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Chapter 7: The Depression

As a child I was not aware of the stock market crash of October
1929. The Great Depression that followed was like a movie in slow
motion – one thing simply led to another like a boat slowly sinking in
the water. In fact, the stock market slowly lost almost 90 percent of its
value by July 1932. The investigation in 1933 (usually referred to as the
Pecora Investigation, named after the lead investigator) revealed that
the stock market had been corrupted in a variety of ways. Major broker-
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favored parties at less that the open market cost. Even former President
Coolidge had been the recipient of such favor. Often there was collusion
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that stocks could be bought on a margin of 10 percent enhanced specula-
tion and led to disastrous swings in prices of stocks.
Banking in the United States expanded wildly in the early part
of the 1900s. By 1921 there were 29,778 separate banking companies
in the United States. Small, weak banks were often associated with the
economy of a single town, so that banks failed in the 1920s at the rate
of 550 per year despite the generally prosperous times. The rate of bank
failures exploded – 1,300 in 1930, 2,000 in 1931, and in 1932, 5,700
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viduals and small companies was catastrophic.
As the stock market sank, the Federal Reserve Bank tightened
the availability of money and raised interest rates. Between 1929 and
1932, the Federal Reserve Bank reduced the U.S. money supply by
one third, thereby making the Depression deeper and longer. The Bank
could not have chosen a worse strategy. The Consumer Price Index de-
creased 6.4 percent in 1930, 9.3 percent in 1931, and 10.3 percent in
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often strong factor in our economic life. Contrast that experience with
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We had an example close to home regarding the impact of a

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