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Do not fill this in! ==Causes== {{Main|Causes of the Great Depression}} [[File:Money_supply_during_the_great_depression_era.png|upright=1.8|thumb|right| Money supply decreased considerably between [[Black Tuesday]] and the [[Emergency Banking Act|Bank Holiday in March 1933]], when there were massive [[bank runs]] across the United States.]] [[File:CPI 1914-2022.webp|thumb|alt=CPI 1914β2022|400px| {{legend|#0076BA |[[Inflation]]}} {{legend|#EE220C |[[Deflation]]}} {{legend-line|#1DB100 solid 3px|[[Money supply|M2 money supply]] increases Year/Year}} ]] [[File:1930Industry.svg|right|thumb|upright=1.35|U.S. industrial production, 1928β1939]] The two classic competing economic theories of the Great Depression are the [[Keynesian economics|Keynesian]] (demand-driven) and the [[Monetarism|Monetarist]] explanation.<ref>{{Cite web|first1=Nick|last1=Lioudis|title=What is the difference between Keynesian and monetarist economics?|url=https://www.investopedia.com/ask/answers/012615/what-difference-between-keynesian-economics-and-monetarist-economics.asp|access-date=July 12, 2021|website=Investopedia|language=en|archive-date=December 20, 2021|archive-url=https://web.archive.org/web/20211220193534/https://www.investopedia.com/ask/answers/012615/what-difference-between-keynesian-economics-and-monetarist-economics.asp|url-status=live}}</ref> There are also various [[Heterodox economics|heterodox theories]] that downplay or reject the explanations of the Keynesians and monetarists. The consensus among demand-driven theories is that a large-scale loss of confidence led to a sudden reduction in consumption and investment spending. Once panic and deflation set in, many people believed they could avoid further losses by keeping clear of the markets. Holding money became profitable as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand.<ref>{{Cite web|title=Great Depression β Causes of the decline|url=https://www.britannica.com/event/Great-Depression|access-date=July 12, 2021|website=Encyclopedia Britannica|language=en|archive-date=May 9, 2015|archive-url=https://web.archive.org/web/20150509121741/https://www.britannica.com/EBchecked/topic/243118/Great-Depression|url-status=live}}</ref> Monetarists believe that the Great Depression started as an ordinary recession, but the shrinking of the [[money supply]] greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.<ref>{{Cite web|last=Hayes|first=Adam|title=What is a Monetarist?|url=https://www.investopedia.com/terms/m/monetarist.asp|access-date=July 12, 2021|website=Investopedia|language=en|archive-date=November 5, 2021|archive-url=https://web.archive.org/web/20211105044704/https://www.investopedia.com/terms/m/monetarist.asp|url-status=live}}</ref> 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.<ref name="in JSTOR">{{cite journal|at=p. 150|jstor=2123771|url=https://www.employees.csbsju.edu/jolson/ECON315/Whaples2123771.pdf|title=Where is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions|journal=The Journal of Economic History|volume=55|issue=1|last1=Whaples|first1=Robert|year=1995|doi=10.1017/S0022050700040602|citeseerx=10.1.1.482.4975|s2cid=145691938 |access-date=February 18, 2022|archive-date=November 4, 2021|archive-url=https://web.archive.org/web/20211104183848/http://www.employees.csbsju.edu/jolson/econ315/whaples2123771.pdf|url-status=live}}</ref> Today there is also significant academic support for the [[debt deflation]] theory and the [[expectations hypothesis]] that β building on the monetary explanation of [[Milton Friedman]] and [[Anna Schwartz]] β add non-monetary explanations.<ref>{{Cite journal|last1=Mendoza|first1=Enrique G.|last2=Smith|first2=Katherine A.|date=September 1, 2006|title=Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices|url=https://www.sciencedirect.com/science/article/pii/S002219960500098X|journal=Journal of International Economics|language=en|volume=70|issue=1|pages=82β114|doi=10.1016/j.jinteco.2005.06.016|issn=0022-1996|access-date=February 18, 2022|archive-date=February 18, 2022|archive-url=https://web.archive.org/web/20220218125338/https://www.sciencedirect.com/science/article/abs/pii/S002219960500098X|url-status=live}}</ref><ref>{{Cite journal|last1=Buraschi|first1=Andrea|last2=Jiltsov|first2=Alexei|date=February 1, 2005|title=Inflation risk premia and the expectations hypothesis|url=https://www.sciencedirect.com/science/article/pii/S0304405X04001333|journal=Journal of Financial Economics|language=en|volume=75|issue=2|pages=429β490|doi=10.1016/j.jfineco.2004.07.003|issn=0304-405X|access-date=February 18, 2022|archive-date=February 18, 2022|archive-url=https://web.archive.org/web/20220218125325/https://www.sciencedirect.com/science/article/abs/pii/S0304405X04001333|url-status=live}}</ref> There is a consensus that the [[Federal Reserve System]] should have cut short the process of monetary deflation and banking collapse, by expanding the money supply and acting as [[lender of last resort]]. If they had done this, the economic downturn would have been far less severe and much shorter.<ref>{{cite journal|at=p. 143|jstor=2123771|url=https://www.employees.csbsju.edu/jolson/ECON315/Whaples2123771.pdf|title=Where is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions|journal=The Journal of Economic History|volume=55|issue=1|last1=Whaples|first1=Robert|year=1995|doi=10.1017/S0022050700040602|citeseerx=10.1.1.482.4975|s2cid=145691938 |access-date=February 18, 2022|archive-date=November 4, 2021|archive-url=https://web.archive.org/web/20211104183848/http://www.employees.csbsju.edu/jolson/econ315/whaples2123771.pdf|url-status=live}}</ref> ===Mainstream explanations=== Modern mainstream economists see the reasons in * A money supply reduction ([[Monetarists]]) and therefore a banking crisis, reduction of credit, and bankruptcies. * Insufficient demand from the private sector and insufficient fiscal spending ([[Keynesians]]). * Passage of the [[SmootβHawley Tariff Act]] exacerbated what otherwise might have been a more "standard" [[recession]] (both [[Monetarists]] and [[Keynesians]]).<ref name="ReferenceB" /> Insufficient spending, the money supply reduction, and debt on margin led to falling prices and further bankruptcies ([[Irving Fisher]]'s debt deflation). ====Monetarist view==== [[File:Great Depression monetary policy.png|thumb|The Great Depression in the U.S. from a monetary view. [[Real gross domestic product]] in 1996-Dollar (blue), [[price index]] (red), [[money supply]] M2 (green) and number of banks (grey). All data adjusted to 1929 = 100%.]] [[File:American union bank.gif|thumb|Crowd at New York's American Union Bank during a [[bank run]] early in the Great Depression]] The monetarist explanation was given by American economists [[Milton Friedman]] and [[Anna J. Schwartz]].<ref>''A Monetary History of the United States, 1857β1960''. Princeton University Press, Princeton, New Jersey, 1963.</ref> They argued that the Great Depression was caused by the banking crisis that caused one-third of all banks to vanish, a reduction of bank shareholder wealth and more importantly [[Contractionary monetary policy|monetary contraction]] of 35%, which they called "The [[Great Contraction]]". This caused a price drop of 33% ([[deflation]]).<ref>Randall E. Parker (2003), [https://books.google.com/books?id=Y-g4AgAAQBAJ&q=%22Pin+the+blame+squarely+on+the+Federal+Reserve%22&pg=PA11 ''Reflections on the Great Depression''] {{Webarchive|url=https://web.archive.org/web/20210818225154/https://books.google.com/books?id=Y-g4AgAAQBAJ&lpg=PR1&pg=PA11#v=snippet&q=%22Pin%20the%20blame%20squarely%20on%20the%20Federal%20Reserve%22 |date=August 18, 2021 }}, Edward Elgar Publishing, {{ISBN|978-1-84376-550-9}}, pp. 11β12</ref> By not lowering interest rates, by not increasing the monetary base and by not injecting liquidity into the banking system to prevent it from crumbling, the Federal Reserve passively watched the transformation of a normal recession into the Great Depression. Friedman and Schwartz argued that the downward turn in the economy, starting with the stock market crash, would merely have been an ordinary recession if the Federal Reserve had taken aggressive action.<ref>{{cite book|last1=Friedman|first1=Milton|url=https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You're%20right%20We%20did%20it%22|title=The Great Contraction, 1929β1933|author2=Anna Jacobson Schwartz|publisher=Princeton University Press|year=2008|isbn=978-0691137940|edition=New|access-date=February 18, 2022|archive-date=January 16, 2020|archive-url=https://web.archive.org/web/20200116121531/https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You%27re%20right%20We%20did%20it%22|url-status=live}}</ref><ref>{{cite book|last=Bernanke|first=Ben|url=https://books.google.com/books?id=c2OSWhLjzJkC&q=Schwartz&pg=PA6|title=Essays on the Great Depression|publisher=Princeton University Press|year=2000|isbn=0-691-01698-4|page=7|access-date=May 24, 2021|archive-date=December 24, 2021|archive-url=https://web.archive.org/web/20211224221348/https://books.google.com/books?id=c2OSWhLjzJkC&q=Schwartz&pg=PA6|url-status=live}}</ref> This view was endorsed in 2002 by [[Federal Reserve Board of Governors|Federal Reserve Governor]] [[Ben Bernanke]] in a speech honoring Friedman and Schwartz with this statement: {{blockquote|Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again.|Ben S. Bernanke<ref>Ben S. Bernanke (8 November 2002), [https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/default.htm "FederalReserve.gov: Remarks by Governor Ben S. Bernanke"] {{Webarchive|url=https://web.archive.org/web/20200324160935/https://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm |date=March 24, 2020 }} Conference to Honor Milton Friedman, University of Chicago</ref><ref name=FriedmanSchwartz>{{cite book|last1=Friedman|first1=Milton|last2=Schwartz|first2=Anna|title=The Great Contraction, 1929β1933|url=https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You're%20right%20We%20did%20it%22|year=2008|publisher=Princeton University Press|page=247|isbn=978-0691137940|edition=New|access-date=February 18, 2022|archive-date=January 16, 2020|archive-url=https://web.archive.org/web/20200116121531/https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You%27re%20right%20We%20did%20it%22|url-status=live}}</ref>}} The Federal Reserve allowed some large public bank failures β particularly that of the [[New York Bank of United States]] β which produced panic and widespread runs on local banks, and the Federal Reserve sat idly by while banks collapsed. Friedman and Schwartz argued that, if the Fed had provided emergency lending to these key banks, or simply bought [[government bond]]s on the [[open market]] to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, and the money supply would not have fallen as far and as fast as it did.<ref>{{cite journal|last=Krugman|first=Paul|date=February 15, 2007|title=Who Was Milton Friedman?|url=https://www.nybooks.com/articles/19857|journal=[[The New York Review of Books]]|volume=54 |issue=2 |archive-url=https://web.archive.org/web/20080410200144/https://www.nybooks.com/articles/19857|archive-date=April 10, 2008|access-date=May 22, 2008}}</ref> With significantly less money to go around, businesses could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the [[Federal Reserve Bank of New York|New York branch]].<ref>{{cite book|author=G. Edward Griffin|url=https://archive.org/details/TheCreatureFromJekyllIslandByG.EdwardGriffin|title=The Creature from Jekyll Island: A Second Look at the Federal Reserve|year=1998|isbn=978-0-912986-39-5|edition=3d|page=[https://archive.org/details/TheCreatureFromJekyllIslandByG.EdwardGriffin/page/n261 503]|publisher=American Media }}</ref> One reason why the Federal Reserve did not act to limit the decline of the money supply was the [[gold standard]]. At that time, the amount of credit the Federal Reserve could issue was limited by the [[Federal Reserve Act]], which required 40% gold backing of Federal Reserve Notes issued. By the late 1920s, the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes.<ref name="text">Frank Freidel (1973), [[iarchive:franklindrooseve04fran|''Franklin D. Roosevelt: Launching the New Deal'']], ch. 19, Little, Brown & Co.</ref> A "promise of gold" is not as good as "gold in the hand", particularly when they only had enough gold to cover 40% of the Federal Reserve Notes outstanding. During the bank panics, a portion of those demand notes was redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. On 5 April 1933, President Roosevelt signed [[Executive Order 6102]] making the private ownership of [[gold certificate]]s, coins and bullion illegal, reducing the pressure on Federal Reserve gold.<ref name="text" /> ====Keynesian view==== British economist [[John Maynard Keynes]] argued in ''[[The General Theory of Employment, Interest and Money]]'' that lower [[aggregate expenditure]]s in the economy contributed to a massive decline in income and to employment that was well below the average. In such a situation, the economy reached equilibrium at low levels of economic activity and high unemployment. Keynes's basic idea was simple: to keep people fully employed, governments have to run deficits when the economy is slowing, as the private sector would not invest enough to keep production at the normal level and bring the economy out of recession. Keynesian economists called on governments during times of [[Crisis (economic)|economic crisis]] to pick up the slack by increasing [[government spending]] or cutting taxes. As the Depression wore on, [[Franklin D. Roosevelt]] tried [[public works]], [[Agricultural subsidy|farm subsidies]], and other devices to restart the U.S. economy, but never completely gave up trying to balance the budget. According to the Keynesians, this improved the economy, but Roosevelt never spent enough to bring the economy out of recession until the start of [[World War II]].<ref>{{Cite journal| author-link=Lawrence Klein|first=Lawrence R.|last=Klein|title=The Keynesian Revolution|year=1947| pages=56β58, 169, 177β179|location=New York|publisher=Macmillan}}; {{Cite book|first=Theodore|last=Rosenof|title=Economics in the Long Run: New Deal Theorists and Their Legacies, 1933β1993|year=1997|location=Chapel Hill|publisher=University of North Carolina Press|isbn=0-8078-2315-5}}</ref> =====Debt deflation===== [[File:U.S. Public and Private Debt as a % of GDP.jpg|thumb]] [[Irving Fisher]] argued that the predominant factor leading to the Great Depression was a vicious circle of deflation and growing over-indebtedness.<ref name="Fisher33">{{cite journal|last=Fisher|first=Irving|s2cid=35564016|date= October 1933|title=The Debt-Deflation Theory of Great Depressions|journal=Econometrica|volume=1| pages=337β57|doi=10.2307/1907327|issue=4|publisher=The Econometric Society|jstor=1907327}}</ref> He outlined nine factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows: # Debt liquidation and distress selling # Contraction of the money supply as bank loans are paid off # A fall in the level of asset prices # A still greater fall in the net worth of businesses, precipitating bankruptcies # A fall in profits # A reduction in output, in trade and in employment # [[Pessimism]] and loss of confidence # Hoarding of money # A fall in nominal interest rates and a rise in deflation adjusted interest rates<ref name="Fisher33"/> During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%.<ref name="Margin Requirements">{{cite journal|last=Fortune|first=Peter|date=SeptemberβOctober 2000|title=Margin Requirements, Margin Loans, and Margin Rates: Practice and Principles β analysis of history of margin credit regulations β Statistical Data Included|journal=New England Economic Review|url=https://findarticles.com/p/articles/mi_m3937/is_2000_Sept-Oct/ai_80855422/pg_5|archive-url=https://web.archive.org/web/20150811102239/http://findarticles.com/p/articles/mi_m3937/is_2000_Sept-Oct/ai_80855422/pg_5|url-status=dead|archive-date=August 11, 2015|access-date=February 18, 2022}}</ref> Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers [[Margin call|called in these loans]], which could not be paid back.<ref name="lhf-30s">{{cite web|access-date=May 22, 2008|url=https://www.livinghistoryfarm.org/farminginthe30s/money_08.html|title=Bank Failures|publisher=Living History Farm|archive-url=http://webarchive.loc.gov/all/20090219185825/https://livinghistoryfarm.org/farminginthe30s/money_08.html|archive-date=February 19, 2009|url-status=dead}}</ref> Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits {{Lang|fr|en masse}}, triggering multiple [[bank run]]s. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.<ref name="lhf-30s"/> Outstanding debts became heavier, because prices and incomes fell by 20β50% but the debts remained at the same dollar amount. After the panic of 1929 and during the first 10 months of 1930, 744 U.S. banks failed. (In all, 9,000 banks failed during the 1930s.) By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the [[Emergency Banking Act|March Bank Holiday]].<ref>"Friedman and Schwartz, Monetary History of the United States", 352</ref> Bank failures snowballed as desperate bankers called in loans that borrowers did not have time or money to repay. With future profits looking poor, [[Investment|capital investment]] and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.<ref name="lhf-30s"/> Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A [[Virtuous circle and vicious circle|vicious cycle]] developed and the downward spiral accelerated. The liquidation of debt could not keep up with the fall of prices that it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed.<ref name="Fisher33"/> This self-aggravating process turned a 1930 recession into a 1933 great depression. Fisher's debt-deflation theory initially lacked mainstream influence because of the counter-argument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Pure re-distributions should have no significant macroeconomic effects. Building on both the monetary hypothesis of Milton Friedman and Anna Schwartz and the debt deflation hypothesis of Irving Fisher, [[Ben Bernanke]] developed an alternative way in which the financial crisis affected output. He builds on Fisher's argument that dramatic declines in the price level and nominal incomes lead to increasing real debt burdens, which in turn leads to debtor insolvency and consequently lowers [[aggregate demand]]; a further price level decline would then result in a debt deflationary spiral. According to Bernanke, a small decline in the price level simply reallocates wealth from debtors to creditors without doing damage to the economy. But when the deflation is severe, falling asset prices along with debtor bankruptcies lead to a decline in the nominal value of assets on bank balance sheets. Banks will react by tightening their credit conditions, which in turn leads to a [[credit crunch]] that seriously harms the economy. A credit crunch lowers investment and consumption, which results in declining aggregate demand and additionally contributes to the deflationary spiral.<ref>Randall E. Parker, ''Reflections on the Great Depression'', Edward Elgar Publishing, 2003, {{ISBN|978-1-84376-550-9}}, pp. 14β15</ref><ref name="Bernanke83">{{cite journal|last=Bernanke|first=Ben S|date=June 1983|title=Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression|journal=The American Economic Review|publisher=The American Economic Association|volume=73|issue=3|pages=257β276|jstor=1808111|url=https://faculty.arts.ubc.ca/dpaterson/econ532/10twenties/bernanke.pdf|access-date=February 22, 2021|archive-date=November 18, 2017|archive-url=https://web.archive.org/web/20171118070151/https://faculty.arts.ubc.ca/dpaterson/econ532/10twenties/bernanke.pdf|url-status=dead}}</ref><ref name="Mishkin78">{{cite journal|doi=10.1017/S0022050700087167|last=Mishkin|first= Fredric|date=December 1978|title=The Household Balance and the Great Depression|journal=Journal of Economic History|volume=38|issue=4|pages=918β937|s2cid=155049545 }}</ref> =====Expectations hypothesis===== Since economic mainstream turned to the [[new neoclassical synthesis]], expectations are a central element of macroeconomic models. According to [[Peter Temin]], Barry Wigmore, Gauti B. Eggertsson and [[Christina Romer]], the key to recovery and to ending the Great Depression was brought about by a successful management of public expectations. The thesis is based on the observation that after years of deflation and a very severe recession important economic indicators turned positive in March 1933 when [[Franklin D. Roosevelt]] took office. Consumer prices turned from deflation to a mild inflation, industrial production bottomed out in March 1933, and investment doubled in 1933 with a turnaround in March 1933. There were no monetary forces to explain that turnaround. Money supply was still falling and short-term interest rates remained close to zero. Before March 1933, people expected further deflation and a recession so that even interest rates at zero did not stimulate investment. But when Roosevelt announced major regime changes, people began to expect inflation and an economic expansion. With these positive expectations, interest rates at zero began to stimulate investment just as they were expected to do. Roosevelt's fiscal and monetary policy regime change helped make his policy objectives credible. The expectation of higher future income and higher future inflation stimulated demand and investment. The analysis suggests that the elimination of the policy dogmas of the gold standard, a balanced budget in times of crisis and small government led endogenously to a large shift in expectation that accounts for about 70β80% of the recovery of output and prices from 1933 to 1937. If the regime change had not happened and the Hoover policy had continued, the economy would have continued its free fall in 1933, and output would have been 30% lower in 1937 than in 1933.<ref>Gauti B. Eggertsson, [https://www.aeaweb.org/articles.php?doi=10.1257/aer.98.4.1476 ''Great Expectations and the End of the Depression''] {{Webarchive|url=https://web.archive.org/web/20160125070317/https://www.aeaweb.org/articles.php?doi=10.1257%2Faer.98.4.1476 |date=January 25, 2016 }}, American Economic Review 2008, 98:4, 1476β1516</ref><ref>Christina Romer, [https://www.nytimes.com/2012/10/21/business/how-the-fiscal-stimulus-helped-and-could-have-done-more.html "The Fiscal Stimulus, Flawed but Valuable"] {{Webarchive|url=https://web.archive.org/web/20211129132620/https://www.nytimes.com/2012/10/21/business/how-the-fiscal-stimulus-helped-and-could-have-done-more.html |date=November 29, 2021 }}, ''The New York Times'', October 20, 2012.</ref><ref>Peter Temin, ''Lessons from the Great Depression'', MIT Press, 1992, {{ISBN|978-0-262-26119-7}}, pp. 87β101.</ref> The [[recession of 1937β1938]], which slowed down economic recovery from the Great Depression, is explained by fears of the population that the moderate tightening of the monetary and fiscal policy in 1937 were first steps to a restoration of the pre-1933 policy regime.<ref>{{cite journal|jstor=29730131|at=p. 1480|title=Great Expectations and the End of the Depression|journal=The American Economic Review|volume=98|issue=4|last1=Eggertsson|first1=Gauti B.|year=2008|doi=10.1257/aer.98.4.1476|hdl=10419/60661|hdl-access=free}}</ref> ====Common position==== There is common consensus among economists today that the government and the central bank should work to keep the interconnected macroeconomic aggregates of [[gross domestic product]] and [[money supply]] on a stable growth path. When threatened by expectations of a depression, [[central bank]]s should expand liquidity in the banking system and the government should cut taxes and accelerate spending in order to prevent a collapse in money supply and [[aggregate demand]].<ref name="nber.org">{{cite journal |first=J. Bradford |last=De Long |title='Liquidation' Cycles: Old Fashioned Real Business Cycle Theory and the Great Depression |journal=NBER Working Paper No. 3546 |date=December 1990 |page=1 |doi=10.3386/w3546 |doi-access=free }}</ref> At the beginning of the Great Depression, most economists believed in [[Say's law]] and the equilibrating powers of the market, and failed to understand the severity of the Depression. Outright leave-it-alone [[Liquidationism (economics)|liquidationism]] was a common position, and was universally held by [[Austrian School]] economists.<ref name="Randall E. Parker 2003, p. 9"/> The liquidationist position held that a depression worked to liquidate failed businesses and investments that had been made obsolete by technological development β releasing [[factors of production]] (capital and labor) to be redeployed in other more productive sectors of the dynamic economy. They argued that even if self-adjustment of the economy caused mass bankruptcies, it was still the best course.<ref name="Randall E. Parker 2003, p. 9" /> Economists like [[Barry Eichengreen]] and [[J. Bradford DeLong]] note that President [[Herbert Hoover]] tried to keep the federal budget balanced until 1932, when he lost confidence in his Secretary of the Treasury [[Andrew Mellon]] and replaced him.<ref name="Randall E. Parker 2003, p. 9">Randall E. Parker, ''Reflections on the Great Depression'', Elgar Publishing, 2003, {{ISBN|978-1-84376-335-2}}, p. 9</ref><ref name="WhiteLawrence">{{cite journal|first=Lawrence|last=White|title=Did Hayek and Robbins Deepen the Great Depression?|journal=Journal of Money, Credit and Banking|volume=40|issue=4|pages=751β768|year=2008|doi=10.1111/j.1538-4616.2008.00134.x|url=https://dergipark.org.tr/tr/pub/liberal/issue/48188/609854|access-date=November 7, 2019|archive-date=April 15, 2021|archive-url=https://web.archive.org/web/20210415095946/https://dergipark.org.tr/tr/pub/liberal/issue/48188/609854|url-status=live}}</ref><ref>{{cite journal |first=J. Bradford |last=De Long |title='Liquidation' Cycles: Old Fashioned Real Business Cycle Theory and the Great Depression |journal=NBER Working Paper No. 3546 |date=December 1990 |page=5 |doi=10.3386/w3546 |doi-access=free }}</ref> An increasingly common view among economic historians is that the adherence of many Federal Reserve policymakers to the liquidationist position led to disastrous consequences.<ref name="WhiteLawrence" /> Unlike what liquidationists expected, a large proportion of the capital stock was not redeployed but vanished during the first years of the Great Depression. According to a study by [[Olivier Blanchard]] and [[Lawrence Summers]], the recession caused a drop of net [[capital accumulation]] to pre-1924 levels by 1933.<ref>{{cite journal |first=J. Bradford |last=De Long |title='Liquidation' Cycles: Old Fashioned Real Business Cycle Theory and the Great Depression |journal=NBER Working Paper No. 3546 |date=December 1990 |page=33 |doi=10.3386/w3546 |doi-access=free }}</ref> Milton Friedman called leave-it-alone liquidationism "dangerous nonsense".<ref name="nber.org" /> He wrote: {{blockquote|I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You've just got to let it cure itself. You can't do anything about it. You will only make it worse. ... I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.<ref name="WhiteLawrence" />}} ===Heterodox theories=== ====Austrian School==== Two prominent theorists in the [[Austrian School]] on the Great Depression include Austrian economist [[Friedrich Hayek]] and American economist [[Murray Rothbard]], who wrote ''[[America's Great Depression]]'' (1963). In their view, much like the monetarists, the [[Federal Reserve System|Federal Reserve]] (created in 1913) shoulders much of the blame; however, unlike the [[Monetarism|Monetarists]], they argue that the key cause of the Depression was the expansion of the [[money supply]] in the 1920s which led to an unsustainable credit-driven boom.<ref name="America's Great Depression, pp. 159-163">Murray Rothbard, ''America's Great Depression'' (Ludwig von Mises Institute, 2000), pp. 159β163.</ref> In the Austrian view, it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and [[capital goods]]. Therefore, by the time the Federal Reserve tightened in 1928 it was far too late to prevent an economic contraction.<ref name="America's Great Depression, pp. 159-163" /> In February 1929 [[Friedrich Hayek|Hayek]] published a paper predicting the Federal Reserve's actions would lead to a crisis starting in the [[Stock market|stock]] and [[Credit market|credit]] markets.<ref>Steele, G. R. (2001). ''Keynes and Hayek''. Routledge. p. 9. {{ISBN|978-0-415-25138-9}}.</ref> According to Rothbard, the government support for failed enterprises and efforts to keep wages above their market values actually prolonged the Depression.<ref>Rothbard, ''America's Great Depression'', pp. 19β21.</ref> Unlike [[Murray Rothbard|Rothbard]], after 1970 [[Friedrich Hayek|Hayek]] believed that the Federal Reserve had further contributed to the problems of the Depression by permitting the money supply to shrink during the earliest years of the Depression.<ref> For Hayek's view, see: * Diego Pizano, ''Conversations with Great Economists: Friedrich A. Hayek, John Hicks, Nicholas Kaldor, Leonid V. Kantorovich, Joan Robinson, Paul A.Samuelson, Jan Tinbergen'' (Jorge Pinto Books, 2009). For Rothbard's view, see: * Murray Rothbard, ''A History of Money and Banking in the United States'' (Ludwig von Mises Institute), pp. 293β294.</ref> However, during the Depression (in 1932<ref name=":1" /> and in 1934)<ref name=":1" /> Hayek had criticized both the [[Federal Reserve System|Federal Reserve]] and the [[Bank of England]] for not taking a more contractionary stance.<ref name=":1">[[John Cunningham Wood]], Robert D. Wood, ''Friedrich A. Hayek'', Taylor & Francis, 2004, {{ISBN|978-0-415-31057-4}}, p. 115</ref> [[Hans Sennholz]] argued that most [[Austrian business cycle theory|boom and busts]] that plagued the American economy, such as those in [[Panic of 1819|1819β20]], [[Depression of 1837|1839β1843]], [[Panic of 1857|1857β1860]], [[Long Depression|1873β1878]], [[Depression of 1893|1893β1897]], and [[Depression of 1920β21|1920β21]], were generated by government creating a boom through easy money and credit, which was soon followed by the inevitable bust.<ref>{{cite web|url=https://fee.org/articles/the-great-depression/|title=The Great Depression|access-date=October 23, 2016|work=[[Foundation for Economic Education]]|first=Hans|last=Sennholz|date=October 1, 1969|archive-date=December 24, 2021|archive-url=https://web.archive.org/web/20211224092014/https://fee.org/articles/the-great-depression/|url-status=live}}</ref> [[Ludwig von Mises]] wrote in the 1930s: "Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth, i.e. the accumulation of savings made available for productive investment. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."<ref>{{cite web|url=https://mises.org/library/causes-economic-crisis-and-other-essays-and-after-great-depression|title=The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression|access-date=October 24, 2016|work=[[Ludwig von Mises Institute]]|first=Ludwig|last=Mises|date=August 18, 2014|archive-date=December 5, 2021|archive-url=https://web.archive.org/web/20211205164755/https://mises.org/library/causes-economic-crisis-and-other-essays-and-after-great-depression|url-status=live}}</ref><ref>{{cite web|url=https://www.businessinsider.com/buying-bad-debt-to-return-bank-solvency-2011-2?op=1|title=Buying Bad Debt to Return Bank Solvency|access-date=October 24, 2016|work=[[Business Insider]]|first=Bill|last=Bonner|date=February 25, 2011|archive-date=October 24, 2016|archive-url=https://web.archive.org/web/20161024214604/http://www.businessinsider.com/buying-bad-debt-to-return-bank-solvency-2011-2?op=1|url-status=live}}</ref> ==== Marxist ==== [[Marxism|Marxists]] generally argue that the Great Depression was the result of the inherent instability of the [[Capitalist mode of production (Marxist theory)|capitalist mode of production]].<ref>{{Cite book |last=Corey |first=Lewis |url=https://books.google.com/books?id=fAW8AAAAIAAJ |title=The Decline of American Capitalism |date=1934 |publisher=Covici Friede Publishers |isbn=978-0-405-04116-7 |language=en}}</ref> According to ''[[Forbes]]'', "The idea that capitalism caused the Great Depression was widely held among intellectuals and the general public for many decades."<ref>{{Cite web |last=Fleisher |first=Larry |date=2009-10-30 |title=The Great Depression And The Great Recession |url=https://www.forbes.com/2009/10/29/depression-recession-gdp-imf-milton-friedman-opinions-columnists-bruce-bartlett.html |access-date= |website=[[Forbes]] |language=en}}</ref> ====Inequality==== [[File:Tenantless farm Texas panhandle 1938.jpg|thumb|[[Mechanised agriculture|Power farming]] displaces tenants from the land in the western dry cotton area. [[Childress County, Texas]], 1938.]] Two economists of the 1920s, [[Waddill Catchings]] and [[William Trufant Foster]], popularized a theory that influenced many policy makers, including [[Herbert Hoover]], [[Henry A. Wallace]], [[Paul Douglas]], and [[Marriner Eccles]]. It held the economy produced more than it consumed, because the consumers did not have enough income. Thus the unequal [[distribution of wealth]] throughout the 1920s caused the Great Depression.<ref>{{Cite book|last=Joseph.|first=Dorfman|url=https://worldcat.org/oclc/71400420|title=The economic mind in American civilization.|date=1959|publisher=The Viking Press|oclc=71400420|access-date=February 18, 2022|archive-date=February 18, 2022|archive-url=https://web.archive.org/web/20220218125334/https://www.worldcat.org/title/economic-mind-in-american-civilization-vol-5-1918-1933/oclc/71400420|url-status=live}}</ref><ref name="Allgoewer">{{cite journal|last=Allgoewer|first=Elisabeth|date=May 2002|title=Underconsumption theories and Keynesian economics. Interpretations of the Great Depression|journal=Discussion Paper No. 2002β14|url=https://www.vwa.unisg.ch/RePEc/usg/dp2002/dp0214allgoewer_ganz.pdf|access-date=February 18, 2022|archive-date=March 4, 2016|archive-url=https://web.archive.org/web/20160304134117/http://www1.vwa.unisg.ch/RePEc/usg/dp2002/dp0214allgoewer_ganz.pdf|url-status=live}}</ref> According to this view, the root cause of the Great Depression was a global over-investment in heavy industry capacity compared to wages and earnings from independent businesses, such as farms. The proposed solution was for the government to pump money into the consumers' pockets. That is, it must redistribute purchasing power, maintaining the industrial base, and re-inflating prices and wages to force as much of the inflationary increase in purchasing power into [[consumer spending]]. The economy was overbuilt, and new factories were not needed. Foster and Catchings recommended<ref>{{Cite book|last1=Foster|first1=William Trufant|url=https://books.google.com/books?id=BDNBAAAAIAAJ|title=The Road to Plenty|last2=Catchings|first2=Waddill|date=1928|publisher=Houghton Mifflin|language=en|access-date=December 28, 2021|archive-date=February 18, 2022|archive-url=https://web.archive.org/web/20220218125332/https://books.google.com/books?id=BDNBAAAAIAAJ|url-status=live}}</ref> federal and state governments to start large construction projects, a program followed by Hoover and Roosevelt. ====Productivity shock==== {{blockquote|It cannot be emphasized too strongly that the [productivity, output, and employment] trends we are describing are long-time trends and were thoroughly evident before 1929. These trends are in nowise the result of the present depression, nor are they the result of the World War. On the contrary, the present depression is a collapse resulting from these long-term trends.|[[M. King Hubbert]]<ref>{{Cite journal |last1 = Hubbert |first1 = M. King |title = Man Hours and Distribution, Derived from ''Man Hours: A Declining Quantity'', Technocracy, Series A, No. 8, August 1936 |year = 1940 |url = https://www.scribd.com/doc/22289589/Man-Hours-and-Distribution-M-King-Hubbert |journal = |access-date = September 9, 2017 |archive-date = April 7, 2020 |archive-url = https://web.archive.org/web/20200407132524/https://www.scribd.com/doc/22289589/Man-Hours-and-Distribution-M-King-Hubbert |url-status = live }}</ref>}} The first three decades of the 20th century saw economic output surge with [[electrification]], [[mass production]], and motorized farm machinery, and because of the rapid growth in productivity there was a lot of excess production capacity and the work week was being reduced. The dramatic rise in [[productivity]] of major industries in the U.S. and the effects of productivity on output, wages and the workweek are discussed by Spurgeon Bell in his book ''Productivity, Wages, and National Income'' (1940).<ref>{{Cite book |last1= Bell |first1=Spurgeon|title= Productivity, Wages and National Income, The Institute of Economics of the Brookings Institution |year= 1940}}</ref> Summary: Please note that all contributions to Christianpedia may be edited, altered, or removed by other contributors. If you do not want your writing to be edited mercilessly, then do not submit it here. You are also promising us that you wrote this yourself, or copied it from a public domain or similar free resource (see Christianpedia:Copyrights for details). Do not submit copyrighted work without permission! Cancel Editing help (opens in new window) Discuss this page