ARCHITECTS OF THE GREAT DEPRE$$ION:

Big Banks, Wall St., & the Federal Reserve

INTRODUCTION

I am not an authority on economic theories or financial matters analyzed within the field of macroeconomics. Aside from endorsing Adam Smith's ideal vision of a democratic, humanitarian, free-market capitalist society, I do not subscribe to any specific dogma, but am simply an observer of humanity's activities and their innate, idiosyncratic and universal behavioral traits. If a statement or ideology defies logic or deflects from common wisdom, I am highly suspicious of them.

As I contemplate the unsavory symbiosis between the Federal Reserve and Wall Street, who earned their notorious reputation by profiting from unethical financial ventures that crush economic sectors, indulging in bailout protectionism, and conjuring conceptual absurdities such as "derivatives", it is clear that Adam Smith's model of a financially moral, healthy society was never likely to prevail. For indeed, even while the incipient United States took form in the late 18th century, Wall Street, i.e. New York City, had been labeled an ignominious “cauldron of financial speculation.”1

The Buttonwood Traders. A depiction of security traders meeting "under a Buttonwood tree on Wall Street" to formulate the subsequent Buttonwood Agreement of 1792, now the New York Stock Exchange. Courtesy of Time.com and the New York Stock Exchange.

A TROJAN HORSE

Great Depression era photo. Courtesy of Lincoln JournalStar.com

Dow Jones Industrial Average, 1928-1930. Public domain.

Graph detailing the decreased money supply due to bank runs between Black Tuesday and 1933. Public domain.

The notion of empires juggling their highly dynamic economies is an exhaustive, complicated subject to ponder. To a novice like me, the objective that governments can centralize the execution of efficient, organized economies seems implausible; and in practice is a precarious balancing act that even when properly managed by scrupulous individuals, only alleviates what are unavoidable economic cycles or downtrends.

When contemplating the factors that instigated the Great Depression, Big Banks who gambled with customer deposits in order to over-speculate, and the Federal Reserve's inelastic monetary policies and awful response as depositors' panic escalated, immediately surface as the key causes. With this in mind, I now reference the authoritative voice of Milton Friedman, proponent of Monetarism and Free-Market Capitalism, who was the first to fault the Federal Reserve as prime culprits of the Great Depression. Born in 1912, Milton Friedman (1912-2006) was an eye-witness to the consequences of Wall Street speculation and Federal Reserve monetary policies which caused the Stock Market Crash of 1929 and Great Depression.2 A convergence of sympathy for the tremendous suffering that unfolded and his need to scientifically determine the causation of the worst cataclysmic financial disaster in history were the driving forces which compelled Friedman to study economics, prompting his and Anna Jacobson Schwartz's (1915-2012) explanatory theory found in their 1963 opus, A Monetary History of the United States.3

Milton Friedman with his future wife Rose in 1935. Hoover Archives.

Anna Jacobson Schwartz. New York Times.

Prior to the onset of the Great Depression, The McFadden Act of 1927 was the landmark legislation which allowed the Federal Reserve to remain as the nation's central bank and regulatory body. Their mandate in the McFadden Act permitted the Federal Reserve to commandeer the nation's banking practices as a security measure; and prevented less stable, independent banks from acquiring and participating in interstate banking.

Concurrently, the McFadden Act was the Federal Reserve's timely form of monopolistic self-preservation, before "the original charters of the twelve Federal Reserve District Banks were set to expire in 1934" and undergo a renewal process.4 Economic scholars can only speculate whether the Federal Reserve's charters would have been renewed after the calamity that ensued in 1929; or how differently organized our capitalist system would be without the ironclad centralization of Federal Reserve power.

The Federal Reserve System was originally formed in 1913 as the central bank of the United States in response to a climate of financial insecurity and absence of national uniformity.5 When the McFadden Act was signed into law during the Roaring Twenties boom bubble, the Federal Reserve appeared to be, and ostensibly was, a stabilizing agent that prevented economic crises. They were congratulated by the Bank, Business and Political triarchy as responsible for the nation's financial prosperity. Because of the Federal Reserve, "economic growth had been rapid, interest rates...stable...recessions had been short...gold reserves had risen," and "the Federal Reserve Note...[became] one of the world’s leading currencies."6 Existing amid the post World War I global environment, the United States was in a remarkably pleasant financial position compared to many other world powers, particularly in Europe.

ABYSMAL MANAGEMENT

The national celebration proved to be quite premature, however. When formally tested, the Federal Reserve's leadership in 1929 were unable to withstand the challenge of an erupting, Vesuvian level bank panic contagion, profoundly exacerbating the crisis with their horrible, negligent guardianship. As stated by Ben Bernanke during his 2002 address before a conference in Friedman's honor, "the decline in money induced by bank panics" during the Great Depression "would not have occurred under previous regimes" that existed as independent banking bodies prior to the formation of the Federal Reserve. Bernanke's conclusion was predicated on Friedman's groundbreaking research studies. Among the assortment of curative remedies before 1913, "bank panics were typically handled by banks themselves--for example, through urban consortiums of private banks called clearinghouses. If a run on one or more banks in a city began, the clearinghouse might declare a suspension of payments, meaning that, temporarily, deposits would not be convertible into cash. Larger, stronger banks would then take the lead, first, in determining that the banks under attack were in fact fundamentally solvent, and second, in lending cash to those banks that needed to meet withdrawals."7

But instead of implementing traditional, effective emergency solutions, the Federal Reserve had subscribed to a callous, Social Darwinist styled "liquidation" theory based on the fallacy that weeding out small or weak banks would aid recovery. And for their part, large banks who once intervened before the Federal Reserve existed, no longer felt obliged to do so.8 These terrible decisions set into motion the worst economic national and global maelstrom ever recorded.

Crowd gathering at Wall Street and Broad Street intersection following the 1929 crash. Public domain.

A bank run during the Great Depression in New York at American Union Bank, 1931. National Archives.

One shantytown, out of innumerable Hooverville shantytowns during the Great Depression, circa 1930. Courtesy of Benshemeth.weebly.com

Marriner Eccles Building, Board of Governers of the Federal Reserve, 1937.

REMEDIES

President Franklin D. Roosevelt signs the Glass-Steagall Act alongside the bill's co-sponsors, Senator Carter Glass and Representative Henry Steagall, and others, 1933. (Photo: Bettmann/Bettmann/Getty Images)

An Impoverished American Family Living in a Shanty, 1936. By Dorothea Lange. Library of Congress.

Unemployed men in a Depression-era soup kitchen line, 1931 Chicago. U.S. National Archives.

What Friedman and Schwartz highlighted in their brilliant research, is the importance of appointing intelligent officials who will govern an elastic monetary system by extending cash flow when necessary, keeping interest rates and inflation at reasonable levels, and curtailing depositor panics to stop widespread withdrawals. Additionally, curbing speculating and thievery must be included as critical components of proper economic management, alongside a judicial system which compensates victims and punishes criminal behavior. The experts who disputed or continue to dispute Friedman's hypothesis appear to defy both logic and the evidence.9 When concluding his 2002 speech, Bernanke himself vindicated Friedman and Schwartz's theorem, agreeing that in the aftermath of Benjamin Strong's death in 1928, intentional monetary contraction by a terribly incompetent Federal Reserve created the Great Depression. Their negative program was without a doubt the nucleus of the Great Depression, as demonstrably supported by Friedman's meticulous research and his striking comparisons of banking measures taken under similar conditions elsewhere or before the Federal Reserve existed.10 The Glass-Steagall Act of 1933 was one of the critical responses to assure that the havoc inflicted upon society by irresponsible bank speculators from Wall Street would never occur again.11 Indisputably, protective regulations such as those imposed by Glass-Steagall, coupled with the social programs instituted by Franklin D. Roosevelt, are imperative criteria for any civilization which aspires to be just, humane, and inhibit large-scale financial corruption. The Great Depression cost many millions of poor souls their employments, life-savings, and dwellings--while in contrast, some financiers made windfall profits off the collapse; or at the very least, insouciantly continued with their luxurious lifestyles.

During the late 20th century, Glass-Steagall underwent a systematic, organized attack instituted by both political parties who maneuver the United States through their duopoly. Glass-Steagall is now essentially drained of its vigor, partially-repealed with the cooperation of conservatives and neo-liberals. I am reminded by scholars that Glass-Steagall alone cannot save the nation from economic catastrophe; not now, nor during the Great Depression. In response, I would say maybe so, but it was a solid, effective statute nevertheless, and a declaration of ethical standards.12

CITATIONS: 1. Joan Brown Wettingfeld, "Our History: When New York was the U.S. Capitol," Queens Newsletter, 2000, https://qns.com/2000/02/our-history-when-new-york-was-the-u-s-capital/. 2. Thomas Brock, "Who was Milton Friedman?" Investopedia, 2022, https://www.investopedia.com/terms/m/milton-friedman.asp. 3. Ivan Pongracic Jr., "The Great Depression According to Milton Friedman," Foundation for Economic Education, 2007, https://fee.org/articles/the-great-depression-according-to-milton-friedman/. 4. Federal Reserve History, "The McFadden Act of 1927," https://www.federalreservehistory.org/essays/mcfadden-act. 5. David C. Wheelock, "Overview: The History of the Federal Reserve," Federal Reserve History, 2021, https://www.federalreservehistory.org/essays/federal-reserve-history. 6. Gary Richardson, Daniel Park, Alejandro Komai, and Michael Gou, "McFadden Act of 1927," Federal Reserve History, 2013, https://www.federalreservehistory.org/essays/mcfadden-act. 7. Ben S. Bernanke, "Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois November 8, 2002," The Federal Reserve Board, https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/.

8. Ibid. 9. Thomas Brock, "Who was Milton Friedman?" Investopedia, 2022, https://www.investopedia.com/terms/m/milton-friedman.asp. 10. Ben S. Bernanke, "Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois November 8, 2002," The Federal Reserve Board, https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/. 11. Julia Maues, "Banking Act of 1933, Glass-Steagall," Federal Reserve History, 2013, https://www.federalreservehistory.org/essays/glass-steagall-act. 12. Oonagh McDonald, "The Repeal of the Glass-Steagall Act: Myth and Reality," Cato Institute No. 804, November 16, 2016, https://www.federalreservehistory.org/essays/mcfadden-act.

BIBLIOGRAPHY:

Bernanke, Ben S. "Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois November 8, 2002." The Federal Reserve Board, https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/.

Brock, Thomas. "Who was Milton Friedman?" Investopedia, 2022. https://www.investopedia.com/terms/m/milton-friedman.asp. Federal Reserve History. "The McFadden Act of 1927." https://www.federalreservehistory.org/essays/mcfadden-act. Maues, Julia. "Banking Act of 1933, Glass-Steagall." Federal Reserve History, 2013. https://www.federalreservehistory.org/essays/glass-steagall-act. McDonald, Oonagh. "The Repeal of the Glass-Steagall Act: Myth and Reality." Cato Institute No. 804, November 16, 2016. https://www.federalreservehistory.org/essays/mcfadden-act. Pongracic Jr., Ivan. "The Great Depression According to Milton Friedman." Foundation for Economic Education, 2007. https://fee.org/articles/the-great-depression-according-to-milton-friedman/. Richardson, Gary, Daniel Park, Alejandro Komai, and Michael Gou. "McFadden Act of 1927." Federal Reserve Histoy, 2013, https://www.federalreservehistory.org/essays/mcfadden-act. Wettingfeld, Joan Brown. "Our History: When New York was the U.S. Capitol." Queens Newsletter, 2000. https://qns.com/2000/02/our-history-when-new-york-was-the-u-s-capital/. Wheelock, David C. "Overview: The History of the Federal Reserve." Federal Reserve History, 2021. https://www.federalreservehistory.org/essays/federal-reserve-history.