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 it. In other words the damaging monetary mischief had taken place earlier in the decade, and not later, in the early 1930s. Thus the crash and deflationary depression that followed were the predictable and inescapable consequence of the earlier excesses (Haberler, 1941).
The analysis of the boom and bust cycle of the 1920s and 1930s which follows will draw on the insights of both perspectives. However the ultimate implications of its conclusions tends to see the depressi...