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Do not fill this in! ===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" />}} Summary: Please note that all contributions to Christianpedia may be edited, altered, or removed by other contributors. 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