Instruct: Given a question, retrieve relevant passages that answer the question.
Query: What was the main cause of the Great Depression?
The causes of the Great Depression in the early 20th century have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises. The specific economic events that took place during the Great Depression are well established. There was an initial stock market crash that triggered a "panic sell-off" of assets. This was followed by a deflation in asset and commodity prices, dramatic drops in demand and credit, and disruption of trade, ultimately resulting in widespread unemployment (over 13 million people were unemployed by 1932) and impoverishment. However, economists and historians have not reached a consensus on the causal relationships between various events and government economic policies in causing or ameliorating the Depression.
There is an ongoing debate between historians as to what extent President Calvin Coolidge's laissez-faire hands-off attitude has contributed to the Great Depression. Despite a growing rate of bank failures he did not heed voices that predicted the lack of banking regulation as potentially dangerous. He did not listen to members of Congress warning that stock speculation had gone too far and he ignored criticisms that workers did not participate sufficiently in the prosperity of the Roaring Twenties.[88]
Economists and economic historians are almost evenly split as to whether the traditional monetary explanation that monetary forces were the primary cause of the Great Depression is right, or the traditional Keynesian explanation that a fall in autonomous spending, particularly investment, is the primary explanation for the onset of the Great Depression.[3] Today the controversy is of lesser importance since there is mainstream support for the debt deflation theory and the expectations hypothesis that building on the monetary explanation of Milton Friedman and Anna Schwartz add non-monetary explanations.
The idea that reduced capital investment was a cause of the depression is a central theme in secular stagnation theory.
Causes of the Great Depression Cities in the Great Depression Dust Bowl Entertainment during the Great Depression Great Contraction List of Depression-era outlaws Timeline of the Great Depression
Ben S. Bernanke. Essays on the Great Depression (2000) Bernstein, Michael A. The Great Depression: Delayed Recovery and Economic Change in America, 1929–1939 (1989) focus on low-growth and high-growth industries Bordo, Michael D., Claudia Goldin, and Eugene N. White, eds. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century (1998). Advanced economic history. Chandler, Lester. America's Greatest Depression (1970). economic history overview. De Long, Bradford. Liquidation Cycles and the Great Depression (1991) Jensen, Richard J. "The Causes and Cures of Unemployment in the Great Depression," Journal of Interdisciplinary History 19 (1989) 553–83. online at JSTOR in most academic libraries McElvaine, Robert S. The Great Depression (2nd ed 1993) social history Mitchell, Broadus. Depression Decade: From New Era through New Deal, 1929–1941 (1964), standard economic history overview. Warren, Harris Gaylord. Herbert Hoover and the Great Depression (1959).
Friedman and Schwartz identified four main policy mistakes made by the Federal Reserve that led to a sharp and undesirable decline in the money supply:The book was the first to present the then novel argument that excessively tight monetary policy by the Federal Reserve following the boom of the 1920s turned an otherwise normal recession into the Great Depression of the 1930s. Previously, the consensus of economists was that loss of investor and consumer confidence following the Wall Street Crash of 1929 was a primary cause of the Great Depression.
The Austrian School asserted that the Great Depression was the result of a credit bust. Alan Greenspan wrote that the bank failures of the 1930s were sparked by Great Britain dropping the gold standard in 1931. This act "tore asunder" any remaining confidence in the banking system. Financial historian Niall Ferguson wrote that what made the Great Depression truly 'great' was the European banking crisis of 1931. According to Fed Chairman Marriner Eccles, the root cause was the concentration of wealth resulting in a stagnating or decreasing standard of living for the poor and middle class. These classes went into debt, producing the credit explosion of the 1920s. Eventually the debt load grew too heavy, resulting in the massive defaults and financial panics of the 1930s.
Great Contraction Criticism of the Federal Reserve Political philosophy Timeline of the Great Depression
America's Great Depression is a 1963 treatise on the 1930s Great Depression and its root causes, written by Austrian School economist and author Murray Rothbard. The fifth edition was released in 2000.
In their 1963 book A Monetary History of the United States, 1867–1960, Milton Friedman and Anna Schwartz laid out their case for a different explanation of the Great Depression. Essentially, the Great Depression, in their view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman and Schwartz called "The Great Contraction"[7] — a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. Friedman and Schwartz argue that people wanted to hold more money than the Federal Reserve was supplying. As a result, people hoarded money by consuming less. This caused a contraction in employment and production since prices were not flexible enough to immediately fall. The Fed's failure was in not realizing what was happening and not taking corrective action.[8] In a speech honoring Friedman and Schwartz, Ben Bernanke stated:
After the Depression, the primary explanations of it tended to ignore the importance of the money supply. However, in the monetarist view, the Depression was "in fact a tragic testimonial to the importance of monetary forces."[11] In their view, the failure of the Federal Reserve to deal with the Depression was not a sign that monetary policy was impotent, but that the Federal Reserve implemented the wrong policies. They did not claim the Fed caused the depression, only that it failed to use policies that might have stopped a recession from turning into a depression.
After a series of droughts in the early 1890s, Gladstone's government appointed another Royal Commission into the depression in 1894. Its final report found foreign competition as the main cause in the fall in prices. It recommended changes in land tenure, tithes, education, and other minor items.
Acceptance of the Austrian explanation of what primarily caused the Great Depression is compatible with either acceptance or denial of the Monetarist explanation. Austrian economist Murray Rothbard, who wrote America's Great Depression (1963), rejected the Monetarist explanation. He criticized Milton Friedman's assertion that the central bank failed to sufficiently increase the supply of money, claiming instead that the Federal Reserve did pursue an inflationary policy when, in 1932, it purchased $1.1 billion of government securities, which raised its total holding to $1.8 billion. Rothbard says that despite the central bank's policies, "total bank reserves only rose by $212 million, while the total money supply fell by $3 billion". The reason for this, he argues, is that the American populace lost faith in the banking system and began hoarding more cash, a factor very much beyond the control of the Central Bank. The potential for a run on the banks caused local bankers to be more conservative in lending out their reserves, which, according to Rothbard's argument, was the cause of the Federal Reserve's inability to inflate.[41]
There are also several various heterodox theories that reject the explanations of the Keynesians and monetarists. Some new classical macroeconomists have argued that various labor market policies imposed at the start caused the length and severity of the Great Depression. The Austrian school of economics focuses on the macroeconomic effects of money supply and how central banking decisions can lead to malinvestment. Marxist economists view the Great Depression, with all other economic crises, as a symptom of the cyclical nature of capitalism and the instability that is inherent in the capitalist model.
The Great Depression: America, 1929–1941 () is a 1984 history of the Great Depression by acclaimed historian Robert S. McElvaine. In this interpretive history, McElvaine discusses the causes and the results of the worst depression in American history, covering the time from 1929 to 1941. He examines the causes of this cataclysmic event, its impact upon the American people, and the political, governmental, and cultural responses to it. He comes down firmly in favor of the "demand-side" argument that maldistribution of income in the 1920s having left the bulk of potential consumers with too small a share of national income to buy all that mass production was putting on the market was the principal cause of the collapse. Building on his innovative use of letters written by "ordinary" Americans during the Depression that were collected in his first book, "Down and Out in the Great Depression", McElvaine takes readers into the experience of Depression victims to an extent never before achieved.
...austere and puritanical souls [who] regard [the Great Depression] ... as an inevitable and a desirable nemesis on so much "overexpansion" as they call it ... It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again...
Starting with the adoption of the gold standard in Britain and the United States, the Long Depression (1873–1896) was indeed longer than what is now referred to as the Great Depression, but shallower. However, it was known as "the Great Depression" until the 1930s.
Uncertainty was a major factor, argued by several economists, that contributed to the worsening and length of the depression. It was also said to be responsible "for the initial decline in consumption that marks the" beginning of the Great Depression by economists Paul R. Flacco and Randall E. Parker. Economist Ludwig Lachmann argues that it was pessimism that prevented the recovery and worsening of the depression[103] President Hoover is said to have been blinded from what was right in front of him.
She has also researched the causes of the Great Depression in the United States and how the US recovered from the depression. Her work showed that the Great Depression occurred more severely in the US than in Europe, and had somewhat different causes than the Great Depression in Europe. Romer showed that fiscal policy played a relatively small role in the recovery from the depression in the US, because taxes were raised in the US almost as quickly as government spending increased during the New Deal. However, accidental monetary policy played a large role in the US recovery from depression. This monetary policy came first from the devaluation of the dollar in terms of gold in 1933–1934, and later from the flight of European capital to the relatively stable US as war in Europe became more likely.
Causes of the Great Depression Entertainment during the Great Depression Great Contraction Penny auction (foreclosure) The New Deal and the arts in New Mexico Timeline of the Great Depression Ham and Eggs Movement, California pension plan, 1938–40 Great Depression in Washington State Project Sales tax tokens
Second, there are the monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal Reserve) caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.[2] Related to this explanation are those who point to debt deflation causing those who borrow to owe ever more in real terms.
The conclusions of his 1971 paper on Central Banks and Economic and Social Welfare programs foreshadowed what is probably his most influential and best known work: "Did Monetary Forces Cause the Great Depression?" (1976). This work hypothesized that it was not primarily the actions of the Federal Reserve in response to the economic downturn of 1930 which turned a recession into the most far reaching slump in the modern economic period, but instead was an autonomous drop in demand. He would later revisit this thesis in his 1989 work "Lessons from the Great Depression", as well as publish several papers building on his conclusions. He joined, in some way, the conclusions of Keynes and Friedman: the Great Depression started with troubles in the 'real economy' later expanded to the financial world via speculation and money destruction (also see the analysis of Rondo Cameron about 'wildcat banking').
Barber says a decline in the population growth rate is likely to affect the demand for housing, and claims this is apparently what happened during the 1920s. He concludes:
The causes of the Great Recession seem similar to the Great Depression, but significant differences exist. The previous chairman of the Federal Reserve, Ben Bernanke, had extensively studied the Great Depression as part of his doctoral work at MIT, and implemented policies to manipulate the money supply and interest rates in ways that were not done in the 1930s. Generally speaking, the recovery of the world's financial systems tended to be quicker during the Great Depression of the 1930s as opposed to the late-2000s recession.