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May 2, 2010 Reading Time: 2 minutes

In this great little book, U.S. economic historian Gene Smiley presents the most recent economic historiography on the Great Depression. He concludes that the crisis was caused by the economic dislocations of World War I along with the attempts by the Bank of England, in conjunction with the monetary authorities of the U.S., to erect a fatally flawed quasi-gold standard in the 1920s. The crisis that followed the crash of 1929 was exacerbated by misguided government policies to alleviate the situation, instead prolonging the slump for the full decade of the 1930s.

Quoting from the Preface:

“The Great Depression is often said to demonstrate the instability of market economies and the need for government oversight and direction. The evidence can no longer support such assumptions. Government efforts to control and direct the gold standard for national purposes brought on the depression. Once it began, government actions, particularly in the United States, caused it to be much longer and much more severe. When the contraction finally ended, government interference in U.S. markets made the recovery unbearably slow and in 1937-38 brought on a ‘depression within a depression.’ The 1930s economic crisis is tragic testimony to government interference in market economies.”

The author, unfortunately, does not fully analyze the distorting effects of low interest rates in the 1920s, as pointed out by Richard M. Ebeling in a book review:

“Smiley fails to present a fully coherent theory of why the downturn began in America in 1929, other than to correctly point out that in 1927 and 1928 the Federal Reserve had increased the money supply to keep the stock market and construction booms going. Then the Fed brought the monetary expansion to a halt in late 1928 and 1929. That set the stage for the stock-market crash.”

Smiley is right in pointing out the dis-coordinating effects of a rapidly shrinking money supply in the early 1930s:

“Because money prices are the primary coordinating agents in a market economy, the price system may be disrupted by disturbances to the monetary system. A pronounced decline in the money supply will cause prices to fall […] but not all prices will fall simultaneously. This is the most common cause of depressions.”

Though the book falls short of presenting a comprehensive analysis of what went wrong in the 1920s, it is still a good introduction to the topic of the Great Depression, especially what went wrong in the 1930s. For a fuller analysis of the distorting effects of U.S. monetary policy in the 1920s, Murray Rothbard’s essay “The Gold-Exchange Standard of the Interwar Years” would be a good starting point.

Gene Smiley
Rethinking the Great Depression
Ivan R. Dee, 2003

Marius Gustavson

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