Chapter 45 [The 1929 Great Depression: Causes, Process, and Results, Part 1]

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[James Origins and Today] Chapter 45 - The 1929 Great Depression: Causes, Process, and Results, Part 1 (06/22/2023)

The largest economic depression in human history was the Great Depression. (In 2008, it was the Great Recession.) U.S. GDP declined 15%, U.S. unemployment reached 23%, and the highest unemployment rate in other countries reached 33%. Agricultural product prices fell 60%.

By mid-1930, interest rates had fallen to low levels, but expected deflation and people's continued reluctance to borrow meant that consumer spending and investment remained very low. By May 1930, automobile sales had fallen below their 1928 level. Overall, prices began to fall, although wages remained stable in 1930. Then, in 1931, a deflationary spiral began.

The two classic competing economic theories of the Great Depression are the Keynesian (demand-driven) explanation and the monetarist explanation. The consensus of the demand-driven theory is that a massive loss of confidence caused a sudden reduction in consumption and investment spending. Once panic and deflation began, many people believed they could avoid further losses by staying away from the market. As prices fell, holding money became profitable, and a given amount of money could buy more and more goods, which intensified the decline in demand.

Monetarists believe that the Great Depression began as an ordinary recession, but the contraction of the money supply greatly worsened the economic situation, causing the recession to become a depression.

There is a consensus that the Federal Reserve should have shortened the process of monetary deflation and bank collapse by expanding the money supply and acting as lender of last resort. If they had done so, the severity of the recession would have been greatly reduced, and its duration would have been much shorter.