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((short description|Overview of the causes of the Great Depression))
[[File:Real GDP of the United States from 1910-1960.svg|thumb|upright=1.5|US annual real GDP from 1910 to 1960, with the years of the Great Depression (1929–1939) highlighted.]]
[[File:CPI 1914-2022.webp|thumb|alt=CPI 1914-2022|330px|
((legend|#0076BA |[[Inflation]]))
((legend|#EE220C |[[Deflation]]))
((legend-line|#1DB100 solid 3px|[[Money supply|M2 money supply]] increases Year/Year))
]]
[[File:Money_supply_during_the_great_depression_era.png|thumb|right| Money supply decreased significantly between [[Black Tuesday]], October 24, 1929, and the [[Emergency Banking Act|Bank Holiday in March 1933]] when there were massive [[bank runs]] across the United States.]]
The '''causes of the Great Depression''' in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate.<ref>((cite book |last1=Humphrey |first1=Thomas M. |last2=Timberlake |first2=Richard H. |title=GOLD, THE REAL BILLS DOCTRINE, AND THE FED : sources of monetary disorder, 1922–1938. |publisher=CATO INSTITUTE |isbn=978-1-948647-55-7|date=April 2, 2019 ))</ref> They are part of the larger debate about [[economic crises]] and [[recession]]s. The specific economic events that took place during the [[Great Depression]] are well established. 

There was an initial stock market crash that triggered a "panic sell-off" of assets. This was followed by a [[deflation]] in asset and [[commodity]] prices, dramatic drops in demand and the total quantity of money in the economy, and disruption of trade, ultimately resulting in widespread unemployment (over 13 million people were unemployed by 1932) and impoverishment. However, economists and historians have not reached a consensus on the [[causal relationship]]s between various events and government economic policies in causing or ameliorating the Depression.

Current [[mainstream economics|mainstream]] theories may be broadly classified into two main points of view. The first are the demand-driven theories, from [[Keynesian economics|Keynesian]] and [[institutional economics|institutional economists]] who argue that the depression was caused by a widespread loss of confidence that led to drastically lower investment and persistent [[underconsumption]]. The demand-driven theories argue that the [[financial crisis]] following the 1929 crash led to a sudden and persistent reduction in consumption and investment spending, causing the depression that followed.<ref>
((cite book
|title=A Great Leap Forward: 1930s Depression and U.S. Economic Growth
|last1=Field
|first1= Alexander J.
|url=https://books.google.com/books?id=n2tXIWa8PoYC
|year= 2011 |publisher =Yale University Press
|location= New Haven, London
|isbn=978-0-300-15109-1 |page=182| postscript = Field cites Freeman & Schwartz (1963), Temin (1976), Bernanke (1983), Field (1984), Romer (1990), Eighengreen (1992)))
</ref> Once panic and deflation set in, many people believed they could avoid further losses by keeping clear of the markets. Holding money therefore became profitable as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand. 

Second, there are the [[Monetarism|monetarists]], who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the [[Federal Reserve]]) caused a shrinking of the [[money supply]] which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.<ref>((cite book|author1=Milton Friedman|author2=Anna Jacobson Schwartz|title=The Great Contraction, 1929–1933|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|isbn=978-0691137940|edition=New))</ref> Related to this explanation are those who point to [[debt deflation]] causing those who borrow to owe ever more in real terms.

There are also several various [[heterodox economics|heterodox theories]] that reject the explanations of the Keynesians and monetarists. Some [[New classical macroeconomics|new classical macroeconomists]] have argued that various labor market policies imposed at the start caused the length and severity of the Great Depression.

==Trying to return to the Gold Standard==
((See also|Financial crisis of 1914|World War I reparations))
During [[World War I]] many countries suspended their [[gold standard]] in varying ways.  There was high inflation from WWI, and in the 1920s in the [[Hyperinflation in the Weimar Republic|Weimar Republic]], [[Hyperinflation#Austria|Austria]], and throughout Europe.  In the late 1920s there was a scramble to deflate prices to get the gold standard's conversion rates back on track to pre-WWI levels, by causing [[deflation]] and high unemployment through monetary policy. In 1933 [[Franklin D. Roosevelt|FDR]] signed [[Executive Order 6102]] and in 1934 signed the [[Gold Reserve Act]].<ref>https://www.cato.org/blog/world-war-i-gold-great-depression#:~:text=The%20result%20was%20a%20second,4%20years%20in%20a%20row. ((Bare URL inline|date=August 2024))</ref>

==General theoretical reasoning==
The two classical competing theories of the Great Depression are the Keynesian (demand-driven) and the monetarist explanation. There are also various heterodox theories that downplay or reject the explanations of the Keynesians and monetarists.

Economists and economic historians are almost evenly split as to whether the traditional monetary explanation that monetary forces were the primary cause of the Great Depression is right, or the traditional Keynesian explanation that a fall in autonomous spending, particularly investment, is the primary explanation for the onset of the Great Depression.<ref name="in JSTOR">Robert Whaples, [http://www.employees.csbsju.edu/jolson/ECON315/Whaples2123771.pdf "Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions"], ''Journal of Economic History'', Vol. 55, No. 1 (March 1995), p. 150 [https://www.jstor.org/stable/2123771 in JSTOR.]</ref> Today the controversy is of lesser importance since there is mainstream support for the debt deflation theory and the expectations hypothesis that building on the monetary explanation of [[Milton Friedman]] and [[Anna Schwartz]] add non-monetary explanations.

There is consensus that the [[Federal Reserve System]] should have cut short the process of monetary deflation and banking collapse. If the Federal Reserve System had done that, the economic downturn would have been far less severe and much shorter.<ref>Robert Whaples, [http://www.employees.csbsju.edu/jolson/ECON315/Whaples2123771.pdf  "Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions"], ''Journal of Economic History'', Vol. 55, No. 1 (March 1995), p. 143 [https://www.jstor.org/stable/2123771 in JSTOR.]</ref>

===Mainstream theories===

====Keynesian====
((Main|Keynesian economics))
In his book ''[[The General Theory of Employment, Interest and Money]]'' (1936), British economist [[John Maynard Keynes]] introduced concepts that were intended to help explain the Great Depression. He argued that there are reasons that the self-correcting mechanisms that many economists claimed should work during a downturn might not work.

One argument for a non-interventionist policy during a [[recession]] was that if [[Consumption (economics)|consumption]] fell due to [[Wealth|savings]], the savings would cause the [[Interest|rate of interest]] to fall. According to the [[Classical economics|classical economists]], lower interest rates would lead to increased investment spending and demand would remain constant. However, Keynes argues that there are good reasons that investment does not necessarily increase in response to a fall in the interest rate. Businesses make investments based on expectations of profit. Therefore, if a fall in consumption appears to be long-term, businesses analyzing trends will lower expectations of future sales. Therefore, the last thing they are interested in doing is investing in increasing future production, even if lower interest rates make capital inexpensive. In that case, the economy can be thrown into a general slump due to a decline in consumption.<ref>Keen 2000, p. 198.</ref> According to Keynes, this self-reinforcing dynamic is what occurred to an extreme degree during the Depression, where [[bankruptcy|bankruptcies]] were common and investment, which requires a degree of optimism, was very unlikely to occur. This view is often characterized by economists as being in opposition to [[Say's Law]].

The idea that reduced [[capital investment]] was a cause of the depression is a central theme in [[secular stagnation theory]].

Keynes argued that if the national government spent more money to help the economy to recover the money normally spent by consumers and business firms, then unemployment rates would fall. The solution was for the [[Federal Reserve|Federal Reserve System]] to "create new money for the national government to borrow and spend" and to cut taxes rather than raising them, in order for consumers to spend more, and other beneficial factors.<ref name="Caldwell">Caldwell, J., & O'Driscoll, T. G. (2007). What Caused the Great Depression?. Social Education, 71(2), 70-74</ref> Hoover chose to do the opposite of what Keynes thought to be the solution and allowed the federal government to raise taxes exceedingly to reduce the budget shortage brought upon by the depression. Keynes proclaimed that more workers could be employed by decreasing interest rates, encouraging firms to borrow more money and make more products. Employment would prevent the government from having to spend any more money by increasing the amount at which consumers would spend. Keynes' theory was then confirmed by the length of the Great Depression within the United States and the constant unemployment rate. Employment rates began to rise in preparation for [[World War II]] by increasing government spending. "In light of these developments, the Keynesian explanation of the Great Depression was increasingly accepted by economists, historians, and politicians".<ref name="Caldwell"/>

====Monetarist====
((Main|Monetarism))
[[File:Great Depression monetary policy.png|thumb|The Great Depression in a monetary view.]]
In their 1963 book ''[[A Monetary History of the United States|A Monetary History of the United States, 1867–1960]]'', [[Milton Friedman]] and [[Anna Schwartz]] laid out their case for a different explanation of the Great Depression. Essentially, the Great Depression, in their view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman and Schwartz called "The [[Great Contraction]]"<ref>((cite book|author1=Milton Friedman|author2=Anna Jacobson Schwartz|title=The Great Contraction, 1929–1933|url= https://books.google.com/books?id=-lCArZfazBkC&pg=PP1|year=2008|publisher=Princeton University Press|isbn=978-0691137940|edition=New))</ref> — a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. Friedman and Schwartz argue that people wanted to hold more money than the Federal Reserve was supplying. As a result, people hoarded money by consuming less. This caused a contraction in employment and production since prices were not flexible enough to immediately fall. The Fed's failure was in not realizing what was happening and not taking corrective action.<ref>Paul Krugman (February 3, 2007), [http://www.nybooks.com/articles/19857 "Who Was Milton Friedman?"], ''New York Review of Books''</ref> In a speech honoring Friedman and Schwartz, [[Ben Bernanke]] stated:

<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."<ref>Ben Bernanke (Nov. 8, 2002), [http://www.federalreserve.gov/boarddocs/speeches/2002/20021108/default.htm FederalReserve.gov: "Remarks by Governor Ben S. Bernanke"], Conference to Honor Milton Friedman, University of Chicago</ref><ref>((cite book|author1=Milton Friedman|author2=Anna Jacobson Schwartz|title=The Great Contraction, 1929–1933|url= https://books.google.com/books?id=-lCArZfazBkC&pg=PP1|year=2008|publisher=Princeton University Press|page=247|isbn=978-0691137940|edition=New))</ref><br />
— Ben S. Bernanke</blockquote>

After the Depression, the primary explanations of it tended to ignore the importance of the money supply. However, in the monetarist view, the Depression was "in fact a tragic testimonial to the importance of monetary forces".<ref>((cite book|author1=Milton Friedman|author2=Anna Jacobson Schwartz|title=The Great Contraction, 1929–1933|url=https://books.google.com/books?id=-lCArZfazBkC&q=%22The%20contraction%20is%20in%20fact%20a%20tragic%20testimonial%20to%20the%20importance%20of%20monetary%20forces.%22|year=2008|pages=xviii, 13|publisher=Princeton University Press|isbn=978-0691137940|edition=New))</ref> In their view, the failure of the [[Federal Reserve System|Federal Reserve]] to deal with the Depression was not a sign that monetary policy was impotent, but that the Federal Reserve implemented the wrong policies. They did not claim the Fed ''caused'' the depression, only that it failed to use policies that might have stopped a recession from turning into a depression.

Before 
the Great Depression, the [[Economy of the United States|U.S. economy]] had already experienced a number of depressions. These depressions were often set off by banking crisis, the most significant occurring in [[Panic of 1873|1873]], [[Panic of 1893|1893]], [[Panic of 1901|1901]], and [[Panic of 1907|1907]].<ref>((cite web |last1=Amadeo |first1=Kimberly |title=17 Recessions in U.S. History |url=https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011 |website=The Balance |access-date=November 5, 2019 |language=en))</ref> Before the [[Federal Reserve Act|1913 establishment of the Federal Reserve]], the banking system had dealt with these crises in the U.S. (such as in the [[Panic of 1907]]) by suspending the convertibility of deposits into currency. Starting in 1893, there were growing efforts by financial institutions and business men to intervene during these crises, providing liquidity to banks that were suffering runs. During the banking panic of 1907, an ad hoc coalition assembled by [[J. P. Morgan]] successfully intervened in this way, thereby cutting off the panic, which was likely the reason why the depression that would normally have followed a banking panic did not happen this time.  A call by some for a government version of this solution resulted in the establishment of the Federal Reserve.<ref>* ((Cite book | title = The Panic of 1907: Lessons Learned from the Market's Perfect Storm | last1 = Bruner | first1 = Robert F. | last2 = Carr | first2 = Sean D. | year = 2007 | publisher = John Wiley & Sons | location = Hoboken, New Jersey | isbn = 978-0-470-15263-8 | url= https://books.google.com/books?id=dOMpE4zDZJIC))</ref>

But in 1929–32, the Federal Reserve did not act to provide [[liquidity]] to banks suffering [[bank run]]s. In fact, its policy contributed to the banking crisis by permitting a sudden contraction of the money supply. During the [[Roaring Twenties]], the central bank had set as its primary goal "price stability", in part because the governor of the New York Federal Reserve, [[Benjamin Strong]], was a disciple of [[Irving Fisher]], a tremendously popular economist who popularized stable prices as a monetary goal. It had kept the number of dollars at such an amount that prices of goods in society appeared stable. In 1928, Strong died, and with his death this policy ended, to be replaced with a [[real bills doctrine]] requiring that all currency or securities have material goods backing them. This policy permitted the U.S. [[money supply]] to fall by over a third from 1929 to 1933.<ref>((cite web|author=Richard H. Timberlake|date=August 2005|url=http://www.econjournalwatch.org/pdf/TimberlakeIntellectualTyrannyAugust2005.pdf|title=Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy|work=Econ Journal Watch|access-date=June 6, 2011|archive-date=September 10, 2005|archive-url=https://web.archive.org/web/20050910125855/http://www.econjournalwatch.org/pdf/TimberlakeIntellectualTyrannyAugust2005.pdf|url-status=dead))</ref>

When this money shortage caused runs on banks, the Fed maintained its true bills policy, refusing to lend money to the banks in the way that had cut short the 1907 panic, instead allowing each to suffer a catastrophic run and fail entirely. This policy resulted in a series of bank failures in which one-third of all banks vanished.<ref>Randall E. Parker (2003), [https://books.google.com/books?id=0X64AAAAIAAJ&q=one-third ''Reflections on the Great Depression''], Elgar Publishing ((ISBN|978-1843763352)), p. 11</ref> According to [[Ben Bernanke]], the subsequent credit crunches led to waves of bankruptcies.<ref>Ben Bernanke (1983), [http://www.nber.org/papers/w1054 "Non-monetary effects of the financial crisis in the propagation of the Great Depression"], ''American Economic Review'' . Am 73#3 257–76.</ref> Friedman said that if a policy similar to 1907 had been followed during the banking panic at the end of 1930, perhaps this would have stopped the vicious circle of the forced liquidation of assets at depressed prices. Consequently, the banking panics of 1931, 1932, and 1933 might not have happened, just as suspension of convertibility in 1893 and 1907 had quickly ended the liquidity crises at the time."<ref>Friedman 2007, p. 15.</ref>

Monetarist explanations had been rejected in Samuelson's work ''[[Economics (textbook)|Economics]]'', writing: "Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected."<ref>((Harv|Samuelson|1948|loc=p. 353))</ref> According to Keynesian economist [[Paul Krugman]], the work of Friedman and Schwartz became dominant among [[mainstream economists]] by the 1980s but should be reconsidered in light of Japan's [[Lost Decade (Japan)|Lost Decade]] of the 1990s.<ref>Paul Krugman, blog (December 14, 2009), [https://krugman.blogs.nytimes.com/2009/12/14/samuelson-friedman-and-monetary-policy/ "Samuelson, Friedman, and monetary policy"], ''The New York Times''</ref> The role of monetary policy in financial crises is in active debate regarding the [[financial crisis of 2007–2008]]; see [[Causes of the Great Recession]].

====Additional modern nonmonetary explanations====
The monetary explanation has two weaknesses. First, it is not able to explain why the demand for money was falling more rapidly than the supply during the initial downturn in 1930–31.<ref>Robert Whaples, [http://www.employees.csbsju.edu/jolson/ECON315/Whaples2123771.pdf "Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions"], ''Journal of Economic History'', Vol. 55, No. 1 (March 1995), p. 150, [https://www.jstor.org/stable/2123771?seq=1#page_scan_tab_contents in JSTOR]</ref> Second, it is not able to explain why in March 1933 a recovery took place although short term interest rates remained close to zero and the money supply was still falling. These questions are addressed by modern explanations that build on the monetary explanation of Milton Friedman and Anna Schwartz but add non-monetary explanations.

=====Debt deflation=====
[[File:U.S. Public and Private Debt as a % of GDP.jpg|thumb]]
[[File:American union bank.gif|thumb|Crowd at New York's American Union Bank during a [[bank run]] early in the Great Depression.]]
[[File:Crowd outside nyse.jpg|thumb|Crowd gathering on [[Wall Street]] after the [[Wall Street Crash of 1929|1929 crash]].]]
((main|Debt deflation))

Total debt to GDP levels in the U.S. reached a high of just under 300 per cent by the time of the Depression. This level of debt was not exceeded again until near the end of the 20th century.<ref>[https://www.mauldineconomics.com/frontlinethoughts/double-debt-problem] Several graphs of total debt to GDP can be found on the Internet.</ref>

Jerome (1934) gives an unattributed quote about finance conditions that allowed the great industrial expansion of the post-W.W.I period:
<blockquote>Probably never before in this country had such a volume of funds been available at such low rates for such a long period.<ref name="Jerome 1934"/></blockquote>

Furthermore, Jerome says that the volume of new capital issues increased at a 7.7% compounded annual rate from 1922 to 1929 at a time when the Standard Statistics Co.'s index of 60 high grade bonds yielded from 4.98% in 1923 to 4.47% in 1927.

There was also a real estate and housing bubble in the 1920s, especially in [[Florida]], which burst in 1925. [[Alvin Hansen]] stated that housing construction during the 1920s decade exceeded population growth by 25 per cent.<ref>((Cite journal
| last1 = Hansen
| first1 =Alvin
| title = Economic Progress and Declining Population Growth
| year = 1939
|journal= American Economic Review
|volume=29
|issue=March
|pages=1–15
| jstor =1806983
))</ref>  See also: [[Florida land boom of the 1920s]]: Statistics kept by Cook County, Illinois show over 1 million vacant plots for homes in the Chicago area, despite only 950,000 plots being occupied, the result of Chicago's explosive population growth in combination with a real estate bubble.

[[Irving Fisher]] argued the predominant factor leading to the Great Depression was over-indebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles.<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=337–357|doi=10.2307/1907327|issue=4|publisher=The Econometric Society|jstor=1907327))</ref> He then 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 worths of business, 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 [[Wall Street Crash of 1929]] preceding the Great Depression, margin requirements were only 10%.<ref name="Margin Requirements">((cite journal|last=Fortune|first=Peter|date=Sep–Oct 2000|title= Margin Requirements, Margin Loans, and Margin Rates: Practice and Principles – analysis of history of margin credit regulations – Statistical Data Included|journal=New England Economic Review|url= http://findarticles.com/p/articles/mi_m3937/is_2000_Sept-Oct/ai_80855422/pg_3/?tag=content;col1))</ref> Brokerage firms, in other words, would lend $90 for every $10 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits 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">((cite web|access-date=May 22, 2008|url=http://www.livinghistoryfarm.org/farminginthe30s/money_08.html|title=Bank Failures|publisher=Living History Farm|archive-url=http://webarchive.loc.gov/all/20090219185825/http://livinghistoryfarm.org/farminginthe30s/money_08.html|archive-date=February 19, 2009|url-status=dead))</ref>

Outstanding debts became heavier, because prices and incomes fell by 20–50% 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, ''[[A Monetary History of the United States]]'', p.352</ref>

Bank failures snowballed as desperate bankers called in loans, which the 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 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 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]] as well as 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 leads to lowered [[aggregate demand]], a further decline in the price level then results 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, that in turn leads to a [[credit crunch]] which does serious harm to the economy. A credit crunch lowers investment and consumption and results in declining aggregate demand which additionally contributes to the deflationary spiral.<ref>Randall E. Parker (2003), [https://books.google.com/books?id=0X64AAAAIAAJ ''Reflections on the Great Depression''], Edward Elgar Publishing ((ISBN|9781843765509)), pp. 14-15</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=257–276|jstor=1808111))</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=918–37|s2cid=155049545 ))</ref>

Economist [[Steve Keen]] revived the [[Debt-reset theory of macroeconomics|debt-reset theory]] after he accurately predicted the 2008 recession based on his analysis of the Great Depression, and recently((When|date=October 2013)) advised Congress to engage in debt-forgiveness or direct payments to citizens in order to avoid future financial events.<ref>((cite web|last=Keen |first=Steve |url=http://www.debtdeflation.com/blogs/2012/12/06/briefing-for-congress-on-the-fiscal-cliff-lessons-from-the-1930s/ |title=Briefing for Congress on the Fiscal Cliff: Lessons from the 1930s – Steve Keen's Debtwatch |publisher=Debtdeflation.com |date=December 6, 2012 |access-date=December 1, 2014))</ref> Some people support the debt-reset theory.<ref>((cite magazine|last=Friedersdorf |first=Conor |url=https://www.theatlantic.com/business/archive/2012/12/what-if-the-fiscal-cliff-is-the-wrong-cliff/265964/# |title=What If the Fiscal Cliff Is the Wrong Cliff? |magazine=The Atlantic |date=December 5, 2012 |access-date=December 1, 2014))</ref><ref>((cite web|url=http://seekingalpha.com/instablog/428250-michael-clark/605631-private-debt-caused-the-current-great-depression-not-public-debt |title=Private Debt Caused The Current Great Depression, Not Public Debt – Michael Clark |date=11 May 2012 |publisher=Seeking Alpha |access-date=December 1, 2014))</ref>

===== Expectations hypothesis =====
Expectations have been a central element of macroeconomic models since the economic mainstream accepted the [[new neoclassical synthesis]]. While not rejecting that it was inadequate demand that sustained the depression, according to [[Peter Temin]], Barry Wigmore, Gauti B. Eggertsson and [[Christina Romer]] the key to recovery and the end of the Great Depression was the successful management of public expectations. This thesis is based on the observation that after years of deflation and a very severe recession, important economic indicators turned positive in March 1933, just as [[Franklin D. Roosevelt]] took office. Consumer prices turned from deflation to a mild inflation, industrial production bottomed out in March 1933, 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 a further deflation and 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 those expectations, interest rates at zero began to stimulate investment as planned. Roosevelt's fiscal and monetary policy regime change helped to make his policy objectives credible. The expectation of higher future income and higher future inflation stimulated demand and investments. The analysis suggests that the elimination of the policy dogmas of the gold standard, a balanced budget in times of crises and small government led to a large shift in expectation that accounts for about 70–80 percent 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 percent lower in 1937 than in 1933.<ref name="aeaweb.org">Gauti B. Eggertsson, [http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.4.1476 ''Great Expectations and the End of the Depression''], American Economic Review 2008, 98:4, 1476–1516</ref><ref name="nytimes.com">The New York Times, 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], October 20, 2012</ref><ref>Peter Temin, ''Lessons from the Great Depression'', MIT Press, 1992, ((ISBN|9780262261197)), p. 87-101</ref>

The [[recession of 1937–38]], 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 would be first steps to a restoration of the pre March 1933 policy regime.<ref>Gauti B. Eggertsson, [https://www.jstor.org/stable/29730131 Great Expectations and the End of the Depression], ''The American Economic Review'', Vol. 98, No. 4 (Sep. 2008), S. 1476–1516, p. 1480</ref>

===Heterodox theories===

====Austrian School====
((Main|Austrian School))
Austrian economists argue that the Great Depression was the inevitable outcome of the monetary policies of the Federal Reserve during the 1920s. The central bank's policy was an "easy credit policy" which led to an unsustainable credit-driven boom. The inflation of the money supply during this period led to an unsustainable boom in both asset prices (stocks and bonds) and [[capital goods]]. By the time the Federal Reserve belatedly tightened monetary policy in 1928, it was too late to avoid a significant economic contraction.<ref>Murray Rothbard, ''America's Great Depression'' (Ludwig von Mises Institute, 2000), pp. 159–63.</ref> Austrians argue that government intervention after the crash of 1929 delayed the market's adjustment and made the road to complete recovery more difficult.<ref>Rothbard, ''America's Great Depression'', pp. 19–21"</ref><ref>((cite book| last =Mises| first =Ludwig von | title =The Causes of the Economic Crisis; and Other Essays Before and After the Great Depression| publisher = [[Ludwig von Mises Institute]]| date =2006| pages =207| url =https://mises.org/library/causes-economic-crisis-and-other-essays-and-after-great-depression| isbn =978-1933550039 ))</ref>

Acceptance of the Austrian explanation of what primarily caused the Great Depression is compatible with either acceptance or denial of the monetarist explanation. Austrian economist [[Murray Rothbard]], who wrote ''[[America's Great Depression]]'' (1963), rejected the monetarist explanation. He criticized Milton Friedman's assertion that the central bank failed to sufficiently increase the supply of money, claiming instead that the Federal Reserve did pursue an inflationary policy when, in 1932, it purchased $1.1 billion of government securities, which raised its total holding to $1.8 billion. Rothbard says that despite the central bank's policies, "total bank reserves only rose by $212 million, while the total money supply fell by $3 billion". The reason for this, he argues, is that the American populace lost faith in the banking system and began hoarding more cash, a factor very much beyond the control of the Central Bank. The potential for a run on the banks caused local bankers to be more conservative in lending out their reserves, which, according to Rothbard's argument, was the cause of the Federal Reserve's inability to inflate.<ref>Rothbard, ''[[A History of Money and Banking in the United States (book)|A History of Money and Banking in the United States]]'', pp. 293–94.</ref>

[[Friedrich Hayek]] had criticised the Federal Reserve and the [[Bank of England]] in the 1930s for not taking a more contractionary stance.<ref>[[John Cunningham Wood]], Robert D. Wood, ''Friedrich A. Hayek'', Taylor & Francis, 2004, ((ISBN|9780415310574)), p. 115</ref> However, in 1975, Hayek admitted that he made a mistake in the 1930s in not opposing the Central Bank's deflationary policy and stated the reason why he had been ambivalent: "At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy.<ref name="WhiteClash">White, ''Clash of Economic Ideas'', p. 94.  See also((Cite journal|first=Lawrence|last=White|s2cid=153773721|title=Did Hayek and Robbins Deepen the Great Depression?|journal=Journal of Money, Credit and Banking |volume=40|issue=4|pages=751–768|year=2008|doi=10.1111/j.1538-4616.2008.00134.x|url=https://dergipark.org.tr/tr/pub/liberal/issue/48188/609854))</ref> In 1978, he made it clear that he agreed with the point of view of the monetarists, saying, "I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy", and that he was as opposed to deflation as he was to inflation.<ref name="A. Hayek 2009">F. A. Hayek, interviewed by Diego Pizano July 1979 published in: Diego Pizano, ''Conversations with Great Economists:  Friedrich A. Hayek, John Hicks, Nicholas Kaldor, Leonid V. Kantorovich, Joan Robinson, Paul A.Samuelson, Jan Tinbergen'' (Jorge Pinto Books, 2009).</ref> Concordantly, economist [[Lawrence H. White|Lawrence White]] argues that the [[Austrian business cycle theory|business cycle theory]] of Hayek is inconsistent with a monetary policy which permits a severe contraction of the money supply.

====Marxian ====
((Expand section|date=April 2017)) 
((See also|Marxism#Criticism_of_capitalism|label 1=Marxian criticisms of capitalism))
[[Marxism|Marxists]] generally argue that the Great Depression was the result of the inherent instability of the [[Capitalist mode of production (Marxist theory)|capitalist mode of production]].<ref>((cite web|url=http://www.marxists.org/archive/corey/1934/decline/index.html |title=Lewis Corey: The Decline of American Capitalism (1934) |publisher=Marxists.org |date=September 30, 2007 |access-date=December 1, 2014))</ref> According to [[Forbes]], "The idea that capitalism caused the Great Depression was widely held among intellectuals and the general public for many decades."<ref>((Cite web |last=Fleisher |first=Larry |date=2009-10-30 |title=The Great Depression And The Great Recession |url=https://www.forbes.com/2009/10/29/depression-recession-gdp-imf-milton-friedman-opinions-columnists-bruce-bartlett.html |access-date=2022-04-22 |website=[[Forbes]] |language=en))</ref>

==Specific theories of cause==

===Non-debt deflation===
In addition to the debt deflation there was a component of productivity deflation that had been occurring since [[The Great Deflation]] of the last quarter of the 19th century.<ref name="Bell 1940"/> There may have also been a continuation of the correction to the sharp inflation caused by World War I.

[[Price of oil|Oil prices]] reached their all-time low in the early 1930s as production began from the [[East Texas Oil Field]], the largest field ever found in the [[Contiguous United States|lower 48 states]]. With the oil market oversupplied prices locally fell to below ten cents per barrel.<ref>((cite book
|title=The Prize: The Epic Quest for Oil, Money $ Power
|last=Yergin
|first= Daniel
|year=1992 ))</ref>

===Productivity or technology shock===
In the first three decades of the 20th century productivity and economic output surged due in part to [[electrification]], [[mass production]] and the increasing motorization of transportation and farm machinery. [[Electrification]] and [[mass production]] techniques such as [[Fordism]] permanently lowered the demand for labor relative to economic output.<ref name="Beaudreau 1996"/><ref name="Vatter_et_al"/>  By the late 1920s the resultant rapid growth in productivity and investment in manufacturing meant there was a considerable excess production capacity.<ref>Beaudreau (1996) cites capacity utilization at 84-86%, which would be a decent number today; however, there were some industrial leaders who complained of overcapacity, as did Senator Smoot.</ref>

Sometime after the peak of the business cycle in 1923, more workers were displaced by productivity improvements than growth in the employment market could meet, causing unemployment to slowly rise after 1925.<ref name="Beaudreau 1996">((cite book |title=Mass Production, the Stock Market Crash and the Great Depression |last=Beaudreau |first=Bernard C. |year=1996 |publisher=Authors Choice Press|location=New York, Lincoln, Shanghi ))</ref><ref>((Cite journal
| last1 = Jerome
| first1 = Harry
| title = Mechanization in Industry, National Bureau of Economic Research
| journal = NBER
| year = 1934
| url = https://papers.nber.org/books/jero34-1
| postscript = <For the several industries studied industry expansion offset most of the productivity gains that would otherwise have resulted in many more job losses than actually occurred. To prevent rising unemployment the laid off workers would have to have changed industries, but it was noted that even if workers were successful at such a change the time typically took 18 months or more. The employment statistics for the 1930 census reflect conditions after the start of the depression so the actual employment situation prior to the depression is unknown.>))</ref> Also, the work week fell slightly in the decade prior to the depression.<ref>((cite web
 |title=Hours of Work in U.S. History 
 |year=2010 
 |url=http://eh.net/encyclopedia/article/whaples.work.hours.us 
 |url-status=dead 
 |archive-url=https://web.archive.org/web/20111026075949/http://eh.net/encyclopedia/article/whaples.work.hours.us 
 |archive-date=October 26, 2011 
))</ref><ref>((Cite journal
| last1 = Whaples
| first1 = Robert
| title = The Shortening of the American Work Week: An Economic and Historical Analysis of Its Context, Causes, and Consequences
| journal = Journal of Economic History
| volume=51 |issue=2 |pages=454–57
| date = June 1991
| doi = 10.1017/S0022050700039073
| s2cid = 153813437
))</ref><ref name="Field 2004">((cite web
 |last1=Field 
 |first1=Alexander 
 |title=Technological Change and Economic Growth the Interwar Years and the 1990s 
 |year=2004 
 |url=http://www.econ.yale.edu/seminars/echist/eh04/field-041006.pdf 
 |url-status=dead 
 |archive-url=https://web.archive.org/web/20120310163302/http://www.econ.yale.edu/seminars/echist/eh04/field-041006.pdf 
 |archive-date=March 10, 2012 
))</ref> Wages did not keep up with productivity growth, which led to the problem of [[underconsumption]].<ref name="Beaudreau 1996"/>

[[Henry Ford]] and [[Edward A. Filene]] were among prominent businessmen who were concerned with [[overproduction]] and [[underconsumption]]. Ford doubled wages of his workers in 1914. The over-production problem was also discussed in Congress, with Senator [[Reed Smoot]] proposing an import tariff, which became the [[Smoot–Hawley Tariff Act]]. The Smoot–Hawley Tariff was enacted in June 1930.  The tariff was misguided because the U.S. had been running a trade account surplus during the 1920s.<ref name="Beaudreau 1996"/>

Another effect of rapid technological change was that after 1910 the rate of capital investment slowed, primarily due to reduced investment in business structures.<ref name="Vatter_et_al">(( Cite journal
| last1 = Vatter
| last2 = Walker
| last3 =Alperovitz
| first1 = Harold G.
| first2 = John F.
| first3 =Gar
| title = The onset and persistence of secular stagnation in the U.S. economy: 1910–1990
| journal= Journal of Economic Issues
| year = 2005
))</ref>

The depression led to additional large numbers of plant closings.<ref name="Jerome 1934"/>

<blockquote>It cannot be emphasized too strongly that the [productivity, output and employment] trends we are describing are long-time trends and were thoroughly evident prior to 1929. These trends are in nowise the result of the present depression, nor are they the result of the World War. On the contrary, the present depression is a collapse resulting from these long-term trends. — [[M. King Hubbert]]<ref>((Cite journal
| last1 = Hubbert
| first1 = M. King
| title = Man Hours and Distribution, Derived from ''Man Hours: A Declining Quantity'', Technocracy, Series A, No. 8, August 1936
| year = 1940
| url = https://www.scribd.com/doc/22289589/Man-Hours-and-Distribution-M-King-Hubbert
))</ref></blockquote>

In the book ''Mechanization in Industry'', whose publication was sponsored by the [[National Bureau of Economic Research]], Jerome (1934) noted that whether mechanization tends to increase output or displace labor depends on the elasticity of demand for the product.<ref name="Jerome 1934"/> In addition, reduced costs of production were not always passed on to consumers. It was further noted that agriculture was adversely affected by the reduced need for [[animal feed]] as [[Horse|horses]] and [[Mule|mules]] were [[Mechanization of agriculture|displaced by inanimate sources of power]] following [[World War I]]. As a related point, Jerome also notes that the term "[[technological unemployment]]" was being used to describe the labor situation during the depression.<ref name="Jerome 1934"/>

<blockquote>Some portion of the increased unemployment which characterized the [[Interwar United States|post-War years in the United States]] may be attributed to the mechanization of industries producing commodities of inelastic demand. — Fredrick C. Wells, 1934<ref name="Jerome 1934">((Cite book
| last1 = Jerome
| first1 = Harry
| title = Mechanization in Industry, National Bureau of Economic Research
| chapter = Introduction to "Mechanization in Industry"
| journal = Mechanization in Industry
| pages = –11–2
| year = 1934
| chapter-url = http://www.nber.org/chapters/c5239
))</ref></blockquote>

The dramatic rise in productivity of major industries in the U. S. and the effects of productivity on output, wages and the work week are discussed by a Brookings Institution sponsored book.<ref name="Bell 1940">((Cite journal
| last1 = Bell
| first1 = Spurgeon
| title = Productivity, Wages and National Income, The Institute of Economics of the Brookings Institution
| year = 1940
))</ref>

Corporations decided to lay off workers and reduced the amount of raw materials they purchased to manufacture their products. This decision was made to cut the production of goods because of the amount of products that were not being sold.<ref name="Caldwell"/>

[[Joseph Stiglitz]] and [[Bruce Greenwald]] suggested that it was a productivity-shock in agriculture, through fertilizers, mechanization and improved seed, that caused the drop in agricultural product prices.  Farmers were forced off the land, further adding to the excess labor supply.<ref name="Stiglitz, The Book of Jobs">((Cite news
| last = Stiglitz
| first = Joseph
| title = The Book of Jobs
| url=https://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201
| magazine=Vanity Fair
| access-date=December 23, 2011
| year = 2011
))</ref>

The prices of agricultural products began to decline after W.W.I and eventually many farmers were forced out of business, causing the failure of hundreds of small rural banks. [[Agricultural productivity]] resulting from [[Tractor|tractors]], [[Fertilizer|fertilizers]], and [[hybrid corn]] was only part of the problem; the other problem was the change over from horses and mules to internal combustion transportation. The horse and mule population began declining after W.W.I, freeing up enormous quantities of land previously used for animal feed.<ref name="Jerome 1934"/><ref name="Ayres-War 2002">((Cite journal
| last1 = Ayres
| last2 = Ayres
| last3 = Warr
| first1 = R. U.
| first2 = L. W.
| first3 = B.
| title = Exergy, Power and Work in the U. S. Economy 1900–1998, Insead's Center For the Management of Environmental Resources, 2002/52/EPS/CMER
| year = 2002
| url = http://terra2000.free.fr/downloads/expowork.pdf
| postscript = <Fig. 4 in Appendix>
| access-date = December 20, 2011
| archive-url = https://web.archive.org/web/20130518160114/http://terra2000.free.fr/downloads/expowork.pdf
| archive-date = May 18, 2013
| url-status = dead
))From one-sixth to one-quarter of all land had been used to grow animal feed.</ref><ref>((cite book |title      = A New Economic View of American History
 |last1      = Atack
 |first1     = Jeremy
 |last2      = Passell
 |first2     = Peter
 |year       = 1994
 |publisher  = W.W. Norton and Co.
 |location   = New York
 |isbn       = 978-0-393-96315-1
 |pages      = [https://archive.org/details/neweconomicviewo00atac/page/574 574–6]
 |url        = https://archive.org/details/neweconomicviewo00atac/page/574
))
</ref>

The rise of the internal combustion engine and increasing numbers of motorcars and buses also halted the growth of electric street railways.<ref>((Cite web |url=http://debunkportland.com/printables/TQOrigin.pdf |title=''General Motors and the Decline of Streetcars'' |access-date=January 11, 2012 |archive-url=https://web.archive.org/web/20130520124616/http://debunkportland.com/printables/TQOrigin.pdf |archive-date=May 20, 2013 |url-status=dead ))</ref>

The years 1929 to 1941 had the highest [[total factor productivity]] growth in the history of the U. S., largely due to the productivity increases in public utilities, transportation and trade.<ref>
((cite book
|title=A Great Leap Forward: 1930s Depression and U.S. Economic Growth
 |last1=Field
 |first1= Alexander J.
|year= 2011 |publisher =Yale University Press
|location= New Haven, London
|isbn=978-0-300-15109-1 
))
</ref>

===Disparities in wealth and income===
Economists such as [[Waddill Catchings]], [[William Trufant Foster]], [[Rexford Tugwell]], [[Adolph Berle]] (and later [[John Kenneth Galbraith]]), popularized a theory that had some influence on [[Franklin D. Roosevelt]].<ref>((cite book |first=David M. |last=Kennedy |title=Freedom From Fear, The American People in Depression and War 1929–1945 |publisher=Oxford University Press |year=1999 |isbn=978-0-19-503834-7 |pages=[https://archive.org/details/freedomfromfeara00kenn/page/122 122, 123] |url=https://archive.org/details/freedomfromfeara00kenn/page/122 ))</ref> This theory held that the economy produced more goods than consumers could purchase, because the consumers did not have enough income.<ref>Dorfman,1959</ref><ref name="Allgoewer">((cite journal|last=Allgoewer|first=Elisabeth|date=May 2002|title=Underconsumption theories and Keynesian economics. Interpretations of the Great Depression|journal=Discussion Paper No. 2002–14| url=http://ux-tauri.unisg.ch/RePEc/usg/dp2002/dp0214allgoewer_ganz.pdf))</ref><ref name="Peter Clemens 1954, p. 108">((cite book |first=Peter |last=Clemens |title=Prosperity, Depression and the New Deal: The USA 1890–1954 |publisher=Hodder Education |year=2008 |isbn=978-0-340-965887 |page=108 ))</ref> According to this view, in the 1920s wages had increased at a lower rate than productivity growth, which had been high. Most of the benefit of the increased productivity went into profits, which went into the [[stock market bubble]] rather than into consumer purchases. Thus workers did not have enough income to absorb the large amount of capacity that had been added.<ref name="Beaudreau 1996"/>

According to this view, the root cause of the Great Depression was a global overinvestment while the level of wages and earnings from independent businesses fell short of creating enough purchasing power. It was argued that government should intervene by an increased taxation of the rich to help make income more equal. With the increased revenue the government could create public works to increase employment and 'kick start' the economy. In the U.S.A. the economic policies had been quite the opposite until 1932. The [[Revenue Act of 1932]] and public works programmes introduced in Hoover's last year as president and taken up by Roosevelt, created some redistribution of purchasing power.<ref name="Peter Clemens 1954, p. 108"/><ref>''The Road to Plenty'' (1928)</ref>

The stock market crash made it evident that banking systems Americans were relying on were not dependable. Americans looked towards insubstantial banking units for their own liquidity supply. As the economy began to fail, these banks were no longer able to support those who depended on their assets – they did not hold as much power as the larger banks. During the depression, "three waves of bank failures shook the economy."<ref name="Chapter">Chapter 15: The Great Depression. (1999). Growth of the International Economy 1820–2000 (pp. 226–34). Taylor & Francis Ltd / Books.</ref> The first wave came just when the economy was heading in the direction of recovery at the end of 1930 and the beginning of 1931. The second wave of bank failures occurred "after the Federal Reserve System raised the rediscount rate to stanch an outflow of gold"<ref name="Chapter"/> around the end of 1931. The last wave, which began in the middle of 1932, was the worst and most devastating, continuing "almost to the point of a total breakdown of the banking system in the winter of 1932–1933".<ref name="Chapter"/> The reserve banks led the United States into an even deeper depression between 1931 and 1933, due to their failure to appreciate and put to use the powers they withheld – capable of creating money – as well as the "inappropriate monetary policies pursued by them during these years".<ref name="Chapter"/>

===Gold Standard system===
((Main|Gold standard))
According to the gold standard theory of the Depression, the Depression was largely caused by the decision of most western nations after [[World War I]] to return to the gold standard at the pre-war gold price.  Monetary policy, according to this view, was thereby put into a deflationary setting that would over the next decade slowly grind away at the health of many European economies.<ref>Ben Bernanke, ''Studies on the Great Depression'', Princeton University Press, 2009.</ref>

This post-war policy was preceded by an inflationary policy during World War I, when many European nations abandoned the gold standard, forced((citation needed|date=October 2012)) by the enormous costs of the war. This resulted in inflation because the supply of new money that was created was spent on war, not on investments in productivity to increase aggregate supply that would have neutralized inflation. The view is that the quantity of new money introduced largely determines the inflation rate, and therefore, the cure to inflation is to reduce the amount of new currency created for purposes that are destructive or wasteful, and do not lead to economic growth.

After the war, when America and the nations of Europe went back on the gold standard, most nations decided to return to the gold standard at the pre-war price. When the [[United Kingdom]], for example, passed the Gold Standard Act of 1925, thereby returning Britain to the gold standard, the critical decision was made to set the new price of the [[Pound Sterling]] at parity with the pre-war price even though the pound was then trading on the [[foreign exchange market]] at a much lower price. At the time, this action was criticized by [[John Maynard Keynes]] and others, who argued that in so doing, they were forcing a revaluation of wages without any tendency to equilibrium. Keynes' criticism of Chancellor of the Exchequer [[Winston Churchill]]'s form of the return to the gold standard implicitly compared it to the consequences of the [[Treaty of Versailles]].

One of the reasons for setting the currencies at parity with the pre-war price was the prevailing opinion at that time that deflation was not a danger, while inflation, particularly the [[Hyperinflation in the Weimar Republic|inflation in the Weimar Republic]], was an unbearable danger. Another reason was that those who had loaned in nominal amounts hoped to recover the same value in gold that they had lent.((citation needed|date=August 2012)) Because of the [[World War I reparations]] that [[Weimar Republic|Germany]] had to pay [[French Third Republic|France]], Germany began a credit-fueled period of growth in order to export and sell enough goods abroad to gain gold to pay the reparations. The U.S., as the world's gold sink, loaned money to Germany to stabilize its currency, which allowed it to access additional credit<ref>((Cite book |last=Winkler |first=Heinrich August |title=Der lange Weg nach Westen |publisher=C.H. Beck |year=2000 |isbn=978-3-406-66049-8 |volume=1 |location=Munich |pages=451 |language=de |trans-title=The Long Road to the West))</ref> to spur the growth needed to pay back France, and France to pay back loans to the U.K. and the U.S. The loan and a reparations schedule were codified in the [[Dawes Plan]].

In some cases, deflation can be hard on sectors of the economy such as agriculture, if they are deeply in debt at high interest rates and are unable to refinance, or that are dependent upon loans to finance capital goods when low interest rates are not available. Deflation erodes the price of commodities while increasing the real liability of debt. Deflation is beneficial to those with assets in cash, and to those who wish to invest or purchase assets or loan money.

More recent research, by economists such as Temin, [[Ben Bernanke]], and [[Barry Eichengreen]], has focused on the constraints policy makers were under at the time of the Depression. In this view, the constraints of the inter-war [[gold standard]] magnified the initial economic shock and were a significant obstacle to any actions that would ameliorate the growing Depression. According to them, the initial destabilizing shock may have originated with the [[Wall Street Crash of 1929]] in the U.S., but it was the gold standard system that transmitted the problem to the rest of the world.<ref>Eichengreen 1992, p. xi</ref>

According to their conclusions, during a time of crisis, policy makers may have wanted to loosen [[monetary policy|monetary]] and [[fiscal policy]], but such action would threaten the countries' ability to maintain their obligation to exchange gold at its contractual rate. The gold standard required countries to maintain high interest rates to attract international investors who bought foreign assets with gold. Therefore, governments had their hands tied as the economies collapsed, unless they abandoned their currency's link to gold. Fixing the exchange rate of all countries on the gold standard ensured that the market for foreign exchange can only equilibrate through interest rates. As the Depression worsened, many countries started to abandon the gold standard, and those that abandoned it earlier suffered less from deflation and tended to recover more quickly.<ref>Bernanke 2002, p. 80</ref>

[[Richard Timberlake]], economist of the [[free banking]] school and protégé of Milton Friedman, specifically addressed this stance in his paper ''Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy'', wherein he argued that the Federal Reserve actually had plenty of lee-way under the gold standard, as had been demonstrated by the [[price stability]] policy of [[New York Fed]] governor [[Benjamin Strong]], between 1923 and 1928. But when Strong died in late 1928, the faction that took over dominance of the Fed advocated a [[real bills]] doctrine, where all money had to be represented by physical goods. This policy, forcing a 30% deflation of the dollar that inevitably damaged the U.S. economy, is stated by Timberlake as being arbitrary and avoidable, the existing gold standard having been capable of continuing without it:

:This shift in control was decisive. In accordance with the precedent Strong had set in promoting a stable price level policy without heed to any golden fetters, real bills proponents could proceed equally unconstrained in implementing their policy ideal. System policy in 1928–29 consequently shifted from price level stabilization to passive real bills. "The" gold standard remained where it had been—nothing but formal window dressing waiting for an opportune time to reappear.<ref>Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy, RICHARD H. TIMBERLAKE http://www.econjournalwatch.org/pdf/TimberlakeIntellectualTyrannyAugust2005.pdf ((Webarchive|url=https://web.archive.org/web/20050910125855/http://www.econjournalwatch.org/pdf/TimberlakeIntellectualTyrannyAugust2005.pdf |date=September 10, 2005 ))</ref>

===Financial institution structures===
[[File:Stocks29.jpg|thumb|400px|New York stock market index]]

Economic historians (especially Friedman and Schwartz) emphasize the importance of numerous bank failures. The failures were mostly in rural America. Structural weaknesses in the rural economy made local banks highly vulnerable. Farmers, already deeply in debt, saw farm prices plummet in the late 1920s and their implicit real interest rates on loans skyrocket.

Their land was already over-mortgaged (as a result of the 1919 bubble in land prices), and crop prices were too low to allow them to pay off what they owed. Small banks, especially those tied to the agricultural economy, were in constant crisis in the 1920s with their customers defaulting on loans because of the sudden rise in real interest rates; there was a steady stream of failures among these smaller banks throughout the decade.

The city banks also suffered from structural weaknesses that made them vulnerable to a shock. Some of the nation's largest banks were failing to maintain adequate reserves and were investing heavily in the stock market or making risky loans. Loans to Germany and Latin America by New York City banks were especially risky. In other words, the banking system was not well prepared to absorb the shock of a major recession.

Economists have argued that a [[liquidity trap]] might have contributed to bank failures.<ref>((Cite book|title=Macroeconomics|last=Blanchard|first=Olivier|publisher=Pearson|year=2006|isbn=978-0131860261|location=New York))</ref>

Economists and historians debate how much responsibility to assign the Wall Street Crash of 1929. The timing was right; the magnitude of the shock to expectations of future prosperity was high. Most analysts believe the market in 1928–29 was a "bubble" with prices far higher than justified by fundamentals. Economists agree that somehow it shared some blame, but how much no one has estimated. Milton Friedman concluded, "I don't doubt for a moment that the collapse of the stock market in 1929 played a role in the initial recession".<ref>Parker, p. 49.</ref>

But the idea of owning [[Government bond|government bonds]] initially became ideal to investors when [[Liberty bond|Liberty Loan]] drives encouraged this possession in America during World War I. This strive for dominion persisted into the 1920s. After World War I, the United States became the world's creditor and was depended upon by many foreign nations. "Governments from around the globe looked to Wall Street for loans".<ref name="Chernow"/> Investors then started to depend on these loans for further investments. Chief counsel of the [[United States Senate Committee on Banking, Housing, and Urban Affairs|Senate Bank Committee]], [[Ferdinand Pecora]], disclosed that [[National City Corp.|National City]] executives were also dependent on loans from a special bank fund as a safety net for their stock losses while American banker [[Albert H. Wiggin]], "made millions selling short his own bank shares".<ref name="Chernow"/>

Economist David Hume stated that the economy became imbalanced as the recession spread on an international scale. The cost of goods remained too high for too long during a time where there was less international trade. Policies set in selected countries to "maintain the value of their currency" resulted in an outcome of bank failures.<ref name="Tenim"/> Governments that continued to follow the gold standard were led into bank failure, meaning that it was the governments and central bankers that contributed as a stepping stool into the depression.

The debate has three sides: one group says the crash caused the depression by drastically lowering expectations about the future and by removing large sums of investment capital; a second group says the economy was slipping since summer 1929 and the crash ratified it; the third group says that in either scenario the crash could not have caused more than a recession. There was a brief recovery in the market into April 1930, but prices then started falling steadily again from there, not reaching a final bottom until July 1932. This was the largest long-term U.S. market decline by any measure. To move from a recession in 1930 to a deep depression in 1931–32, entirely different factors had to be in play.<ref>White, 1990.</ref>

===Protectionism===
((Main|Protectionism))
[[Protectionism]], such as the American [[Smoot–Hawley Tariff Act]], is often indicated as a cause of the Great Depression, with countries enacting protectionist policies yielding a [[beggar thy neighbor]] result.<ref>''[https://krugman.blogs.nytimes.com/2009/11/30/protectionism-and-the-great-depression/ Protectionism and the Great Depression]'', [[Paul Krugman]], ''The New York Times'', November 30, 2009</ref><ref name="eichenirwin">''[http://voxeu.org/index.php?q=node/3280 The protectionist temptation: Lessons from the Great Depression for today]'', VOX, Barry Eichengreen, Douglas Irwin, March 17, 2009</ref> The Smoot–Hawley Tariff Act was especially harmful to agriculture because it caused farmers to default on their loans. This event may have worsened or even caused the ensuing bank runs in the [[Midwestern United States|Midwest]] and [[Western United States|West]] that caused the collapse of the banking system. A petition signed by over 1,000 economists was presented to the U.S. government warning that the Smoot–Hawley Tariff Act would bring disastrous economic repercussions; however, this did not stop the act from being signed into law.

Governments around the world took various steps into spending less money on foreign goods such as: "imposing tariffs, import quotas, and exchange controls". These restrictions formed a lot of tension between trade nations, causing a major deduction during the depression. Not all countries enforced the same measures of protectionism. Some countries raised tariffs drastically and enforced severe restrictions on foreign exchange transactions, while other countries condensed "trade and exchange restrictions only marginally":<ref name="Eichengreen"/>
*"Countries that remained on the gold standard, keeping currencies fixed, were more likely to restrict foreign trade." These countries "resorted to protectionist policies to strengthen the balance of payments and limit gold losses". They hoped that these restrictions and depletions would hold the economic decline.<ref name="Eichengreen"/> 
*Countries that abandoned the gold standard, allowed their currencies to [[Currency appreciation and depreciation|depreciate]] which caused their [[Balance of payments]] to strengthen. It also freed up monetary policy so that central banks could lower interest rates and act as lenders of last resort. They possessed the best policy instruments to fight the Depression and did not need protectionism.<ref name="Eichengreen"/>
*"The length and depth of a country's economic downturn and the timing and vigor of its recovery is related to how long it remained on the [[gold standard]]. Countries abandoning the gold standard relatively early experienced relatively mild recessions and early recoveries. In contrast, countries remaining on the gold standard experienced prolonged slumps."<ref name="Eichengreen"/>

In a 1995 survey of American economic historians, two-thirds agreed that the Smoot-Hawley tariff act at least worsened the Great Depression.<ref name="jstor.org">Robert Whaples, "Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions", ''Journal of Economic History'', Vol. 55, No. 1 (Mar. 1995), pp. 139–54 [https://www.jstor.org/stable/2123771 in JSTOR]</ref> However, many economists believe that the Smoot-Hawley tariff act was not a major contributor to the great depression. Economist [[Paul Krugman]] holds that, "Where protectionism really mattered was in preventing a recovery in trade when production recovered". He cites a report by Barry Eichengreen and Douglas Irwin: Figure 1 in that report shows trade and production dropping together from 1929 to 1932, but production increasing faster than trade from 1932 to 1937. The authors argue that adherence to the gold standard forced many countries to resort to tariffs, when instead they should have devalued their currencies.<ref>((Cite news|url=https://krugman.blogs.nytimes.com/2009/11/30/protectionism-and-the-great-depression/|title=Protectionism and the Great Depression|newspaper=Paul Krugman Blog|date=30 November 2009 |access-date=October 23, 2016))</ref> [[Peter Temin]] argues that contrary the popular argument, the contractionary effect of the tariff was small. He notes that exports were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in the next two years and the fall was offset by the increase in domestic demand from tariff.<ref>Temin, P. 1989. ''Lessons from the Great Depression'', MIT Press, Cambridge, Mass [https://books.google.com/books?id=squLnSDrJ4EC&dq=peter+temin+smoot+hawley+Lessons+from+the+Great+Depression&pg=PA46]</ref>

===International debt structure===
((more citations needed section|date=June 2015))

When the war came to an end in 1918, all European nations that had been allied with the U.S. owed large sums of money to [[Banking in the United States|American banks]], sums much too large to be repaid out of their shattered treasuries. This is one reason why the [[Allies of World War I|Allies]] had insisted (to the consternation of [[Woodrow Wilson]]) on reparation payments from Germany and [[Austria-Hungary]]. Reparations, they believed, would provide them with a way to pay off their own debts. However, the [[German Empire]] and [[Austria-Hungary]] were themselves in deep economic trouble after the war; they were no more able to pay the reparations than the Allies to pay their debts.

The debtor nations put strong pressure on the U.S. in the 1920s to forgive the debts, or at least reduce them. The American government refused. Instead, U.S. banks began making large loans to the nations of Europe. Thus, debts (and reparations) were being paid only by augmenting old debts and piling up new ones. In the late 1920s, and particularly after the American economy began to weaken after 1929, the European nations found it much more difficult to borrow money from the U.S. At the same time, high U.S. tariffs were making it much more difficult for them to sell their goods in U.S. markets. Without any source of revenue from foreign exchange to repay their loans, they began to default.

Beginning late in the 1920s, European demand for U.S. goods began to decline. That was partly because European industry and agriculture were becoming more productive, and partly because some European nations (most notably [[Weimar Germany]]) were suffering serious financial crises and could not afford to buy goods overseas. However, the central issue causing the destabilization of the [[Economy of Europe|European economy]] in the late 1920s was the international debt structure that had emerged in the [[aftermath of World War I]].

The high tariff walls such as the [[Smoot–Hawley Tariff Act]] critically impeded the payment of war debts. As a result of high U.S. tariffs, only a sort of cycle kept the reparations and war-debt payments going. During the 1920s, the former allies paid the war-debt installments to the U.S. chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the U.S. and Britain. Similarly, U.S. investments abroad provided the dollars, which alone made it possible for foreign nations to buy U.S. exports.

The Smoot–Hawley Tariff Act was instituted by Senator [[Reed Smoot]] and Representative [[Willis C. Hawley]], and signed into law by President Hoover, to raise taxes on American imports by about 20 percent during June 1930. This tax, which added to already shrinking income and overproduction in the U.S., only benefitted Americans in having to spend less on foreign goods. In contrast, European trading nations frowned upon this tax increase, particularly since the "United States was an international creditor and exports to the U.S. market were already declining".<ref name="Eichengreen">EICHENGREEN, B., & IRWIN, D. A. (2010). "The Slide to Protectionism in the Great Depression: Who Succumbed and Why?" ''Journal of Economic History'', 70(4), 871–97.</ref> In response to the Smoot–Hawley Tariff Act, some of America's primary producers and largest trading partner, [[Canada]], chose to seek retribution by increasing the financial value of imported goods favoured by the Americans.

In the scramble for liquidity that followed the 1929 stock market crash, funds flowed back from Europe to America, and Europe's fragile economies crumbled.

By 1931, the world was reeling from the worst depression of recent memory, and the entire structure of reparations and war debts collapsed.

===Population dynamics===
In 1939, prominent economist [[Alvin Hansen]] discussed the decline in population growth in relation to the Depression.<ref>(( Cite book
| last1 = Hansen
| first1 =Alvin
| title = Economic Progress and Declining Population Growth
| year = 1939
|isbn= 978-1162557823
| postscript = <Originally printed in a journal.  Reprinted 2004, 2010>
))</ref>
The same idea was discussed in a 1978 journal article by [[Clarence Barber]], an economist at the [[University of Manitoba]].  Using "a form of the [[Harrod–Domar model|Harrod model]]" to analyze the Depression, Barber states:

((Quote|In such a model, one would look for the origins of a serious depression in conditions which produced a decline in Harrod's natural rate of growth, more specifically, in a decline in the rate of population and labour force growth and in the rate of growth of productivity or technical progress, to a level below the warranted rate of growth.<ref name="Clarence Barber">Barber, Clarence L. "On the Origins of the Great Depression", ''Southern Economic Journal'', January, 1978, 44(3), pp. 432–56.</ref>))

Barber says, while there is "no clear evidence" of a decline in "the rate of growth of productivity" during the 1920s, there is "clear evidence" the population growth rate began to decline<!--as a result of what?--> during that same period. He argues the decline in population growth rate may have caused a decline in "the natural rate of growth" which was significant enough to cause a serious depression.<ref name="Clarence Barber" />

Barber says a decline in the population growth rate is likely to affect the demand for housing, and claims this is apparently what happened during the 1920s. He concludes:

((Quote|the rapid and very large decline in the rate of growth of non-farm households was clearly the major reason for the decline that occurred in residential construction in the United States from 1926 on.  And this decline, as Bolch and Pilgrim have claimed, may well have been the most important single factor in turning the 1929 downturn into a major depression.<ref>Barber, Clarence L. "On the Origins of the Great Depression", ''Southern Economic Journal'', January 1978, 44(3), pp. 432–56.  See also Bolch, B. W. and J. D. Pilgrim, "A Reappraisal of Some Factors Associated with Fluctuations in the United States in the Interwar Period."  ''Southern Economic Journal'', January 1973, pp. 327–44.</ref>))

The decline in housing construction that can be attributed to demographics has been estimated to range from 28% in 1933 to 38% in 1940.<ref>
((cite book |title      = A New Economic View of American History
 |last1      = Atack
 |first1     = Jeremy
 |last2      = Passell
 |first2     = Peter
 |year       = 1994
 |publisher  = W.W. Norton and Co.
 |location   = New York
 |isbn       = 978-0-393-96315-1
 |page       = [https://archive.org/details/neweconomicviewo00atac/page/599 599]
 |url        = https://archive.org/details/neweconomicviewo00atac/page/599
))
</ref>

Among the causes of the decline in the population growth rate during the 1920s were a declining birth rate after 1910<ref>
((cite book
|title=The Empty Cradle: How Falling Birthrates Threaten World Prosperity And What to Do About It
|last=Longman
|first=Philip
|year=2004
|isbn=978-0-465-05050-5
|page=[https://archive.org/details/emptycradlehowfa00long/page/87 87]
|publisher=Basic Books
|url=https://archive.org/details/emptycradlehowfa00long/page/87
))</ref> and reduced immigration. The decline in immigration was largely the result of legislation in the 1920s placing greater restrictions on immigration. In 1921, Congress passed the [[Emergency Quota Act]], followed by the [[Immigration Act of 1924]].

Factors that majorly contributed to the failing of the economy since 1925, was a decrease in both residential and non-residential buildings being constructed. It was the debt as a result of the war, fewer families being formed, and an imbalance of mortgage payments and loans in 1928–29, that mainly contributed to the decline in the number of houses being built. This caused the population growth rate to decelerate.((clarify|date=January 2019)) Though non-residential units continued to be built "at a high rate throughout the decade", the demand for such units was actually very low.<ref name="Chapter"/>

==Role of economic policy==

===Calvin Coolidge (1923–29)===
((Main|Presidency of Calvin Coolidge))
There is an ongoing debate between historians as to what extent President [[Calvin Coolidge]]'s [[laissez-faire]] hands-off attitude contributed to the Great Depression. Despite a growing rate of bank failures, he did not heed voices that predicted the lack of banking regulation as potentially dangerous. He did not listen to members of Congress warning that stock speculation had gone too far and he ignored criticisms that workers did not participate sufficiently in the prosperity of the [[Roaring Twenties]].<ref>((cite book |first=Melvin I. |last=Urofsky |title=The American Presidents: Critical Essays |url=https://archive.org/details/americanpresiden00urof |url-access=limited |isbn=978-0-8153-2184-2 |page=[https://archive.org/details/americanpresiden00urof/page/n406 391] |year=2000 |publisher=Garland Pub. ))</ref>

===Leave-it-alone liquidationism (1929–33)===
((Main|Presidency of Herbert Hoover))

====Overview====
[[File:Graph charting income per capita throughout the Great Depression.svg|thumb|450px|The Great Depression in an international context.]]
From the point of view of today's mainstream schools of economic thought, government should strive to keep some broad nominal aggregate on a stable growth path (for proponents of [[new classical macroeconomics]] and [[monetarism]], the measure is the nominal [[money supply]]; for [[Keynesian economists]] it is the nominal [[aggregate demand]] itself). During a depression the [[central bank]] should pour liquidity into the banking system and the government should cut taxes and accelerate spending in order to keep the nominal money stock and total nominal demand from collapsing.<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 |doi=10.3386/w3546 |page=1 |doi-access=free ))</ref>

The United States government and the [[Federal Reserve]] did not do that during the 1929‑32 slide into the Great Depression<ref name="nber.org"/> The existence of "[[Liquidationism (economics)|liquidationism]]" played a key part in motivating public policy decisions not to fight the gathering Great Depression. An increasingly common view among economic historians is that the adherence of some Federal Reserve policymakers to the liquidationist thesis led to disastrous consequences.<ref>((Cite journal|first=Lawrence|last=White|s2cid=153773721|title=Did Hayek and Robbins Deepen the Great Depression?|journal=Journal of Money, Credit, and Banking |volume=40|issue=4|pages=751–768|year=2008|doi=10.1111/j.1538-4616.2008.00134.x|url=https://dergipark.org.tr/tr/pub/liberal/issue/48188/609854))</ref> Regarding the policies of President Hoover, economists [[Barry Eichengreen]] and [[J. Bradford DeLong]] point out that the Hoover administration's fiscal policy was guided by liquidationist economists and policy makers, as Hoover tried to keep the federal budget balanced until 1932, when Hoover lost confidence in his Secretary of the Treasury [[Andrew Mellon]] and replaced him.<ref name="WhiteLawrence">((Cite journal|first=Lawrence|last=White|s2cid=153773721|title=Did Hayek and Robbins Deepen the Great Depression?|journal=Journal of Money, Credit and Banking |volume=40|issue=4|pages=751–768|year=2008|doi=10.1111/j.1538-4616.2008.00134.x|url=https://dergipark.org.tr/tr/pub/liberal/issue/48188/609854))</ref><ref name="nber.org"/><ref name="Randall E. Parker 2003, p. 9">Randall E. Parker, ''Reflections on the Great Depression'', Elgar publishing, 2003, ((ISBN|978-1843763352)), p. 9</ref> Hoover wrote in his memoirs he did not side with the liquidationists, but took the side of those in his cabinet with "economic responsibility", his Secretary of Commerce [[Robert P. Lamont]] and Secretary of Agriculture [[Arthur M. Hyde]], who advised the President to "use the powers of government to cushion the situation".<ref>[http://www.ecommcode.com/hoover/ebooks/pdf/FULL/B1V3_Full.pdf Hoover, Herbert. ''The Memoirs of Herbert Hoover'', p. 31] ((webarchive |url=https://web.archive.org/web/20081217233238/http://www.ecommcode.com/hoover/ebooks/pdf/FULL/B1V3_Full.pdf |date=December 17, 2008 ))</ref> But at the same time he kept Andrew Mellon as Secretary of the Treasury until February 1932. It was during 1932 that Hoover began to support more aggressive measures to combat the Depression.<ref name="delong.typepad.com">Bradford DeLong, [http://delong.typepad.com/sdj/2011/07/what-was-herbert-hoovers-fiscal-policy.html What Was Herbert Hoover's Fiscal Policy?]</ref> In his memoirs, President Hoover wrote bitterly about members of his Cabinet who had advised inaction during the downslide into the Great Depression:

((quote|The leave-it-alone liquidationists headed by Secretary of the Treasury Mellon ... felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate ... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."<ref name="nber.org"/>))

Before the ''[[Keynesian Revolution]]'', such a liquidationist theory was a common position for economists to take and was held and advanced by economists like [[Friedrich Hayek]], [[Lionel Robbins]], [[Joseph Schumpeter]], [[Seymour E. Harris]] and others.<ref name="Randall E. Parker 2003, p. 9"/> According to the liquidationists a depression is good medicine. The function of a depression is to liquidate failed investments and businesses that have been made obsolete by technological development in order to release factors of production (capital and labor) from unproductive uses. These can then be redeployed in other sectors of the technologically dynamic economy. They asserted that deflationary policy minimized the duration of the [[Depression of 1920–21]] by tolerating liquidation which subsequently created economic growth later in the decade. They pushed for deflationary policies (which were already executed in 1921) which – in their opinion – would assist the release of capital and labor from unproductive activities to lay the groundwork for a new economic boom. The liquidationists argued that even if self-adjustment of the economy took mass bankruptcies, then so be it.<ref name="Randall E. Parker 2003, p. 9"/> Postponing the liquidation process would only magnify the social costs. Schumpeter wrote that it<ref name="nber.org"/>

((quote|... leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another (worse) crisis ahead.))

Despite liquidationist expectations, a large proportion of the capital stock was not redeployed and 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 name="nber.org"/>

====Criticism====
Economists such as [[John Maynard Keynes]] and [[Milton Friedman]] suggested that the do-nothing policy prescription which resulted from the liquidationist theory contributed to deepening the Great Depression.<ref name="WhiteLawrence" /> With the rhetoric of ridicule, Keynes tried to discredit the liquidationist view in presenting Hayek, Robbins and Schumpeter as

((quote|...austere and puritanical souls [who] regard [the Great Depression] ... as an inevitable and a desirable nemesis on so much "overexpansion" as they call it ... It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again...))

Milton Friedman stated that at the [[University of Chicago]] such "dangerous nonsense" was never taught and that he understood why at [[Harvard University]] —where such nonsense was taught— bright young economists rejected their teachers' macroeconomics, and become Keynesians.<ref name="nber.org"/> He wrote:

((quote|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" />))

Economist [[Lawrence H. White|Lawrence White]], while acknowledging that Hayek and Robbins did not actively oppose the deflationary policy of the early 1930s, nevertheless challenges the argument of Milton Friedman, [[J.&nbsp;Bradford DeLong]] et al. that Hayek was a proponent of liquidationism. White argues that the business cycle theory of Hayek and Robbins (which later developed into [[Austrian business cycle theory]] in its present-day form) was actually not consistent with a monetary policy which permitted a severe contraction of the money supply. Nevertheless, White says that at the time of the Great Depression Hayek "expressed ambivalence about the shrinking nominal income and sharp deflation in 1929–32".<ref>Lawrence White, ''The Clash of Economic Ideas: The Great Policy Debates and Experiments of the 20th Century'' (Cambridge University Press), p. 94.</ref> In a talk in 1975, Hayek admitted the mistake he made over forty years earlier in not opposing the Central Bank's deflationary policy and stated the reason why he had been "ambivalent": "At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy."<ref name="WhiteClash" /> 1979 Hayek strongly criticized the Fed's contractionary monetary policy early in the Depression and its failure to offer banks liquidity:

((quote|I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.<ref name="A. Hayek 2009"/>))

[[File:US Unemployment from 1910-1960.svg|thumb|350px|Unemployment rate in the US 1910–60, with the years of the Great Depression (1929–39) highlighted; accurate data begins in 1939, represented by a blue line.]]

====Economic policy====
Historians gave Hoover credit for working tirelessly to combat the depression and noted that he left government prematurely aged. But his policies are rated as simply not far-reaching enough to address the Great Depression. He was prepared to do something, but nowhere near enough.<ref>Peter Clemens, ''Prosperity, Depression and the New Deal: The USA 1890–1954'', Hodder Education, 4. Auflage, 2008, ((ISBN|978-0-340-965887)), pp. 110–11</ref> Hoover was no exponent of laissez-faire. But his principal philosophies were [[voluntaryism|voluntarism]], self-help, and rugged individualism. He refused direct federal intervention. He believed that government should do more than his immediate predecessors ([[Warren G. Harding]], [[Calvin Coolidge]]) believed. But he was not willing to go as far as [[Franklin D. Roosevelt]] later did. Therefore, he is described as the "first of the new presidents" and "the last of the old".<ref>Peter Clemens, ''Prosperity, Depression and the New Deal: The USA 1890–1954'', Hodder Education, 4. Auflage, 2008, ((ISBN|978-0-340-965887)), p. 120</ref>

Hoover's first measures were based on voluntarism by businesses not to reduce their workforce or cut wages. But businesses had little choice and wages were reduced, workers were laid off, and investments postponed. The Hoover administration extended over $100 million in emergency farm loans and some $915 million in public works projects between 1930 and 1932. Hoover urged bankers to set up the [[National Credit Corporation]] so that big banks could help failing banks survive. But bankers were reluctant to invest in failing banks, and the National Credit Corporation did almost nothing to address the problem.<ref>Peter Clemens, ''Prosperity, Depression and the New Deal: The USA 1890–1954'', Hodder Education, 4. Auflage, 2008, ((ISBN|978-0-340-965887)), p. 113</ref><ref>((cite encyclopedia|url=http://eh.net/encyclopedia/article/butkiewicz.finance.corp.reconstruction |title=Reconstruction Finance Corporation|encyclopedia=EH.net Encyclopedia|archive-url=https://web.archive.org/web/20131029205418/http://eh.net/encyclopedia/article/butkiewicz.finance.corp.reconstruction |archive-date=October 29, 2013 ))</ref> In 1932 Hoover reluctantly established the [[Reconstruction Finance Corporation]], a Federal agency with the authority to lend up to $2&nbsp;billion to rescue banks and restore confidence in financial institutions. But $2&nbsp;billion was not enough to save all the banks, and [[bank run]]s and bank failures continued.<ref>Peter Clemens, ''Prosperity, Depression and the New Deal: The USA 1890–1954'', Hodder Education, 4. Auflage, 2008, ((ISBN|978-0-340-965887)), p. 114</ref>

====Federal spending====
[[File:Federal Spending.png|thumb|350px|Federal spending in millions of dollars (1910–60). The time period of the Hoover administration, the New Deal and World War&nbsp;II are highlighted.]]
[[J.&nbsp;Bradford DeLong]] explained that Hoover would have been a budget cutter in normal times and continuously wanted to balance the budget. Hoover held the line against powerful political forces that sought to increase government spending after the Depression began for fully two and a half years. During the first two years of the Depression (1929 and 1930) Hoover actually achieved budget surpluses of about 0.8% of [[gross domestic product]] (GDP). In 1931, when the recession significantly worsened and GDP declined by 15%, the federal budget had only a small deficit of 0.6% of GDP. It was not until 1932 (when GDP declined by 27% compared to 1929-level) that Hoover pushed for measures ([[Reconstruction Finance Corporation]], [[Federal Home Loan Bank Act]], direct loans to fund state Depression relief programs) that increased spending. But at the same time he pushed for the [[Revenue Act of 1932]] that massively increased taxes in order to balance the budget again.<ref name="delong.typepad.com"/>

Uncertainty was a major factor, argued by several economists, that contributed to the worsening and length of the depression. It was also said to be responsible "for the initial decline in consumption that marks the" beginning of the Great Depression by economists Paul R. Flacco and Randall E. Parker. Economist Ludwig Lachmann argues that it was pessimism that prevented the recovery and worsening of the depression<ref name="Houck">Houck, D. W. (2000). "RHETORIC AS CURRENCY: HERBERT HOOVER AND THE 1929 STOCK MARKET CRASH". ''Rhetoric & Public Affairs'', 3(2), 155–81.</ref> President Hoover is said to have been blinded from what was right in front of him.

Economist [[James Duesenberry]] argues economic imbalance was not only a result of World War I, but also of the structural changes made during the first quarter of the Twentieth Century. He also states the branches of the nation's economy became smaller, there was not much demand for housing, and the stock market crash "had a more direct impact on consumption than any previous financial panic".<ref name="Barber">Barber, C. L. (1978). "On the Origins of the Great Depression". ''Southern Economic Journal'', 44(3), 432.</ref>

Economist William A. Lewis describes the conflict between America and its primary producers:

((quote|Misfortunes [of the 1930s] were due principally to the fact that the production of primary commodities after the war was somewhat in excess of demand. It was this which, by keeping the terms of trade unfavourable to primary producers, kept the trade in manufactures so low, to the detriment of some countries as the United Kingdom, even in the twenties, and it was this which pulled the world economy down in the early thirties....If primary commodity markets had not been so insecure the crisis of 1929 would not have become a great depression....It was the violent fall of prices that was deflationary.<ref>Lewis, W. A. ''Economic Survey, 1919–1929''. London: Allen and Unwin, 1949.</ref>((page needed|date=January 2013))))

The stock market crash was not the first sign of the Great Depression. "Long before the crash, community banks were failing at the rate of one per day".<ref name="Chernow">((cite news|author=Chernow, R.|date=October 23, 2009|title=Everyman's financial meltdown|work=New York Times|id=((ProQuest|1030683641))))</ref> It was the development of the Federal Reserve System that misled investors in the 1920s into relying on federal banks as a safety net. They were encouraged to continue buying stocks and to overlook any of the fluctuations. Economist Roger Babson tried to warn the investors of the deficiency to come, but was ridiculed even as the economy began to deteriorate during the summer of 1929. While England and Germany struggled under the strain on gold currencies after the war, economists were blinded by an unsustainable 'new economy' they sought to be considerably stable and successful.<ref name="Chernow"/>

Since the United States decided to no longer comply with the gold standard, "the value of the dollar could change freely from day to day".<ref name="Tenim">Temin, P. (2010). ''The Great Recession & the Great Depression''. Daedalus, 139(4), 115–24.</ref> Although this imbalance on an international scale led to crisis, the economy within the nation remained stable.

The depression then affected all nations on an international scale. "The [[Reichsmark|German mark]] collapsed when [[Heinrich Brüning|the chancellor]] put domestic politics ahead of sensible finance; the bank of England abandoned the gold standard after a subsequent speculative attack; and the U.S. Federal Reserve raised its discount rate dramatically in October 1931 to preserve the value of the dollar".<ref name="Tenim"/> The Federal Reserve drove the American economy into an even deeper depression.

====Tax policy====
In 1929 the Hoover administration responded to the economic crises by temporarily lowering [[Income tax in the United States|income tax rates]] and the [[Corporate tax in the United States|corporate tax rate]].<ref name="Roy G. Blakey 2006, p. 301">Roy G. Blakey, Gladys C. Blakey, ''The Federal Income Tax'', 2006, p. 301</ref> At the beginning of 1931, [[Tax return|tax returns]] showed a tremendous decline in income due to the economic downturn. Income tax receipts were 40% less than in 1930. At the same time [[Government spending in the United States|government spending]] proved to be a lot greater than estimated.<ref name="Roy G. Blakey 2006, p. 301"/> As a result, the budget deficit increased tremendously. While Secretary of the Treasury Andrew Mellon urged to increase taxes, Hoover had no desire to do so since 1932 was an election year.<ref>Roy G. Blakey, Gladys C. Blakey, ''The Federal Income Tax'', 2006, pp. 302–03</ref> In December 1931, hopes that the economic downturn would come to an end vanished since all economic indicators pointed to a continuing downward trend.<ref>Roy G. Blakey, Gladys C. Blakey, ''The Federal Income Tax'', 2006, p. 304</ref> On January 7, 1932, Andrew Mellon announced that the Hoover administration would end a further increase in public debt by raising taxes.<ref>Roy G. Blakey, Gladys C. Blakey, ''The Federal Income Tax'', 2006, p. 305</ref> On June 6, 1932, the [[Revenue Act of 1932]] was signed into law.

===Franklin D. Roosevelt (1933–45)===
((Main|Presidency of Franklin D. Roosevelt, first and second terms))
[[File:PIBUSA1920-40.svg|lang=en|thumb|USA GDP annual pattern and long-term trend, 1920–40, in billions of constant dollars.]]

Roosevelt won the [[1932 United States presidential election|1932 presidential election]] promising to promote recovery.<ref>Walsh, Kenneth T. (September 10, 2008) [https://www.usnews.com/news/articles/2008/09/10/the-most-consequential-elections-in-history-franklin-delano-roosevelt-and-the-election-of-1932 The Most Consequential Elections in History: Franklin Delano Roosevelt and the Election of 1932 – U.S. News & World Report]. Usnews.com. Retrieved on July 14, 2013.</ref> He enacted a series of programs, including [[Social Security (United States)|Social Security]], banking reform, and suspension of the [[gold standard]], collectively known as the [[New Deal]].

The majority of historians and economists argue the New Deal was beneficial to recovery. In a survey of economic historians conducted by Robert Whaples, professor of economics at [[Wake Forest University]], anonymous questionnaires were sent to members of the ''Economic History Association''. Members were asked to either ''disagree'', ''agree'', or ''agree with provisos'' with the statement that read: "Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression." While only 6% of economic historians who worked in the history department of their universities agreed with the statement, 27% of those that work in the economics department agreed. Almost an identical percent of the two groups (21% and 22%) agreed with the statement "with provisos", while 74% of those who worked in the history department, and 51% in the economics department, disagreed with the statement outright.<ref name="jstor.org"/>

====Arguments for key to recovery====
According to [[Peter Temin]], Barry Wigmore, Gauti B. Eggertsson and [[Christina Romer]] the biggest primary impact of the [[New Deal]] on the economy and the key to recovery and to end the Great Depression was brought about by a successful management of public expectations. Before the first New Deal measures people expected a contractionary economic situation (recession, deflation) to persist. Roosevelt's fiscal and monetary policy regime change helped to make his policy objectives credible. Expectations changed towards an expansionary development (economic growth, inflation). The expectation of higher future income and higher future inflation stimulated demand and investments. The analysis suggests that the elimination of the policy dogmas of the gold standard, balanced budget and small government led to a large shift in expectation that accounts for about 70–80 percent of the recovery of output and prices from 1933 to 1937. If the regime change would not have happened and the Hoover policy would have continued, the economy would have continued its free fall in 1933, and output would have been 30 percent lower in 1937 than in 1933.<ref name="aeaweb.org"/><ref name="nytimes.com"/>

====Arguments for prolongation of the Great Depression====
In the [[new classical macroeconomics]] view of the Great Depression large negative shocks caused the 1929–33 downturn – including monetary shocks, productivity shocks, and banking shocks – but those developments become positive after 1933 due to monetary and banking reform policies. According to the model Cole-Ohanian impose, the main culprits for the prolonged depression were labor frictions and productivity/efficiency frictions (perhaps, to a lesser extent). Financial frictions are unlikely to have caused the prolonged slump.<ref name="minneapolisfed">Cole, Harold L., and Lee E. Ohanian. [https://www.minneapolisfed.org/research/qr/qr2311.pdf "The Great Depression from a Neoclassical Perspective"] N.p., n.d.</ref><ref name="minneapolisfed_a">Chari, V. V., Patrick J. Kehoe, and Ellen R. McGrattan. [https://www.minneapolisfed.org/research/qr/qr2311.pdf "Accounting for the Great Depression"] N.p., n.d.</ref>

In the Cole-Ohanian model there is a slower than normal recovery which they explain by New Deal policies which they evaluated as tending towards monopoly and distribution of wealth. The key economic paper looking at these diagnostic sources in relation to the Great Depression is Cole and Ohanian's work. Cole-Ohanian point at two policies of New Deal: the [[National Industrial Recovery Act]] and [[National Labor Relations Act]] (NLRA), the latter strengthening NIRA's labor provision. According to Cole-Ohanian New Deal policies created cartelization, high wages, and high prices in at least manufacturing and some energy and mining industries. [[Franklin D. Roosevelt|Roosevelts]] policies against the severity of the Depression like the NIRA, a "code of fair competition" for each industry were aimed to reduce cutthroat competition in a period of severe [[deflation]], which was seen as the cause for lowered demand and employment. The NIRA suspended antitrust laws and permitted collusion in some sectors provided that industry raised wages above clearing level and accepted collective bargaining with labor unions. The effects of [[cartel]]ization can be seen as the basic effect of [[monopoly]]. The given corporation produces too little, charges too high of a price, and under-employs labor. Likewise, an increase in the power of unions creates a situation similar to monopoly. Wages are too high for the union members, so the corporation employs fewer people and, produces less output. Cole-Ohanian show that 60% of the difference between the trend and realized output is due to cartelization and unions.<ref name="minneapolisfed" /> Chari, Kehoe, McGrattan also present a nice exposition that's in line with Cole-Ohanian.<ref name="minneapolisfed_a" />

This type of analysis has numerous counterarguments including the applicability of the equilibrium business cycle to the Great Depression.<ref>De Vroey, Michel R. [http://www.econ.umn.edu/~tkehoe/classes/DevroeyPensieroso.pdf "Real Business Cycle Theory and the Great Depression: The Abandonment of the Abstentionist Viewpoint"] N.p., n.d.</ref>

==See also==
* [[Great Contraction]]
* [[Criticism of the Federal Reserve]]
* [[Political philosophy]]
* [[Timeline of the Great Depression]]

((Clear))

==Notes==
<!--This article uses the Cite.php citation mechanism. If you would like more information on how to add footnotes to this article, please see http://meta.wikimedia.org/wiki/Cite/Cite.php -->
((reflist|2))

==References==
* ((Cite journal|last=Dorfman|first=Joseph|title=Economic Mind in American Civilization|year=1959|postscript= Vol. 4 and 5 cover the ideas of all American economists of 1918–1933))
* ((cite book|author1=Milton Friedman|author2=Anna Jacobson Schwartz|title=The Great Contraction, 1929–1933|url= https://books.google.com/books?id=-lCArZfazBkC&pg=PP1 |year=2008|publisher=Princeton University Press|isbn=978-0-691-13794-0 |edition=New))
* Milton Friedman and Anna Jacobson Schwartz (1963), ''[[A Monetary History of the United States, 1867–1960]]'', Princeton University Press
* [[Allan Meltzer|Meltzer, Allan H]] (2003), [https://books.google.com/books?id=190xVQDRtHAC ''A History of the Federal Reserve Volume I: 1913–1951''], Chicago University Press
* Rothbard, Murray N. (1963), ''[[America's Great Depression]]'' D. Van Nostrand Company, Princeton, N.J.
* ((Cite journal|last=Samuelson|first=Paul|author-link=Paul Samuelson|year=1948|title=Economics|title-link=Economics (textbook)))
* White, Eugene N. (Spring 1990) "The Stock Market Boom and Crash of 1929 Revisited" ''Journal of Economic Perspectives'', Vol. 4, No. 2, pp.&nbsp;67–83; examines different theories

==Further reading==

===World===
* Ambrosius, G. and W. Hibbard. ''A Social and Economic History of Twentieth-Century Europe'' (1989)
* Barber, Clarence Lyle (University of Manitoba) "On the Origins of the Great Depression" (1978)
* [[Michael D. Bordo|Bordo, Michael]], and Anna J. Schwartz, eds. ''A Retrospective on the Classical Gold Standard, 1821–1931'' (1984) (National Bureau of Economic Research Conference Report)
* Bordo, Michael et al. eds. ''The Gold Standard and Related Regimes: Collected Essays'' (1999)
* Brown, Ian. ''The Economies of Africa and Asia in the Inter-War Depression'' (1989)
* Davis, Joseph S. ''The World Between the Wars, 1919–39: An Economist's View'' (1974)
* [[Barry Eichengreen]] (1996), [https://archive.org/details/goldenfettersgol00eich ''Golden Fetters: The Gold Standard and the Great Depression, 1919–1939''] (NBER Series on Long-Term Factors in Economic Development) ((ISBN|0-19-510113-8))
* Barry Eichengreen and Marc Flandreau, eds. ''The Gold Standard in Theory and History'' (1997)
* Feinstein, Charles H. ''The European Economy Between the Wars'' (1997)
* Garraty, John A. ''The Great Depression: An Inquiry into the Causes, Course, and Consequences of the Worldwide Depression of the Nineteen-Thirties, as Seen by Contemporaries and in Light of History'' (1986)
* Garraty, John A. ''Unemployment in History'' (1978)
* Garside, William R. ''Capitalism in Crisis: International Responses to the Great Depression'' (1993)
* Haberler, Gottfried. ''The World Economy, Money, and the Great Depression 1919–1939'' (1976)
* Hall, Thomas E. and J. David Ferguson. ''The Great Depression: An International Disaster of Perverse Economic Policies'' (1998)
* Kaiser, David E. ''Economic Diplomacy and the Origins of the Second World War: Germany, Britain, France and Eastern Europe, 1930–1939'' (1980)
* [[Charles P. Kindleberger|Kindleberger, Charles P.]] ''The World in Depression, 1929–1939'' (1983);
* Tipton, F. and R. Aldrich. ''An Economic and Social History of Europe, 1890–1939'' (1987)

===United States===
* [[Ben S. Bernanke]]. ''Essays on the Great Depression'' (2000)
* Bernstein, Michael A. ''The Great Depression: Delayed Recovery and Economic Change in America, 1929–1939'' (1989) focus on low-growth and high-growth industries
* Bordo, Michael D., [[Claudia Goldin]], and Eugene N. White, eds. ''The Defining Moment: The Great Depression and the American Economy in the Twentieth Century'' (1998). Advanced economic history.
* Chandler, Lester. ''America's Greatest Depression'' (1970). economic history overview.
* De Long, Bradford. ''Liquidation Cycles and the Great Depression'' (1991)
* Jensen, Richard J. "The Causes and Cures of Unemployment in the Great Depression", ''Journal of Interdisciplinary History'' 19 (1989) 553–83. online at JSTOR in most academic libraries
* McElvaine, Robert S. ''The Great Depression'' (2nd ed 1993) social history
* Mitchell, Broadus. ''Depression Decade: From New Era through New Deal, 1929–1941'' (1964), standard economic history overview.
* Warren, Harris Gaylord. ''Herbert Hoover and the Great Depression'' (1959).

===Role of the United States Federal Reserve===
* Chandler, Lester V. ''American Monetary Policy, 1928–41.'' (1971).
* Epstein, Gerald and Thomas Ferguson. "Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932." ''Journal of Economic History'' 44 (December 1984): 957–84. in JSTOR
* Kubik, Paul J., "Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit." ''Journal of Economic Issues''. Vo: 30. Issue: 3. Publication Year: 1996. pp 829+.
* Mayhew, Anne. "Ideology and the Great Depression: Monetary History Rewritten." ''Journal of Economic Issues'' 17 (June 1983): 353–60.
* [[Allan Meltzer|Meltzer, Allan H]]. ''A History of the Federal Reserve, Volume 1: 1913–1951'' (2004) the standard scholarly history
* Steindl, Frank G. ''Monetary Interpretations of the Great Depression.'' (1995).
* [[Peter Temin|Temin, Peter]]. ''Did Monetary Forces Cause the Great Depression?'' (1976).
* Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920–1921 Depression", ''Journal of Economic History'' (1966) 26: 223–38, in JSTOR
* Wicker, Elmus. ''Federal Reserve Monetary Policy, 1917–33.'' (1966).
* Wells, Donald R. ''The Federal Reserve System: A History'' (2004)
* Wueschner, Silvano A. ''Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917–1927'' Greenwood Press. (1999)

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