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The first thing to understand about the economic phenomena that has come to be called the Great Depression is that there was nothing inevitable about it. Events did not need to turn out as they did. In spite of the fevered attempts of the Neo-Keynesians it is now known that Great Depression was caused by an almost unbelievable concatenation of Government blunders that turned a significant recession into the worst economic contraction in the history of our country.

Background

At the time of the Stock Market Crash of 1929 the Federal Reserve Bank had only been in existence for 16 years. The relative degree of inexperience in our Nation's Central Bank acting as lender of last resort was exposed during the crisis that unfolded over the next several years. At the same time the Federal Reserve had no effective oversight powers for safeguarding the soundness of the banking system.

It is also important to note that the U.S. was on a modified gold standard in 1929. This factor had significant impact on developments in trade as the crisis intensified.

The Origin of the Crisis

The start of the crisis began with the crash of the Stock Market in 1929 although the seeds had been planted much earlier. The Federal Reserve has been following a policy of easier money creation partially in order to take pressure off the British Pound in foreign exchange markets which were then settled by means of gold inflows and outflows. The British currency had been under pressure for some time because of trade and budgetary problems.

At some point, the Fed decided that the monetary policy had become too loose and was causing excessive speculation in the stock market and other asset classes. The Fed's precipitous change in policy toward monetary tightening and consequent calling of margin loans from clients by stock brokers was the proximate of the selling panic that cascaded down Wall Street.

The sudden evaporation of paper wealth on Wall Street triggered a series of unintended consequences that rippled through the rest of the economy.

The Banking Crisis

The sudden deflationary impact of Fed policy also had a catastrophic effect on the Banking System. Collateral that had been pledged for loans plunged in value and the Banks were forced to begin calling in loans. This only accelerated the general liquidity problems in the economy and process became self-reinforcing. More lack of liquidity, more deflation, more unemployment. Hundreds of banks failed in 1930 with many more hundreds to follow. The

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