There are many arguments surround the causes of the Great Depression, the lead up to the October 1929 crash, and the overall factors and indicators playing a role in the ultimate demise of the economic storm that culminated the the Great Depression of the 1930s. One common theory about economics of the Great Depression is that there were changes in fiscal policy that directly led to the downfall that occurred. Another argument lies in the existence of a Bull Market in the 1920s.This idea considers the conditions in which the financial markets and rising prices or the expectation of prices on consumer goods will rise that prompts the stock market to reflect confidence therefore rises. Common stock indices prove that the utilities industry drove the higher stock prices in the late 192os. [1}. Yet, it is the Keynesian theory of economics that plays a significant role in then prospect of recovery during the Great Depression and that outlines a significant consequence and methods of producing an economic recovery.[2}
While there were many factors contributing the expansion of the markets and ultimately the bubble, such as buying on margin, mania over expanding stock prices and the potential income, the injection of new technologies and industries, and the innovative way in which banks and brokerage house were able to extend credit during a period in which there existed "tight money" and regulation, these circumstances alone did not create the burst the resulted in the Great Depression. White argues that it is the policies of the Federal Reserve and of Congress that actually caused the Great Depression[3].
Thus, Keynes argues that the correction needed to solve the rising unemployment, failing banks, and interest on money resides in a theory called General theory of Unemployment, Interest, and Money which notes that lack of demand (as a result of no income) produced a lack of lab or requirements, thus increased the need of the Federal Government to spend to generate movement in the economy. [4]
Gary Wolfram of Hillsdale College (2015) writes that by the government injecting money into the economy through spending rescues the economy. The perfect storm or solution occurred with the onset of WWII. This provided ample opportunity for FDR to spend through industry conversions and building planes, tanks, and weapons, regardless if they were destroyed or not. The fact that money was being spent in these areas provided needed jobs that created an opportunity for individuals to spend money. This theory may hold water if the economy thrives and the the spending is regulated. If the spending continues endlessly, then inflation and even hyper inflation may occur. The endless printing and spending of money does not arbitrarily provide jobs; during WWII there was a demand for labor to produce goods for the war effort. Today, however, spending for the sake of spending and providing income to encourage people not to work is ineffective and counterproductive and potentially leads to the downfall of the economy much like in the 1920s and 1930s. [5]
[1] Board of Governors of the Federal Reserve System (1943) found in "The Stock Market Boom and Crash of 1929 Revisited". Eugene White. The Journal of Economic Perspectives, Spring, 1990, Vol 4, No. 2.
[2] Ibid, 71
[3] ibid ,72
[4} Eyskens, Mark. "Influence of the Great Depression on Economic Theory". N,D.
[5] Woldfram, Gary. "Keynesian Economics and the Great Depression. Economics 101: The Principals of the Free Market Economics". (October, 19, 2015)BLOG.
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