Within macroeconomics, economists agree that there were a number of
contributing factors that led to the Great Depression. However, most of the discussion is about what was responsible for the depth and the length of this economic event. In the four years starting in the summer of 1929 until 1933,financial markets and institutions, labor markets as well as international currency and goods markets had stopped functioning and it seemed that economic and monetary policy remained helpless in that period. To analyze the Great Depression, Friedman and Schwartz supply one of the most critical but popular explanations. They focus on the monetary policy of the Federal Reserve System (hereinafter Fed) of the United States(hereinafter U.S.) since the Fed allowed a severe contraction in money supply
in the period of 1929 – 1933, even though the Federal Reserve Act of 1913 delegated monetary actions by the Fed to avoid such monetary contraction. Friedman and Schwartz claim that the severeness of monetary contraction resulted from the Fed’s passive response to the banking panics in the 1930s when the public increased sharply its demand for currency. However, they admit that the Fed conducted a successful policy during most of the 1920s until a “shift in power within the system and the lack of understanding and experience of those individuals to whom the power shifted” occurred. Herein, they point to the death of Benjamin Strong the Governor of the New York Federal Reserve Bank who had the sagacity and leadership to
take measures that would have avoided the Great Depression. Thus, they maintain that monetary contraction in the period of 1929 – 1933 induced the Great Depression due to a misguided policy by the Fed that was eventually in authority for the downturn in economic activity.
Table of Contents
1. INTRODUCTION
2. THE 1920s
2.1 THE ECONOMIC DEVELOPMENT AFTER WORLD WAR I
2.2 RETURN TO THE GOLD STANDARD
2.3 INTERNATIONAL TRADE AND CAPITAL FLOWS
2.4 THE STOCK MARKET BOOM AND THE RESPONSE OF THE FEDERAL RESERVE SYSTEM
3. THE CAUSES OF THE GREAT DEPRESSION
3.1 STOCK MARKET CRASH ON WALL STREET
3.1.1 What caused the Crash?
3.1.2 The Economic Downturn after the Crash of 1929
3.2. BANKING CRISES
3.2.1 The 1930 Banking Crisis
3.2.2 The 1931 Banking Crises
3.2.2.1 Onset of the First 1931 Banking Crisis
3.2.2.2 Onset of the Second 1931 Banking Crisis
3.2.3 The 1933 Banking Crisis
3.2.4 Economic Consequences of the Banking Crises
3.2.4.1 Money Supply Channel
3.2.4.2 Credit Channel
3.2.4.3 Interest Rate Uncertainty Channel
3.3 DEBT DEFLATION
3.3.1 Threat to Banks and other Financial Intermediaries
3.4 THE GOLD STANDARD BETWEEN 1929-1933
3.4.1 The Four Structural Flaws
3.4.1.1 Asymmetry of the Interwar Gold Standard
3.4.1.2 Foreign Exchange Reserves
3.4.1.3 Absence of Power of Central Banks
3.4.1.4 Gold Standard Disparities
3.4.2 The Gold Standard as a Driving Force in the Depression
3.5 RIGIDITY OF NOMINAL WAGES
3.6 WORLD TARIFFS
3.7 HOOVER’S LIQUIDATIONIST THEORY
4. ECONOMIC RECOVERY
5. CONCLUSIVE STATEMENT ON THE GREAT DEPRESSION
Research Objective and Themes
The primary objective of this thesis is to provide a comprehensive analysis of the factors that triggered and deepened the Great Depression in the United States, specifically challenging the narrow focus on monetary policy contraction as the sole cause. The research investigates how structural flaws in the interwar gold standard, banking instability, debt deflation, and global trade policies acted in concert to exacerbate the economic collapse.
- The role of the 1929 stock market crash as a trigger for economic contraction.
- Mechanisms of banking crises and their impact on money supply and credit channels.
- The systemic failure of the international gold standard and its inflationary/deflationary pressures.
- The influence of nominal wage rigidity and world trade tariffs on the global economic downturn.
- Governmental response strategies and the transition to economic recovery.
Excerpt from the Book
3.3 Debt Deflation
The theory of debt deflation goes back to Irving Fisher who discovered the mechanism by which the monetary shock had a real effect on economic activity during the Great Depression. Herein, he pointed at two factors, the initial situation of over-indebtedness and the occurring deflation process that together formed a debt deflation of the most severe sort. In respect to over-indebtedness Fisher was assured that at the onset of the stock market crash numerous households and firms were massively indebted. The main reasons for over-indebtedness were surely the 1920s. But this was not necessarily an irrational behavior of economic agents. This over-indebtedness may also had reflected rational behavior as a response to the investment boom in the twenties, caused through new profit opportunities that came along with technological innovations and the stock market boom during the 1920s as mentioned in chapter 2.
In accordance to Fisher, the stock market crash at Wall Street was then the eventual detonator, precipitating a downward spiral through a devaluation of assets and commodities. Therefore, over-investment and over-speculation are significant spurious emergences but their impact would have been less severe in the presence of deflation, if they were not operated through borrowed money.
Summary of Chapters
1. INTRODUCTION: Outlines the research focus on the multifaceted causes of the Great Depression, questioning the exclusive focus on Federal Reserve monetary policy.
2. THE 1920s: Provides an overview of the economic developments, international capital flows, and the stock market environment leading up to 1929.
3. THE CAUSES OF THE GREAT DEPRESSION: Analyzes the structural and monetary triggers including the stock market crash, banking panics, debt deflation, the gold standard, and trade policy.
4. ECONOMIC RECOVERY: Discusses the transition to recovery following the abandonment of the gold standard and the implementation of new economic policies by the Roosevelt administration.
5. CONCLUSIVE STATEMENT ON THE GREAT DEPRESSION: Synthesizes the findings to argue that the Great Depression resulted from a complex interaction of global and national factors rather than isolated errors.
Keywords
Great Depression, 1929 Stock Market Crash, Federal Reserve System, Gold Standard, Banking Crises, Debt Deflation, Money Supply, Credit Channel, Nominal Wage Rigidity, Smoot-Hawley Act, Economic Contraction, Liquidationist Theory, International Trade, Deflation, Monetary Policy
Frequently Asked Questions
What is the core focus of this thesis?
The thesis examines the various economic, monetary, and structural factors that contributed to the intensity and duration of the Great Depression in the United States.
What are the primary thematic fields covered?
The paper covers macroeconomics, monetary history, the global gold standard system, banking regulation, international trade relations, and labor market dynamics during the 1920s and 1930s.
What is the central research question?
It seeks to determine if the Great Depression was exclusively the result of a misguided monetary policy by the Federal Reserve, as claimed by Friedman and Schwartz, or if other structural factors played a more decisive role.
What research methodology is applied?
The paper utilizes a qualitative literature analysis and review, synthesizing various economic theories (neoclassical, Keynesian) and historical data to evaluate different academic perspectives.
What topics are discussed in the main part?
The main part analyzes the stock market crash, the series of banking panics from 1930-1933, the role of debt deflation, the structural failures of the interwar gold standard, and the impact of world tariffs.
Which keywords best describe this study?
Keywords include Great Depression, Gold Standard, Banking Crises, Debt Deflation, Monetary Contraction, and Structural Flaws.
How did banking panics specifically influence the economic output?
Banking panics reduced the money supply through the money multiplier effect and impaired credit intermediation, which increased the cost of borrowing and forced firms into bankruptcy.
Why does the author focus on the "rules of the game" regarding the gold standard?
The "rules of the game" describe how central banks were supposed to manage gold inflows and outflows to maintain price stability; the paper argues these rules actually forced countries to deflate their economies, worsening the crisis.
- Quote paper
- Dennis Sauert (Author), 2009, The Role of the 1929 Stock Market Crash and other Factors that caused the Great Depression, Munich, GRIN Verlag, https://www.grin.com/document/158132
