To UNDERSTAND THE GREAT DEPRESSION is the Holy Grail of macroeconomics.

Ben S. Bernanke
This Wiki will explain the main history behind and causes of the Great Depression of the late 1920’s and 1930’s. It will also aim to explain some of the occurrences and ideas that made the depression last longer than it would have otherwise. Included will be some basic economic background information necessary to explain the causes of the depression and even the depression itself.



The Roaring 20s
Life1926-02-18.jpg
Figure 1: How to do the Charleston Life Cover 1926

The roaring 20’s refers to the early 1920’s. This was a period of great prosperity in the United States. During this time, interest rates were low, because it was politically popular and loans were abundant which allowed for short-term economic growth. Gaining more resources and new technology, funded by the loans, caused this growth. Unfortunately, this conduct created a credit bubble which was on its way to bursting very soon.

Economic Background Information

business_cycle
Figure 2: The Business Cycle
Depressions are a naturally occurring part of the business cycle. The business cycle is defined as “recurring increases and decreases in the level of economic activity over periods of years consists of peak, recession, trough, and expansion phases”]

Expansion in economic terms is a period of economic growth as measured through real GDP and an economic recession is considered a marked period of declining economic growth rates. Depression happens when the economy reaches the trough section of the business cycle but nothing is immediately available to start the economy’s growth again.




Economic Thought of the Time

At this time many economists believed that “when an economy declined, it would quickly recover on its own.” [[#_edn2|[ii]]] This explains why when the U.S. stock market crashed in 1929, few actions were taken to rectify the situation. After a few years, when it became clear the economy was not just going to fix itself, actions were taken. John Maynard Keynes published his book The General Theory of Employment, Interest, and Money in 1936, and this along with the experiences of the Great Depression caused a shift in economic thought, to consider that market economies could settle into long lasting periods of contractions, rather than rebounding quickly as previously thought. This publication also swayed economists of they day to consider that economies might need government intervention to be removed from depression.[[#_edn3|[iii]]] The economic thought of the time might help explain why no action was taken earlier during the period of contraction to counteract it. Arguments even today go back and forth about what the appropriate role of the government or the Fed might have been in this situation. Some say the Fed and government did too much while others say they did too little too late. [[#_edn4|[iv]]]


The Stock Market Crash
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Figure 3: 1929 Stock Market crash in New York

The Stock Market Crash of October 29, 1929 or Black Tuesday served to wake up the public of the United States to the worsening economic conditions. The causes of the crash had been building up and most things that affected the market were government and policy decisions. “John Maynard Keynes and others have attributed this slow down to an abrupt change in the Federal Reserve policy begun in 1928” The Fed’s actions were to restrict money supply growth by selling government bonds and raising interest rates to avoid rising prices during what was thought to be an economic upswing. [[#_edn5|[v]]] Irving Fisher of Yale University even said that the stock market was on “what looks like a permanently high plateau” and that it could be “a good deal higher than it is today within a few months”[[#_edn6|[vi]]] Unfortunately almost simultaneously with Fishers remarks, the market began to lose ground. Investors began to panic and sell their holdings. The crash of the New York Stock Exchange foretold the crashes of several important exchanges around the world. President Hoover attempted to reassure the public about the crash by assuring them about the countries principle moneymaker of producing goods. Again, bad news was to follow. “The Fed’s index of industrial production for the third quarter showed a decline” in the industries that Hoover had just assured the public were doing well. [[#_edn7|[vii]]] At the opening of the market the next week even more stocks lost value, these however, were the larger more dependable stocks causing even more worry for the public.

What Caused the Great Depression?
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FIgure 4: Migrant Mother

Even today there is quite a bit of debate academic circles about the true causes of the Great Depression. There are three main schools of thought, Austrian, Keynesian, and monetarist. All three have different views based on different economic theories. Keynes has blamed the depression on “the impact of the changes in Federal Reserve Monetary Policy… and the loss of business confidence that undermined investment spending”.[[#_edn8|[viii]]] Monetarists Milton Friedman and his collaborator, Anna Schwartz have listed their ideas on the cause of the depression by emphasizing the role of Federal Reserve policy and the impact of specific monetary shocks to the financial system” Schwartz has, on her own, also emphasized, “non-monetary forces as well as monetary forces in the onset of the depression”. [[#_edn9|[ix]]] Austrian views, “also emphasize the role of monetary forces but take a view diametrically opposed to that of Friedman and Schwartz” by disagreeing about the actions of the Federal Reserve. Austrians believe that the Federal Reserve did too much in the way of interfering in markets, which disallowed the free market to equalize itself. [[#_edn10|[x]]] The only thing that is clear about the causes of the Great Depression is that there is no one true answer. Many theories exist but without the benefit of a time machine it will never be known for sure exactly what effect changing one policy decision or another might have on the severity or length of the depression. Other factors had an impact on the length and severity of the crash as well, Britain’s abandonment of the Gold Standard, three banking crises which lead to bank failures and the Great Stock Market Crash all contributed differently to the depression.

Figure Sources
Figure 1- (Held, 1929)
Figure 2- (Healy)
Figure 3- (Sims, 2007)
Figure 4- (Lange, 1936)



Works Cited

Atack, J., & Passell, P. (1994). A New Economic View of American History (2nd ed.). New York, New York: W.W. Norton and Company.
Healy, M. (n.d.). Chapter 9 Review. Retrieved October 4, 2010, from Harper College: http://www.harpercollege.edu/mhealy/eco212i/lectures/ch9-18.htm
Held, J. How to do the Charleston. Life Magazine.
Lange, D. Destitute pea pickers in California. Mother of seven children. Farm Security Administration.
McConnell, C. R., & Brue, S. L. (2008). Economics (17th Edition ed.). Boston: McGraw-Hill .
O'Sullivan, A., & Sheffrin, S. M. (2005). Economics: Principles in Action. Needham, Massachusetts, USA: Prentice Hall.
Porter, P. E. (2008, November). Economics 201. (S. Brodersen, Interviewer)
Sims, B. (2007). The Great Depression 1929-1939. Retrieved October 4, 2010, from Western Civilization II Guides: http://westerncivguides.umwblogs.org/2009/11/17/the-great-depression-1929-1939/




[[#_ednref|[i]]] (McConnell & Brue, 2008)
[[#_ednref|[ii]]] (O'Sullivan & Sheffrin, 2005)
[[#_ednref|[iii]]] (O'Sullivan & Sheffrin, 2005)
[[#_ednref|[iv]]] (Atack & Passell, 1994)
[[#_ednref|[v]]] (Atack & Passell, 1994)
[[#_ednref|[vi]]] (Atack & Passell, 1994)
[[#_ednref|[vii]]] (Atack & Passell, 1994)
[[#_ednref|[viii]]] (Atack & Passell, 1994)
[[#_ednref|[ix]]] (Atack & Passell, 1994)
[[#_ednref|[x]]] (Atack & Passell, 1994)


Authored by Susan Brodersen