- The Washington Times - Sunday, April 15, 2001

I would have liked to have seen how Jude Wanniski (“The golden standard of redemption,” Commentary Forum, April 8) “discovered that the cause of the 1929 Wall Street crash was the Smoot-Hawley Tariff Act.” Why? Because the Smoot-Hawley Tariff Act was not passed until 1930. The shortsighted, beggar-thy-neighbor Smoot-Hawley tariff definitely contributed to the severity of the Great Depression that followed the 1929 crash, but it did not cause it.

The immediate cause of the crash was the bursting of the stock market speculative bubble. In 1928, the Federal Reserve Board in Washington wanted to take some direct action to limit the purchase of stocks on margin but did not act because of the strong opposition of the president of the New York Federal Reserve Bank, Benjamin Strong. Tougher action by the Fed in 1928 or early 1929 might have broken the speculative bubble earlier, but, to be fair, the Fed did not have explicit authority to set margin requirements until passage of the Securities and Exchange Act of 1934.

Whether the Fed cut interest rates quickly enough after the October 1929 crash is a matter of some debate, but most economists (except for gold bugs such as Mr. Wanniski) believe that the Fed´s action to raise interest rates during the gold crisis of 1931 in order to prevent the outflow of gold was exactly what the economy did not need.

Of course, the Fed should not receive all or even most of the blame for the crash and the Great Depression, and I agree with Mr. Wanniski that the fiscal and tariff policies of both the Hoover and the first Roosevelt administrations deserve their share of the blame.


CLARKE N. ELLIS

Adjunct professor of international political economy

Catholic University of America

Washington

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