The Great Depression: Causes and Consequences
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When discussing the cycle of boom and bust which occurred in the United States in the 1920s and 1930s one is dealing with at least two differing interpretations of economic reality. The first interpretation tends to assert that the depression of the 1930s owed little to the Wall Street Crash. This view argues that there were two main culprits that caused the downturn; a banking crisis and the drastic monetary contraction that took place after 1930 which allegedly was to have been caused by an overly tight monetary policy following the crash (Friedman and Schwartz, 1963). The attractive aspect of this theory is that it implies that the savage deflation and depression of the 1930s was merely the cause of a policy mistake. All that would have been required to correct it, therefore, would have been a determined policy of monetary ease on the part of the Federal Reserve (Friedman and Schwartz, 1963).This view of Friedman and Schwartz is more or less today's accepted explanation. They point out that there was an average rate of decline in wholesale prices of 1% per year between 1923 and 1929, discarding the opinion that the 1920s was a period of inflation. This assessment of the causes of the Great Depression has succeeded in displacing a previous theory which had wide acceptance at the time. This theory argues that the Wall Street crash and the following crisis was really the unavoidable sequel to the monetary and speculative excess that had preceded
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wered long-term interest rates. The end effect of this easing was apparently a type of asset inflation of stock and bond prices A credit expansion took place which began to go largely into the financing of financial speculation. Thus fixed investment began to slacken, particularly in building and construction, while consumer spending accelerated, perhaps fueled by the ephemeral profits of the stock market boom. Industrial production had peaked in May and June of 1929 and was already declining before the stock market crash in the fall of that year. But it was only after the stock market had crashed that the economy began its plunge in earnest (Richebacher, September 1993).
In the late 1920s mushrooming broker loans to customers financed stock speculation on slender margins. The money, which came mostly from corporations, played a crucial role in fueling the runaway stock market boom of 1928-1929. The abrupt withdrawal of these loans was probably also crucial in puncturing the financial bubble in stock speculation.
Historically, the 1928-1929 surge in broker loans may have marked the beginning of large-scale short-term nonbank financing in the U.S. Lured by call money rates of 6-12%, corporations started to lend surplus
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Approximate Word count = 1862
Approximate Pages = 7 (250 words per page)
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