There is no question as to whether or not the Great Depression was caused by a failure of the free market system; of course it wasn’t. Not only was it not caused by this failure but the economy wasn’t improved through government intervention, if anything government intervention prolonged the Great Depression.
The Depression was triggered when the “roaring twenties” came to an unexpected halt. The Federal Reserve System increased money supply by more than 60% thru monetary policies, (as explained in The Great Myths of the Great Depression), but as we all know what goes up must, eventually, come down. This eventual “downfall” was initially caused by the central bank contracting money supply. The government’s intervention did nothing to improve the economic situation for the banks, in fact, it worsened it.
The Federal Reserve was raising interest rates and cutting off money supply. “Its discount rate (the rate the Fed charges member banks for loans) was increased four times, from 3.5 percent to 6 percent, between January 1928 and August 1929” (Reed 3). Over the next few years this resulted in money supply shrinking by 30%.
The Smoot-Hawley Tariff passed while Hoover was President raised the rates of multiple commodities. The government passed this thinking that it would force more trade within the state and solve the unemployment problem, but instead this just decreased the number of exports which did not improve the economy at all. This decrease caused thousands of farmers to go bankrupt. This resulted in the rural banks failing and with them thousands of customers lost their money as well.
Roosevelt, the president at the time, decided to close all banks for a “banking holidy” temporarily deprived depositors of their money. This 9 day period resulted in over 2000 banks never reopening for business. Roosevelt also set a minimum wage law which resulted in those who were less skilled not being able to get or keep a job. This did not help with the unemployment rate.
It seems that the action of the Government had a sort of “snowball” effect on the economy. As they tried to regulate more and more the worse the situation became. This made the Great Depression much longer than it should have been.
