The Federal Reserve definitely caused the Great Depression by contracting the amount of money in circulation by one-third from 1929 to 1933
The crash, as devastating as it was to the speculators, had little effect on the average American. Unemployment didn't become rampant until the depression years which came later and were caused by continued government restraint of the free market. [...] The stage was now set for recovery and sound economic growth, as always had happened in the past.
It did not happen this time. The monetary and political scientists who had created the problem now were in full charge of the rescue. They saw the crash as a golden opportunity to justify even more controls than before. Herbert Hoover launched a multitude of government programs to bolster wage rates, prevent prices from dropping, prop up failing firms, stimulate construction, guarantee home loans, protect the depositors, rescue the banks, subside the farmers, and provide public works. FDR was swept into office by promising even more of the same under the slogan of a New Deal. [...]
In 1931, fresh money was pumped into the economy to restart the cycle, but this time the rocket would not lift off. The dead weight of new bureaucracies and government regulations and subsidies and taxes and welfare benefits and deficit spending and tinkering with prices had kept it on the launching pad. [...] Taxes and regulatory agencies forced companies out of business. Those that remained had to curtail production. Unemployment began to spread. By every economic measure, the economy was no better or worse in 1939 than it was in 1930 when the rescue began. It wasn't until the outbreak of World War II, and the tooling up for war production that followed, that the depression was finally brought to an end.
The securities market reached its high point on September 19 . Then, it began to slide. [...] For five more weeks, the public bought heavily on the way down. [...]
On Tuesday, October 29, the exchanges were crushed by an avalanche of selling. At times there were no buyers at all. By the end of the trading session, over sixteen million shares had been dumped, in most cases at any price that was offered. Within a single day, millions of investors were wiped out. Within a few weeks of further decline, $3 billion of wealth had disappeared. Within twelve months, $40 billion had vanished. People who had counted their paper profits and thought they were rich suddenly found themselves to be very poor.
[...] The insiders who had moved their investments into cash and gold were the buyers. [...] Those who had the cash picked them [solid companies] up for a small fraction of their true worth. Giant holding companies were formed for that task, such as Marine Midland Corporation, the Lehman Corporation, and the Equity Corporation. J.P. Morgan set up the food trust called Standard Brands. Like the shark swallowing the mackerel, the big speculators devoured the small.
It is not unreasonable to surmise that the central bankers had come to the conclusion that the bubble - not only in America, but in Europe - was probably going to rupture very soon. Rather than fight it, as they had in the past, it was time to stand back and let it happen, clear out the speculators, and return the markets to reality. [...] Immediately after the meetings, the monetary scientists began to issue warnings to their colleagues in the financial fraternity to get out of the market. [...]
John D. Rockefeller, J.P. Morgan, Joseph P. Kennedy, Bernard Baruch, Henry Morganthau, Douglas Dillon - the biographies of all the Wall Street giants at that time boast that these men were "wise" enough to get out of the stock market just before the Crash. And it is true. Virtually all of the inner club was rescued. There is no record of any member of the interlocking directorate between the Federal Reserve, the major New York banks, and their prime customers having been caught by surprise. Wisdom, apparently, was greatly affected by whose list one was on.
The commercial banks were the middlemen in this giddy game. By the end of the decade, they were functioning more like speculators than banks. Instead of serving as dependable clearing houses for money, they also had become players in the market. Loans to commercial enterprises for the production of goods and services - which normally are the backbone of sound banking practice - were losing ground to loans for speculating in the stock market and in urban real estate.
During the final phase of America's credit expansion of the 1920s, the rise in prices on the stock market was entirely speculative. Buyers did not care if their stocks were overpriced compared to the dividends they paid. [...] Speculators acquired stock merely to hold for a while and then sell at a profit. [...] it was common for investors to purchase their stocks on margin. That means the buyer puts up a small amount of money as a deposit (the margin) and borrows the rest from his stockbroker - who gets it from the bank, which gets it from the Fed. [...] From August of 1921 to September of 1929, the Dow-Jones industrial stock-price average went from 63.9 to 381.17, a rise of 597%. Credit was abundant, loans were cheap, profits were big.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
[Benjamin] Strong immediately entered into a close alliance with Montagu Norman, Governor of the Bank of England, to save the English economy from depression. This was accomplished by deliberately creating inflation in the U.S. which caused an outflow of gold, a loss of foreign markets, unemployment, and speculation in the stock market, all of which were factors that propelled America into the crash of 1929 and the great depression of the 30s.
Nevertheless, the Romanoff demand did have tremendous repercussions. The threat of a tremendous withdrawal from two of New York's most over-extended and precarious banks caused an underground pressure against call money, or cash, on Wall Street, which then contributed uniquely to the precipitate and famous crash of 1929. Even though the Masonic Canaanites controlled the courts in the United States, they could not be certain that the Romanoffs might not find a court in some traditional country which would grant them a judgment, or even an injunction against Guaranty Trust, a "J.P. Morgan controlled" bank, and National City Bank, the Rothschild and Rockefeller bank in New York. This threat, coming at the very height of the stock market boom of the 1920's, cast a pall over the wheelings and dealings of the speculators, and caused immediate pressure on short term funds, tripping one of the wires to the Great Depression.