m4nu3lf t1_itkmq7z wrote on October 24, 2022 at 10:35 AM

Do people even know what caused the depression? Reading the comments it seems like nobody really knows. It was a governmental mistake. The new FED kept interest rates too high.

RooMagoo t1_itl3c1d wrote on October 24, 2022 at 1:20 PM

That is a gross over-simplification of an extremely complicated situation. Government, yes; fed alone, no. The Fed certainly played a big role in allowing the recession to become a depression, but they were far from the sole cause. The toxic debt cycle Europe was stuck in repaying American banks for WWI, the Smoot-Hawley tariff Act, the gold standard, stupid repricing of currencies post war and mismanagement of banks all caused/led to the depression.

High interest rates killed farmers because the tariff Act killed commodity prices and there had been a land bubble previously. Farmers couldn't pay their loans to banks which caused over-leveraged banks to fail, taking all deposits with them. That example is just one of the many structural failures that occurred due to a multitude of poor decisions.

m4nu3lf t1_itl3nsj wrote on October 24, 2022 at 1:23 PM

As far as I know that's what turned an otherwise recession into a deep and lasting depression. What I'm saying is that with lower interest rates, all other things being equal, you would have likely not had a depression.

RooMagoo t1_itn6yl2 wrote on October 24, 2022 at 9:43 PM

It may have shortened the duration but I think there were way too many other structural problems to have avoided the depression entirely. It's not clear farmers could have paid their mortgages even at lower rates due to rapid deflation in commodities caused by the tariffs and overproduction from industrialization.

Don't forget, the secretary of the Treasury at the beginning of the depression, Andrew Mellon, was a staunch believer in liquidationism. Effectively, liquidate everything and everyone to get the rot out of the system. They actually welcomed deflation and claimed it had solved the '20-21 depression.

New York banks were going to fail no matter what. Over leverage in the stock market and literally lending Germany money to pay reparations to GB and France so they could repay war debt to the same banks. The stock market was in a bubble due to industrialization and mispricing currencies post war and was bound to crash, taking all those over-leveraged banks with them.

The Fed added fuel to the fire by raising rates in a deflationary environment, but that environment already existed due to terrible government and near zero banking regulations.

m4nu3lf t1_itn8n0f wrote on October 24, 2022 at 9:55 PM

Deflation can usually be reversed by low enough interest rates though.

I don't know about the New York banks. If as you say they were highly leveraged, possibility.