 during the first ten months of 1930),** led by New York City’s Bank of the United States**, then the largest failure in American history (pp. 308-311).

The great depression started with the failure of an AUSTRIAN Bank (the CREDITANSTALT). The failure of this bank sent German investors to their own banks, which started “runs” on all major european banks. The bad news spread to New York, and the weaker banks stated folding. Ironically, has the Federal reserve intervened (and made easy credit available to the banks), the Depression would never have started. Economists back then were worried about inflation-and what we got was deflation and depression!

Note that the Creditanstalt collapse happened in 1931, two years after the US stock market crashed. So what we think of as the Great Depression was already under way by then.

As Doug Bowe/Friedman & Schwartz point out, you can argue that the Creditanstalt collapse (and the B.U.S. collapse that happened in its wake) is what transformed a more-or-less ordinary financial crisis/recession into a decade-long Great Depression.

But there’s a lot more to the story than that–
the various struggles of European nations to return to the Gold Standard after W.W. I, the Dust Bowl, the Fed’s excessive fear of inflation, boneheaded laws like the Hawly-Smoot tariff etc. We also know from recent experience that stock market crashes (the 80s) or international banking crises (“Asian flu”) are not enough to cause such a huge economic meltdown by themselves.

So what caused the Great Depression? The only accurate answer is, “It’s complicated.” :slight_smile:

I knew the wunderkinds would have the answer for me! Thank you, one and all!
Also, for Duck Duck Goose, the G’day mate thing was a steal from the movie Dumb and Dumber! Austrian! The wumpus and buddy 1 answers were those for which i was searching. thanks again!

Blah, blah, blah.

The GD was caused by World War I. Ravage most of the economies in Europe four years straight, and eventually it comes back to bite you in the ass.

Since the OP seems happy with his answers, I’ve got a hijacky here:

The story goes that Calvin Cooledge washed his hands of the iffy Stock Market practices of the 1920’s when he was informed that oversight of such things was the responsibility of NY State, not the federal government. Frankly, that sounds pretty reasonable to me.

So what the heck was NYS Governor Franklin D. Roosevelt doing to keep the Stock Market from crashing while he was in office? He’s regarded as one our best presidents because of his performance during the GD. But maybe if he was a little more prudent as governor our parents/grandparents might have been spared a lot of heartache.


Well I don’t know how WW1 can be seen as the sole cause of the GD. Just to add some blah blah blah to what Wumpus and buddy1 supplied–
In the US, the 20s were boom times, with, granted pockets of poverty especially among farmers in the South and West. There were efforts to try dealing with the German reparations problem and repayment of wartime debts to “l’oncle shylock” (as a French minister referred to the US) who refused to let the Allies’ debts go (they did after all, spend the loans stateside on supplies and munitions). Then, there was Hoover’s moratorium and then FDR pretty much let the whole thing go when all the European debtors defaulted.
In addition, stateside, the basic structural problem was overproduction and lack of demand (profits went to owners-- not into pockets of wage-earners who were the ones who could incease demand–and so helped fuel the speculative mania on Wall St), all exacerbated by the crash and then the bank failures in Austria (no more US loans after 1929 to help pay the reparations). The reluctance on the part of the New Dealers to go whole hog on spending (Keynesian pump priming)probably kept the US from climbing out of the Depression and the “recession” of '37 and '38; it took the production demands of WW2 for that to happen. So MY history books say!

I forgot to add that my history books also say that the New Deal did tighten up on the sale of stocks, and created what would later become the SEC; they also did a whole lot with banks, but besides instituting experimental relief measures while guv of NY ('28-'32 I think), I have no idea what FDR did regarding Wall St. Good question though; I’ll have to look it up sometime!

For some reaason, capital asset investment booms (as opposed to consumer booms or government expenditure booms) end in nasty crashes. There have been three capital asset investment booms in the last century, the US in the 1920’s, Japan in the 1980’s, and the US in the 1990’s. We are probably in for big trouble. The Economist wrote an article about this over two years ago and several Wall Street economists have discussed it in their publications (it is not, however, universally accepted).

I do not believe anyone has explained why these types of booms end in crashes but it must have something to do with industrial overcapacity and stagnant personal income (so that consumers are unable to step in and take up the economic slack).

No one seriously ever expected the governor of New York to regulate the stock market. You should laugh in the face of whoever suggested that. Can you imagine what 1920s stockbrokers would have done to an upstart governor who tried to tell them what to do? This was probably propagated by an FDR hater, of which there are still plenty. As for FDR during the depression part of his tenure, he provided hope and greatly expanded the public works projects that Hoover eventually started to set up.

As a staunch Democrat and FDR admirer, I’ve got to say that the Great Depression was not something that government was then equipped to head off, nobody thought of government having that much regulatory power back then. Hoover eventually came around to seeing that a bunch of changes were necessary and began implementing them, but the country blamed him for the crisis.

Was Coolidge responsible for the depth of the crisis? He was a truly awful President, believing that government should do as little as possible. While he was not a moral moron like his predecessor (Harding), he was completely inadequate for the job.

There were several causes of the great depression that built upon one another. It was initially caused by the monetary policy of the federal reserve which inflated the supply during the twenties and then sharply contracted it. Added to this was the disastrous fiscal and trade policies of the Hoover and Rosevelt administrations. Vagaries of the business cycle and bank panics had been a part of all previous depressions but it was the response of the federal reserve and the governments that made the great deprssion different from previous depressions.

We ran out of money.

Prohibition caused the Great Depression!

Here are the inarguable facts:
1> No booze, coke, or weed = Depression
2> After Prohibition (partially) ended, the Depression went away!

Now, there may be some other minor factors that contributed to the GD, such as that bank thingy, but overall, lack of entertainment for the brain = Great Depression.

A dispute I’ve encountered several times re the great depression regards the US government’s role. If I understand the argument, and I may not, it goes like this–
One side says that what would otherwise have been a small, normal recession was turned into a major depression by clumsy, wrongheaded government attempts to fix things; that govt action made things much worse. Therefore, govt regulation of the economy is a bad thing, and should be halted or reduced. Of course we can trust big business! Big business would never harm America!

The other side says that the depression was a wake up call re the need for more govt regulation of the economy, which was instituted, so we are now safe; no more great depressions can occur. Therefore, govt regulation of the economy is a good thing, and we need more of it, not less. Onward to a planned economy! Nevermind what happened to the Soviet Union; we’ll do it right!

So, which side is right?