The Great Depression

Business cycles range from bubble to crash. In both extremes, asset values are out of line, which causes resources to be improperly valued and therefore misplaced. The Dutch tulip mania and the German mark bubble and crash caused great destruction. The Wall Street crash and bank debacle preceded the Great Depression of the 1930s.

Austrian economists point out cheap money and easy credit of the 1920s resulted in 'capital mallocation' and a bubble. After the crash, the Federal Reserve raised the reserve rate resulting in bank failures and a plunge in the money supply.

After that, faulty government policies prevented free trade from bouncing the economy back. Business was hurt by large tax increases as well; the Smoot-Hawley tarifff, and corporate tax, gift tax, and excise tax increases all destroyed business activity.

Wage and price controls and the New Deal welfare state reduced production and further misplaced resouces. Regulations against competition interferred with the price function, which prolonged and deepened the Great Depression.