One of the most surprising aspects of the “Great Crash,” as the stock market crash of October 1929 is called, is that there are not more conspiracy theories concerning its origins and results. However, there are plenty to keep any researcher busy. Among the most prominent:
• Webster Tarpley, in his Against Oligarcy, claims that the crash was the result of “economic warfare” by Great Britain and the Bank of England against “the rest of the world.” A similar view appeared in The Greatest Story Never Told: Winston Churchill and the Crash of 1929, which has the British prime minister somehow causing the crash . . . even though Churchill did not become prime minister for another decade!
• Pundits of the day, supported by the United States Congress, investigated charges that the crash was perpetrated by the “banksters,” such as Charles Mitchell, of National City Bank, for personal gain.
• It was a “secret commitment” to the gold standard (and indirectly, the Bank of England) made by the “House of Morgan” that caused the crash.
• The Federal Reserve perpetrated the crash, mistakenly trying to keep bank profits up. A related conspiracy theory views the Fed as rapidly inflating the money supply in the 1920s in order to pump up the profits of men such as Rockefeller and Morgan.
• Some Christian extremists, seeking to demo-nize Franklin D. Roosevelt, portray the Great Crash as the result of a bank conspiracy to plunge the nation into chaos so that Roosevelt could take over as a dictator, end all private ownership of gold, and centralize government further.
• A less conspiratorial-sounding, but equally removed-from-reality viewpoint was expressed in the famous tirade by John Kenneth Galbraith, The Great Crash, 1929 (1955) in which he blamed “inequities in wealth”—a conspiracy of the rich against the poor—for the crash.
Seventy-three years after the Great Crash, scholars still have not reached a consensus on the causes of the stock market plunge, but have tested some of the conspiracy theories well enough to have ruled them out. It is useful to begin in the boom of the 1920s, and the notion that the boom embodied wild speculation. Not so, say a battery of studies. White (1990), Santoni and Dwyer (1990), and White and Rappoport (1994) all debate the size of the “bubble” or the speculation, but all agree also that whatever level of speculation can be proven remains insufficient to explain the crash. Santoni and White especially contend that securities records show that investors were generally well informed, that the securities matched up well with their earnings projections, and that bond ratings had up to that point tended to correspond accurately to securities prices. In short, most academics today— aside from the Keynesian Left and the radical Christian Right—discount or completely reject the “great bull market” theory as an explanation for the bust.
What about the view that the Federal Reserve pumped up the money supply—by more than 100 percent in the 1920s as one source claimed? Money supply expansion must be measured against growth in the aggregate economy, as money is only a symbol of wealth created. The fact is that the U.S. economy in the 1920s was growing faster than, possibly, any economy at any time in the history of the world. There were entirely new products available for the first time to middle-class consumers: radios, automobiles, electrical appliances, and securities themselves. Charles Merrill, of Merrill Lynch, pioneered securities sales to the middle class during this time. Manufacturing according to most indices nearly doubled from 1920 to 1929; price indices reveal virtually no increase in prices for goods or services; unemployment dropped to the unheard-of levels of under 2 percent in 1926, and remained under 4 percent for most of the decade; and work hours fell. By the end of the decade, the United States held more than one-third of world production. At essentially full employment and robust production, the Fed would have had to crank out money at far higher rates just to stay even with the booming economy.
This has produced another set of scholarly studies, which, though hardly conspiratorial, do not paint a flattering picture of government’s ability to deal with financial matters. In 1963, economists Milton Friedman and Anna J. Schwartz published their seminal work, A Monetary History of the United States, in which they demonstrated that in fact the Federal Reserve barely kept up in the 1920s, then failed miserably to supply liquidity after the crash started and banks started failing. Normally, Friedman’s book would have been hailed by conspiracy theorists, in that it portrayed the government (via the Fed) as incompetent. But Friedman maintained that it was not the Fed itself that failed, but only short-sighted officials. Had New York Federal Reserve President Benjamin Strong lived past 1928, Friedman hypothesized, the Great Depression never would have happened.
To have Friedman give conspiracy theorists a great victory with one hand and take it away with the other took his works off their “must read” lists. Indeed, Friedman remained an oddity: he favored near-total market freedom in every economic activity except banking, where he rejected the notion that competitive money could provide an answer to financial uncertainties. Nevertheless, his work effectively demolished the Keynes/Galbraith view of “underconsumption” and “over-saving,” and took the blame nearly completely off business and put it on the shoulders of government.
The gold standard, a central theme in conspiracy theorists’ arguments about the Great Crash and Great Depression, next came under a withering fire from other academics, such as Barry Eichengreen (Golden Fetters), who showed that far from international cooperation to maintain the gold standard at the “expense” of the “common man,” each national bank was engaged in cutthroat competition to sustain its own position relative to that of other national banks. In other words, the Bank of France, rather than secretly working with the Bank of England and the Federal Reserve to conduct monetary policy conducive to the interests of the Rothschilds and the Morgans, in fact undercut the Bank of England and the Federal Reserve to gain market advantages. Ultimately, each nation in the world left the gold standard except the United States, which, Eichengreen contends, resulted in a massive gold drain from U.S. vaults. Put another way, foreign speculators could get U.S. gold for French, German, or British paper. Thus, ironically, the gold standard was responsible for the Depression, although Eichengreen does not tie the gold standard as clearly to the Great Crash. Still, it is the ultimate irony that if Eichengreen is correct, it was Franklin D. Roosevelt’s act of taking the United States off the gold standard that saved the banking system in 1933! Once again, though, in Eichengreen’s system, the gold standard could only work in the best of all worlds, where politicians did not follow national interest, but rather sought the welfare of the international community through the gold standard first.
If notions about the Federal Reserve “causing” the Great Crash have been fairly well disproved, and if the gold standard has been demonstrated to have at best played a harmful role in accelerating the economic decline, and if “disparities in wealth” do not explain the Crash, then what does? The answer is that economists still don’t know. They can show, as Eugene White does, that the involvement of banks in securities operations did not weaken the banks, but in fact strengthened them. They can show, as several scholars have, that it was the middle class purchasing stocks and bonds, not “the rich.” Is there a “smoking gun,” though?
In 1978, economist (though not an academic) Jude Wanniski published The Way the World Works, in which he tied fluctuations in the stock market to the progress through Congress of the Smoot-Hawley Tariff. This tariff bill would have increased duties across the board, but would have hit particularly hard raw materials needed in manufacturing, thus ensuring that prices on finished goods would have to rise, and that sales would fall. Likewise, most analysts expected that if the bill passed, foreign countries would immediately respond with their own tariffs on U.S. goods, causing U.S. sales overseas to fall. Foreseeing this impact, businesses braced themselves by selling off their own securities in anticipation of the need to “get liquid.” The business sell-off, in turn, triggered a market-wide panic. Without the tools of econometricians, Wanniski was left to “qualitative” evidence—links between critical points in the bill’s passage and downturns in the market. He points to the key meeting of a congressional committee on 28 October that guaranteed the bill’s final passage (the floor vote was assured if Smoot-Hawley got out of committee), claiming this sparked the sell-off.
Until recently, Wanniski’s lack of academic credentials allowed some scholars to ignore him. But several new studies, by Doug Irwin and Mario Crucini, have thrown new fuel on the Smoot-Hawley fire: they have not only applied modern econometric tools, but have found that Wanniski actually substantially understated the expected harm of Smoot-Hawley due to the fact that he had not accounted for the Federal Reserve’s deflation (see Friedman, above). When the impact of dollar deflation was combined with the tariff bill, it had the potential, by itself, with no other “New Deal” or Federal Reserve policy, to reduce U.S. gross national product by 5 percent.
Wanniski, Irwin, and Crucini, along with Eichen-green, have thus turned the conspiracy theorists’ world upside down: protective tariffs, as advocated by politicians such as Pat Buchanan and “New World Order” theorists, may have caused the Great Crash, and the gold standard likely made it worse. Of course, most conspiracy theorists can rejoice that virtually all scholars pretty much agree that the Federal Reserve bungled badly in the 1920s, although exactly how the Fed failed remains a matter of heated debate.
