Wednesday, December 16, 2009
Great Depression
The Great Depression had numerous causes but we discussed a few major ones. The four major explanations are the Keynesian, Internationalist, Monetarist and the mal-distribution of income. So, in this post, I would like you evaluate at least two of the explanations using specific historical detail. Make sure to point out both the value of the explanation as well as its limitations using specific historical detail. Remember to build of the comments before you by adding something new to the thread.
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Keynesian theory states that when people stop spending money and putting more money into the economy, that is when the economy fails. Keynes believed that when people are scared by something bad happening in the economy (stock market crash, failure of the gold standard, failure of the federal reserve to back banks, during the Great Depression and the time leading up to it there could've been a number of things for people to react to) that those people will stop spending their money. Of course the money put into the economy by consumers makes up the income of another group of consumers, who in turn halt their spending in response to decreased income, and therefore cut the income of everyone else, furthering the economic ruin as people decrease their spending. Keynes' solution for this downward spiral was to increase government spending to try and jump start the economy again and to increase the ammount of spending coming from consumers. One way to prove the truth to Keynes' ideas is to look at the failings of the US government. Hoover's administration immediately cut government spending drastically in 1929 and began to balance their budgets. This only served to worsen the already out of control economic situation. If this is not enough evidence to support Keynes on its own, the same thing happened again during Roosevelt's administration. The "Roosevelt Recession" was brought on when Roosevelt attempted the same thing, cutting spending and balancing budgets, which only served to undo the partially healed economy again.
ReplyDeleteKeynes' theory is also supported by the Internationalist theory. Internationalists state that the move off of the gold standard caused a massive change in the value of currency. This caused many people to hoard their money instead of continue their normal spending, causing the economy to spiral downward. But, the other part of the Internationalist view is that as Europe slipped into its own depression, the US lost a humongous market for its own goods. This caused overproduction to increase rapidly and warehouses began to fill with items that no one in the US wanted to buy, as they were already beginning to save their own money as well.
My main point is that many of the causes of the Great Depression are easy to link together. They all have commonalities and are often causes of each other even. I know I am definitely rambling though, so I am ending this. :-)
The central thesis of the Keynesian theory is that the Great Depression was caused by a significant decrease in aggregate demand. In a normal economy, the flow of money is at a "normal" level, meaning that the people are spending money, and by doing so, are stimulating the economy. However, the first major symptom of the Great Depression , the Stock Market Crash, instilled an extremely large amount of public insecurity about spending their money. The loss of confidence in the American economy caused a majority of the population to hoard their money, and in doing so, were actually contribution to their fear a looming "depression", so essentially, they were fueling the fire of an utter economic breakdown. Before the Stock Market Crash, there was a decline in demand. The "Roaring 20s" thrived upton the success of two major industries: Real Estate(houses) and automobiles. Some say that economic success is always a good thing, but the success based on these particular industries presentad a problem. These industries were durable goods. No matter how rich someone is, they only need so many cars and so many houses. So, these industries, which employed so many and played a large role in stimulating the economy, were desting to fail at some point. There were massive amounts of overproduction which led to inflation and the onset of economic hardship led the companies to lay off thousands of workers, which left them penniless, which was also detrimental to the economy.
ReplyDeleteThe question remains: was this the main cause of the depression? It is quite possible that it is. A huge piece of evidence that supports the Keynesian theory of economics is only three letters long: WW2. The transition to a war-time economy and the daramtic increase of spending that followed was what brought the US out of the GD, essentially, a raise in aggregate demand ended the GD. This theory is very strong because it is extremely logical and the circumstances that ended the GD affirm the theory's claims.
The limitations: The solutions that the Keynesian Theory of Economics suggested were deemed "too easy" by policy makers of the time, and if they were applied at the time, it is very unlikely that the public would have been able to shed their economic insecuity that easily. [Shout out to my peers(homies)-- if you can think of any other limitations, add them]
Monetary theory:
The Monetarist theory that was developed by Friedman and Scwartz centers on the idea that the failure of the Federal Reserve System led to the Great Depression. Friedman himself advocated a central bank policy aimed at keeping the supply and demand for money at equilibrium. Monetarists also argue against inflation, and believe that a spiral of delfation is a solution to economic turmoil. Another aspect of Monetarism was the Fed's decision to not allow loans and distribute credit. The smaller amount of money that was physically available and the amount that could be loanded were decreased, it made it difficult for businessmen to invest, which prohibited the reconstruction of the stokck market and ultimately the economy.
This theory has its strengths due to some of the statistics behind it. There were a large amount of banks that failed between 1929 and 1933. Some sources say that of the 25000 banks that were running in 1929, less than 15000 remained in 1933.
Statistics also support the decreased circulation of money during the Great Depression: in 1926, there was apprx $26 billion in circulation $20 billion in 1933. When the Great Depression was over, and WW2 was in the immediate future, there was appx $39 billion in circulation. These number confirm the Monetarist View that the Depression was worsened by the lack of action (circulation of money) on the part of the Federal Reserve System.
Limitations to the theory: There are times that the relationship between the supply and demand of money is minute, therefore making the theory itself founded on nothing. The theory appears to be more of a summation of what occurred during the Great Depression, rather than the cause. It could be argued that the Bank failures and the lack of action by the Federal Reserve System were symptoms of the Great Depression, if not events that exacerbated the already devastated economy. This theory fails to explain or identify what social or economic phenomena that took place to set the Great Depression into motion.
ReplyDeleteTristan, you beat me by one minute, dang!
ReplyDeleteAnyway: very lovely insight, I totally forgot about the "Roosevelt Recession" and it is a great piece of evidence to support the Keynesian Theory.
About the internationalist theory, it also had a lot to do with the differing interest rates that were happening all around the world. People would move their money to the banks w/ the largest interest rates, so they would make more money. However, this had an effect on the public's ability to take out loans because the interest rate was in fact so high, so it was detrimental to the economy in that effect
The Keynesian theory, like Becca and Tristan said, has mainly to do with one thing. That is the failure of Americans spending money. Plain and simple, when people are not spending money, there is no flow of money and that flows into the businesses and their inability to produce because they have no money. Basically, everything goes to a standstill. People were increasingly concerned about the economy's stability and with that came the stock market crash. The people did not want to spend, they wanted to save, expecially with the failure of the gold standard as well. The value of this theory is that it is complete common sense. The proof is in the Depression. People were not spending money. Aggregate demand was not up and small businesses were failing. The limitation of this theory is that is has no real base. It is more an all around summary of what happened, and it just so happens to fit.
ReplyDeleteThe theory that is most important is probably the mal-distribution of income. At the point of the Depression, average people were not making money. The only people that were making money were the rich people. Not that I am going all Liberal on you or anything, but the average people need a chance to be successful, especially during this time. People were not bring given the opportunity to spend and when people are not spending, businesses are not making money. When small businesses are not being taken care of, they fail, and that is just a domino effect. The value of this theory is that again, it is common sense and the proof is in the pudding. When the 'Average Joe' is not spending, something is and when the wealth was not distrubuted to all (working) people, the economy is obviously not going to work.
After reading what everyone else has contributed, I would like to add on to the idea of the Internationalists theory, gotta love that gold standard, and the mal-distribution of income. Going off what triscuit said, The Internationalists theory is strongly supported by the hawley-smoot tariff of 1930. That and economic nationalism added to the turmoil between countries trading together. I remember Mr. Bouchard's gold standard PowerPoint thinking to myself that the concept was complicated and unnecessary and then we later learned that it was one of the causes of the great depression! And let us not forget the great William Jennings Bryan's Cross of Gold speech of 1896, suggesting we get off the gold standard completely because it was not good for the economy! A limitation of this theory is it does not really take into account the mistakes made in the US economy alone, focusing mainly on the connection of the different economies around the world.
ReplyDeleteI would also like to add on to Danielle's point of the mal-distribution of wealth. What it comes down to is the fact that during the great depression and before the US lacked a middle class. And like Danny said the poor were really struggling, and what we forget is that it is the low class that is the majority and stimulates the economy, so when they are to scared to spend then the economy goes down! The limitation of this argument is it does not take into account is the international relationship of the US's economy so putting this theory together with the internationalist theory results in a perfect match! haha thanks for this assignment, it was pretty funny to read my old notes and informative of course!
The Keynes theory is the theory that the sharp drop of government spending played a huge role in the development of the Depression. In his attempt to stem the damage of the Depression in the government and to balance the budget, Wilson made severe cuts to government spending. With an already highly insecure public, this cut in government spending caused and even greater decrease in public spending and a lower aggregate demand. This was doom for mass manufacturing as manufacturers continued to produce large amounts of good that no one was able to or willing to buy. This caused manufacturing to crash.
ReplyDeleteEvidence supporting this theory points to the dramatic increase in the economy when government spending for WWII quickly stimulated the economy and essentially led the US out of Depression.
However this theory does not explain all aspects of the Depression or why it lasted so long.
The Monetary theory gives evidence that the government itself is to blame for the length and harshness of the Depression. Before the Depression, there were thousands of small local banks that depended on the loans and deposits from the local people. The government considered these banks to be weak and a detriment to the economy, raising inflation. To reverse this effect, the Federal Reserve refused to give loans to most of these small banks and many closed down. This impeded recovery by making loans virtually impossible to get. The key weakness of this theory is that the economy did not quickly recover when the government made funds readily available to banks.
Evaluating the many theories of what could have been the cause of the depression, I believe it is the keyensian theory and the monetary theory that lead to the severity of the Great Depression.
ReplyDeleteRecessions and depressions are part of the busniess cyle. The cycle delcares that no economy can forever be prosperious there must always be a decrease. The Great Depression came in at the right time, (some believe that an economy can only be in prosperity for 9 years before the buisness cycle hits the decrease), however the severity of the depression was not expected by anyone.
President Hoover blamed the drastic turn on the economy on Europe and the U.S. was simply an effect of the European issue. Although Hoover's opinion can be seen as reasonable due to the still horrible state of the German economy and France still being destroyed, that was not really the cause.
The orginal theory, makes a better arguement. As developed by Bernstein, he claims that the speculation by business and price-leveling were major causes to the depression. This can be supported by McElvaine, who also agrees that speculation and that lack of money trickling down was the cause of the depression. Speculation, was the idea that bussiness assumed the demand would continue to rise like it did during the roaring twenties, and overproduction became an issue as agregate demand started to decline. The overproduction caused lay offs and shortened wages. This lead to a higher decline in aggregate spending. It became a dominio effect that couldnt be stopped. The issue of severe decrease in aggergate demand was covered by a British Econominst, John Maynard Keynes. His theory was applied to all countries hit by the depression (which was all nations), that the drop in total demand was the cause of the depression, and that drop was due to the psychological effects of the New York Stock Exchange's Crash in October, which scared the public and cause the population to run for banks as debt needed to be paid, as well as banks lacked the money due to the margin buying.
There is no one true cause of the depression, it was a combination of several factors that lead to is severity, it was meant to happen but not to a drastic level that effected the world. Theories can only be applied, there is no real answer to the cause. Only factors, that compilied to a massive disaster that lead to a state of National Security.
As many of my highly intelligent classmates have said, Kaynes believed that the cause was a drop in agregate demand. His evidence was that when demand for loans fell, interest rates would go down. Low interest rates would encourage businesses to spend and that would increase production and thusly employment. However he also beleived that government spending by buying excess goods would be the be all end all to the depression. Unemployment leads to no consumerism and with nobody buying things businesses cannot produce things. with extra product sitting around because nobody is buying, the idea is that the government should buy it up to put more money in the economy. While in theory this seems like a good idea, the problem with it is that Hoover was against direct government intervetion. He believed that if the government intervened then the public would get used to the government bailing them out of things.
ReplyDeleteThe monetary theory by Freedman has similar ideas. This theory says that the fall in demand was a contributingefactor however the length and severity of the depression was from the unwillingness of the government to help banks and businesses. When the banks failed and many had to close, the goverment did very little if anything to help them. this caused a large drop in the circulation of money and without money in the economy for a prolonged period of time, the depression continued to drag on. Hoover's unwillingness did not help the situation nor did his efforts to try get private investors to help. He asked investors to loan money to the banks but they refused to do so unless banks promised they could pay them back, which they could not.
Further investigation into the different theories causing the Great Depression becomes quite frightening due to the realization of how dependent each individual action or event is Internationalist theory. Both relied heavily on the causes and effects of the actions around another. Two theories that come immediately to mind are the Keynesian theory and the Internationalist theory.
ReplyDeleteTo begin with, the Keynesian theory proposes that the fall of the economy was due to a severe lack of spending in the economy. Without the constant circulation of money in and out, up and down, right and left, the flow becomes stagnant and monetary resources that were once depended on for stability but now fluxuate so greatly or stop altogether cause immense chaos. Money and financial value of products doesn't appear out of thin air (or "dead air" in this case) so the most dependable solution was for immediate government spending. However, lack of action on this plan and hope that the economy would see itself through on its own caused great failure and the erruption of the Great Depression.
Transitioning from an American problem to a greater worldly scale we are introduced to the Internationalist theory. The world was still running on the Gold Standard at this time where the currency of the country could be traded for gold (which would be valuable in whatever time) and vice versa. Due to increasing paranoia in the economy and the lack of control the Federal Reserve had control on the American dollar, they maintained the dollar price and inflation rose. As this happened, people invested in trading money for gold and the Depression worsened. It was not until 1933 would the United States end their involvement in the Gold Standard.
Like everyone else said Keynes' theory basically says that the drop in agregate demand led to failure. Nobody was spending money so nobody could make money therefore they still couldn't spend money! I agree with Alex that he believed government intervention would help and that they needed to supply jobs for people (i.e. infrastructure)- because by giving people jobs they not only felt useful to the cause, they were making moeny allowing them to spend.
ReplyDeleteI also agree with Alex about the monetary theory. However, Hoover did try to make a deal with businesses and just go off their word that they would help and loan money to people but there was no incentive therefore they did not feel the need to follow through because after all, it was not helping them.
Annnnnnnd this is from Andi Grover because I don't know how to work this :)
Dang you all! Taking all of the good points makes me a sad panda :( I guess that all I can say is that I agree with what Tristan and Becca put down
ReplyDeleteAnd really with everybody else too, you guys have no idea how long I looked through my notes trying to find new ways to look at this
ReplyDeleteGood Job so far. This weekend, I will go through and so a podcast to clear up any misconceptions in the posts and give you some additional thoughts on the cause of the depression in the US. Realize the Stocks failed in 1929 and the run-on banks did not happen until 1931. Becareful to not over generalize or simplify a very complex problem. Causal factors are always complex but the Depression in especially difficult to understand.
ReplyDeleteWhen you say you agree with someone make sure you say why.
The great depression caused a number of social reform. But was it the source of this change or was it envitable due the change in "roles" of women and men. As well as the minorities.
ReplyDelete