*** the Great Depression -- cause causes








The Great Depression: Causes

The Oakies
Figure 1.--The uneven distribution of wealth was a facor in the Great Depression. There werev other seriius issues such as inadequate regulatiinn ofv thev stock market. Modern economists have come to the conclusion, however, that it was flawed monetary policy that turned a recession into the Great Depression. Interesting, monetary policy was not a major issue at the time. The public debate was more foicused on fiscal policy abd balancung the budget.

Economists still debate what caused the Great Depression. Several factors certainly played roles. The unequal distributions of wealth throughout the 1920s was a factor. The excessive stock market speculation and vulnerable financial system in the late 1920s was another factor. The persistent weakness of the farm sector also played a role. Perhaps what turned an economic down turn into the Great Depression was Government mismanagment of the crisis. President Hoover and Congress enacted the Smoot-Hawley Tariff Act (193) which imposed high protective tariffs. Foreign countries unable to sell to the United States enacted their own protective tariffs and international trade spiraled down, causing the economic down turn to entensify. These are all factors which had economic and financial consequnces. And they are all endless portrayed as the major cause of the Great Depression. Economim down turns are apart of the normal operation of amarket economy. But because Marxist theory and liberal doctrine is hostile to markets, these are the causes usually cited by ecomonists anf other authors. And they do not explain why a perfectly normal economic down turn morphed into the Great Depression. What does explain it is the actions of the Federal Reserve. The Federal Reserve was created to regulate the money supply. The Fed in response to the Stock Market Crash and economic decline severly cut the money supply by more than 25 pecent. One noted economnist believes that this was a very important factor not widely recognized at the time. The cause of the Depression is still a matter of economic debate. There is wide agreement on several important factors. The debate today is more about the relative importance of these major factors. Important to note that unlike some would like us to believe, the Great Depression was not caused by machinations of evil capitalist and bankers, but by Government officials who believed that they could manage the economy better than market forces.

Standard Marxist/Liberal Explanation

Economists still debate what caused the Great Depression. Several factors certainly played roles. The unequal distributions of wealth throughout the 1920s was a factor. The excessive stock market speculation and vulnerable financial system in the late 1920s was another factor. The persistent weakness of the farm sector also played a role. Perhaps what turned an economic down turn into the Great Depression was Government mismanagment of the crisis. President Hoover and Congress enacted the Smoot-Hawley Tariff Act (193) which imposed high protective tariffs. Foreign countries unable to sell to the United States enacted their own protective tariffs and international trade spiraled down, causing the economic down turn to entensify. These are all factors which had economic and financial consequnces. And they are all endless portrayed as the major cause of the Great Depression. Economim down turns are apart of the normal operation of amarket economy. But because Marxist theory and liberal doctrine is hostile to markets, these are the causes usually cited by ecomonists anf other authors. And they do not explain why a perfectly normal economic down turn morphed into the Great Depression.

Principal Cause: Federal Reserve Reducing the Money Supply

The Federal Reserve was created to regulate the money supply. The Fed in response to the Stock Market Crash and economic decline severly cut the money supply by more than 25 pecent. Monetary policy was not a major issue at the time. Political discourse was more focused on fiscal policy (taxes and spending). It now appears that monetary policy was the key factor. One noted economnist believes that this turned what might have been a severe recession into the Great Depression. 【Friedman] Another important economist aggrees and believes that inappropriate tight monetary policy/increased in value of debt which help intensify a deflationary spiral. 【Bernanke. Essays] This was a factor that was not widely recognized at the time and for quite some time after the Depression. It is difficult to believe that this ws not a factor in the Depression. And perhaps if the Fed had eased rather than tightened it might have moderated the dimensions of the Depression. Friedman and his disciple, Ben Bernanke, clearly beliece that it was the primary factor. Bernanke of course put this theory into action with Quatatative Easing during the financial crisis of 2008-09. 【Bernanke. Courage.】 It clearly staved off financial disaster. What is not yet clear is if it has prevented disaster or meerly postponed it and perhaps set he stge for an even more serious financial crisis. Less popular today is the idea that more imprtant was undetmining markets. The U.S. export sector in the industrial heartland got drastically over-built in response to booming but unsustainable global demand for U.S. exports funded by debt raised on Wall Street during the 1920s. Also because the farm belt became a bubble when Washington's war loans during 1915-1920 turned it into the granary of the world. In the 1920s, agriclture was a much larger sector than is the case today.

Reciprocal Links

Thank you for your interest in our site. If using any of our material, partially or in full, we ask that you always provide an active hyperlink to the pages that you have consulted.

Sources

Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World (2009).

Bernanke, Ben. Essays on the Great Depression (Princetoin University Press). Bernanke is a former Princeton University economist appointed to chair the Federal Reserve by President Bush. He is widely considered the pre-eminent living scholar of the Great Depression.

Bernanke, Ben. The Courage to Act.

Friedman, Milton.






CIH







Navigate the Children in History Website:
[Return to Main Depression page]
[Introduction] [Animals] [Biographies] [Chronology] [Climatology] [Clothing] [Disease and Health] [Economics] [Ethnicity] [Geography] [History] [Human Nature] [Law]
[Nationalism] [Presidents] [Religion] [Royalty] [Science] [Social Class]
[Bibliographies] [Contributions] [FAQs] [Glossaries] [Images] [Links] [Registration] [Tools]
[Children in History Home]






Created: 5:08 PM 10/15/2008
Last updated: 11:06 PM 1/21/2023