What Is The Cause Of The Great Depression

Contemporary economic history has been marked by both prosperity periods and systemic disruptions, which led to several international crisis. Preceded by the 1920 's economic expansion, the Great Depression remains the most important crisis of the 20th century in terms of consequences and trauma. With the benefit of hindsight, contemporary economics researchers have put many theories forward to explain the mechanisms that caused the depression. It is however necessary to test the validity of these modern macroeconomic views by looking at them through the prism of history. The consensus about the causes of the Great Depression remains today very little. Through empirical testing, Fackler and Parker (1994) considered the main mono-causal theories
According to their analysis, movements in the real economy can be linked to the disruptions in the financial sector at that time. The “Great contraction” of the money supply (Friedman and Schwartz, 1963) may be an explanatory factor of the Great Depression to the extent that it worsened deflation. This hypothesis seems to be supported by empirical facts; money supply dropped by 35% in the United States, a great number of banks bankrupted, and prices decreased by approximately 33%. The banks failure induced a decrease of private wealth and a drop of money supply, which both contributed to exacerbate deflation. The monetary explanation of the Great Depression implies a failure of the Federal Reserve in its role of “lender of last resort”. The simultaneity of deep deflation and continuous contraction in money supply reveals a systemic flaw. Schwartz and Friedman claim that the Federal Reserve had the ability to block deflation and therefore limit the damages of the crisis. As a matter of fact, the Federal Reserve did not lend to banks to avoid panics and did not implement a monetary expansion whereas the amount of gold allowed such a policy in the early 1930 's. The monetary policy of the United States may have in this way contributed to the strengthening of the Great Depression, but this hypothesis does not explain the reasons behind the behaviour of the
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