The Great Depression: Causes, and cures

The Great Depression is usually seen as one of the greatest single economic events in world history. The interwar years represented years of economic turmoil as countries rebuilt after years of war and collapsing governments. There is a broad historiography representing the Great Depression, with historians determining both the causes of the depression itself, and what was responsible for ending the depression.  

In 1955, one of the first historiographical entries into researching the background of the Depression came from John Kenneth Galbraith’s book The Great Crash, 1929. Much of the common ideas about the Great Depression that have been espoused, especially at the secondary school level, reflect the ideas of Galbraith. It is from Galbraith that the ideas about a stock market bubble, that led to the crash came about, along with the ideas of a stock market buying frenzy that came forth out of a buyer's market. Furthermore, Galbraith’s book drives forth the ideas that there was an abundance of credit, and this led to vast stock speculation.  

The stock market crash of 1929 often is told to be the central cause of the Great Depression, but the reality of the historiography is that the answer is far more complex than a simple attribution to this singular event. Despite this, the study of the stock market crash is still of utmost importance. Eugene White in his article “The Stock Market Boom and Crash of 1929” examines the causes of the crash, often by comparing his recent studies to the works of authors like Galbraith. White puts emphasis on changes in the economy, most importantly the growth of industry at a rapid pace. The means of financing for industrial firms was challenged as commercial banks could not give out long-term loans in the years prior to the depression, nor could they trade, or acquire equities. Banks were able to set up securities, and these new securities grew rapidly, and attracted new investors, and many of these new investors were able to break into the market through investment trusts. Banks were no longer able to mediate between investments and the investor and this opened a new wave of bad investments, and inexperienced investors. At this time stocks prices soared while expected dividends did not, thus causing a bubble to form. White in his article critiques Galbraith’s focus on the investors ability to buy stock on credit, while the Federal Reserve put restrictions in place that limited the availability of credit. White is very skeptical of the idea that credit for stocks led to an extensive stock market boom. White believes that the greatest cause of the bubble, and likely the eventual crash, was the rapid rise in new industries that created new investors rapidly but questionable dividends. With the rise in stock prices, and the levelling of dividends, investors panicked and starting dumping stocks. This led to a recession that was coaxed along by bad policy from the Federal Reserve. 

For the overall causes of the depression, aside from the stock market crash, historians have produced copious quantities of differing ideas. One of the most interesting is the macroeconomic approach, coming from historians like Ben Bernanke. Bernanke wrote about the macro economical cause in his article titled “The Macroeconomics of the Great Depression: A Comparative Approach.” The article addresses the widespread financial instability at the time of the depression, including a drop in the supply of money worldwide. Bernanke argues that during the period known as the Great Contraction, between 1929-1933, monetary shocks around the world, coupled with bad financial policy, caused the depression. These shocks to the financial system, interestingly, were sent worldwide using the gold standard. He also writes about the falling money supply, as well as the monetary crisis caused by deflation, coupled with the slow adjustment of nominal wages which caused a rise in real wages. The gold standard had a major effect on the causation of widespread fiscal issues, as a decrease in gold supplies force countries throughout the world to tighten their financial policies. Between 1931-32 money stocks in all countries decreased according to Bernanke’s data. There were other issues as financial contracts, negotiated before any financial issues, especially deflation, led to debt deflation, as debtors sold whatever they had during a time of panic. The failure to adjust this nominal wage caused the Great Depression according to Bernanke. 

Through the study of these varying historians, and many others, it seems reasonable to see a multi-faceted approach. The macroeconomic study seems ideal as the entire world experienced economic collapse, and there appeared to be a money shortage during the time of the depression, as all countries suffered. The situation in the United States, most notably the stock market crash, was just one of many worldwide financial collapses that occurred. The study of the US stock market collapse offers valuable insight as to why the country started to go down the road to recession, while later models are needed to understand what pushed the country into a depression. The answer is bad monetary policy, as the countries around the world were dealing with a novel financial and market system at the time of the depression. 

The end of the depression is another matter examined readily by historians. The end is often attributed to the booming wartime economies that occurred during the Second World War, but the research is far more nuanced than that. Christina Romer in “What Ended the Great Depression” argued that government fiscal policy had little to do with the recovery of the US economy, and that the recovery began far earlier than the entry of America into World War 2. Bernanke wrote that countries turning away from the gold standard fared much better in an early economic recovery, while Romer states that a flow of gold into the United States during the 1930’s actually caused a rise in money supply. As European countries left the gold standard, gold flowed into the US, thus allowing for more sound investing. The war in Europe contributed to a new supply of gold in the US, and this worked in conjunction with the devaluation of the US dollar in 1933. This stopped rapid deflation, and in turn started a process of inflation.  

Frank Stendl in his article “What Ended the Great Depression? It Was Not World War II” reflects a lot of the same views as Romer. He understands the importance of the Second World War in Europe as a key moment increasing the supply of gold in the US. His criticism of Romer is that she implies a steady growth of the economy but fails to explain another recession that occurred in 1937-38. Stendl believes that the forces that drove the economy forward were constantly moving forward, as early as 1933, and they were strong enough to drive the economy out of another recession in 1938. He refers to this theory as endogenous propagation, and this idea refers to both the raise in aggregate demand, and aggregate supply of money, while also being coupled with greater productivity. Stendl sees the buildup to World War II for America as a hindrance to economic growth, rather than the economy saving event that many historians predict it was. The forces that were in motion early in the depression were growing exponentially throughout the depression to aid in its demise.  

The Great Depression’s end certainly does not seem to come by means of government policy. As learned in Price Fishback’s lecture on the New Deal, the programs put forth by the Federal Government were often ineffective. While they worked in some instances, they did not increase the employment levels at the time. Many write of FDR’s New Deal as the savior of the US economy, but it is easy to see now that there were deeper forces at work. Macroeconomics does seem to be important in understanding the recovery. As the war loomed in Europe, the Depression started to waver in the US, and this was seconded by Romer in her article. There were means of government intervention that were useful, such as the non-interference with gold prices by FDR’s administration. The devaluing of the US dollar was a key moment in changing the trajectory of the depression. The Second World War is often seen as the end of the Depression in the United States, but we learned that the end of the Depression came before the US entry in 1941. 

The study of the Great Depression is a complex one, especially when studying from an economic perspective. The work studied is very tedious, involving in-depth analysis of statistical evidence, that requires a good mind for quantitative research. No doubt there is little room for a single theory as to the cause of the depression, and the end, as the causation is extraordinarily complex, and involved far too many variables for an easy explanation.