The Great Depression

The Great Depression

There were multiple causes for the first downturn in 1929. These include the structural weaknesses and specific events that turned it into a major depression and the manner in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like major bank failures and the stock market crash. In contrast, monetarist economists (such as Barry Eichengreen, Milton Friedman and Peter Temin) point to monetary factors such as actions by the US Federal Reserve that contracted the money supply, as well as Britain's decision to return to the gold standard at pre–World War I parities (US$4.86:£1).

Recessions and business cycles are thought to be a normal part of living in a world of inexact balances between supply and demand. What turns a normal recession or 'ordinary' business cycle into a depression is a subject of much debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the issue of avoiding future depressions. A related question is whether the Great Depression was primarily a failure on the part of free markets or a failure of government efforts to regulate interest rates, curtail widespread bank failures, and control the money supply.

Current theories may be broadly classified into two main points of view and several heterodox points of view. There are demand-driven theories, most importantly Keynesian economics, but also including those who point to the breakdown of international trade, and Institutional economists who point to underconsumption and over-investment (causing an economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. 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...

Similar Essays