Which one is the best explanation for the Great Depression of the 1930s?

[buritobr]

There are many explanations for the depression whick took place after the crash of October 1929. Which one is the most correct?

[Kingpoleon]

Throughout the 1920s, our country grew at rates naturally unsustainable, particularly when such growth is fueled by loans and credit. The recession followed because our tax structure was not (and is not) designed to be altered with tax cuts that increase effective salaries/wages, decrease effective consumption prices, and decrease the cost of transportation and doing business. We further failed by not pursuing monetary policy at a strong enough level to quickly end an economic depression, and our spending policies were as inefficient in application as they were tardy in administration.

I don’t know what “school of economics” that puts me in, if one of you care to label it.

[OSR stands with Israel]

Mix of Monetarist and Keynesian

[GlobeSoc]

The causes of the depression can be explained by Keynesianism, but the cause of the causes is capitalism

[True Federalist (진정한 연방 주의자)]

World War I and the return to the gold standard at the pre-war rates despite the massive increase in money supply during the war. The attempts to defend the overvaluation of various national currencies led to both the irrational exuberance of the Roaring Twenties and the resulting Great Depression when it could no longer be sustained.

[Southern Senator North Carolina Yankee]

I recall mentioning World War I in a similar thread a few years back and it led to derision but it is often and undervalued factor when you consider all of the implications it had especially for weakening the international economic and disrupting global trade not to mention the millions of dead and the economic activity they would have created had they been alive.

[Skill and Chance]

Mix of Monetarist and Keynesian

This.

[World politics is up Schmitt creek]

The causes of the depression can be explained by Keynesianism, but the cause of the causes is capitalism

This. Voted Marxist to Broaden The Debate.

[Amenhotep Bakari-Sellers]

Marxism, just like with Great Recession of 2007, payroll taxes needed to be instituted to help out the poor. The Great Recession, the SSA taxes been needed to be raised, but GOP took control of one branch of Congress and have prevented raising the cap on SSA, since 2010

[Clarko95 📚💰📈]

Why does there have to be a "best" explanation? Why not all of the above?

There was a bubble in the late-1920s, the Fed raised interest rates, the economy slowed and the government was running balance budgets, the farming crisis put banks under severe pressure, consumers couldn't make up for reduced business and government investment, a painful recession occurred 1929-1930 that could have been reversed by government stimulus or more aggressive interest rate cuts, the collapse of BoUS and Caldwell in 1930 tipped us into deflation with no government response, then when the Creditanstalt event happened and a run on U.S. gold happened in 1931, the Fed raised interest rates thus leading to the Chicago banking panic in the summer which led to a domino effect across the whole country, and the government was too little too late (and arguably made things worse with Smoot-Hawley by further reducing trade across the 1930 - 1932 period) across the whole time period until March 1933.

All of these are interrelated and magnified each other, and no single one can be argued to have set it off.

[Southern Senator North Carolina Yankee]

To Clarko's point, lets consider what would have happened today had the stock market crashed the way it did. The Fed would have cut rates. As banks had liquidity problems, they would have intervened either buying up bonds or commercial paper, what have you.

It would have been bad, it would have been a recession obviously, but you wouldn't have a decade of destitution that we ended up with.

I have a lot of respect for libertarians but when it comes to monetary policy, the reflexive opposition to soft money on the surface seems disconnected from reality, but you have to consider the view on fractional reserve banking. Many libertarians who oppose the Fed intervening also oppose the existence of fractional reserve banking.

Let me use this as an analogy, the economy rides on top of a balloon and that balloon props up employment and props up incomes and standards of living. They would view the very existence of a balloon to begin with as an affront to common sense that would necessitate, not only not trying to reflate it, but actively popping it yourself.

The problem with this is that the level of destitution dictates political actions and as I have said, the more desperate the people, the more extreme and desperate the political outcomes will be. It is nice to presume that people value freedom for itself, but if you force someone to choose between bread and freedom, a lot of people will choose bread will choose the survival of their family and their kids over some treatise by John Locke or Thomas Jefferson. That is not something that we necessarily desire, it is a just a statement on human nature as demonstrated through history. There used to be a saying in the end of the cold war, there is no bread without freedom and I read this book that flipped it around, "There is no freedom without bread".

The complete inaction, "letting the bubble unwind itself" created the despair that led to the New Deal. There were problems with the New Deal and problems with Keynesian approach obviously and the fact that the Depression did last so long is a testament to that.

However, it is also a testament to the fact that the financial sector is a complex and intricate web that interconnects all aspects of the economy and if you let that completely unravel, it takes years to rebuild. If that is not present, the bolstering of demand that it creates leads to massive unemployment, falling wages and falling standards of living and those in turn create the very situations where people turn to fascism or turn to Communism.

I understand the hatred directed bailouts and all of the arguments about moral hazard, but you cannot prioritize avoiding moral hazard over systemic risk. Moral hazard just means that you aren't protecting people from suffering the consequences of their own actions. Systemic risk means that everyone else takes the hit as well. Say you are a small business who makes all of your money at one time of the year. Farming is a good example, retail is a good example. You need money to pay expenses all year long, but you only get money in the fall or in the winter. You need revolving lines of credit to do business. Yes loading up on debt is a problem, but it is a just a statement of reality. Small business creates 66% of the jobs and small business often need revolving lines of credit otherwise, they just saw down and those jobs are destroyed.

Letting the financial sector implode in on itself like a proverbial world trade center, is not the answer in any economic recession. You need a lender of last resort and in 1929-1932, the Fed failed in its mission to act as that lender of last resort. You also need a set of rules to minimize risk and then a system that allows people to suffer consequences but still protects the broader economy from the systemic risk that is incumbent in that situation.

[Southern Senator North Carolina Yankee]

As to the point about Smoot-Hawley, tariffs were like the tax cuts of today in the sense that they were the unifying umbrella that kept the GOP together and was the bog standard response that any economic problem dictated "raise tariffs", just like today it is "cut taxes". This held their coalition together and enabled them to be seen as the party protecting worker's job against the free trade Democrats.

However, the situation changes economically once you become the number one economy in the world. Protectionism is great if you are a new kid on the block and don't possess what is called "economies of scale", meaning essentially that existing firms have efficiency bonus baked in because they 1. have already been doing it and 2. don't have to eat the startup costs.

Protectionism thus enables you to stand up an industry in a competitive market but once it becomes the dominant low cost producer, it doesn't need protectionism, it needs demand and it needs markets.

Economists realized this transition in 1930 and they wrote begging them not to pass the Smoot-Hawley tariff. Political economic policy is a lagging indicator and thus with it so baked in, the GOP couldn't just let it go and so they forced through a huge increase in tariffs and nuked international trade at the worst possible time with all of this other stuff happening. They also nuked their own political machine because workers realized that the GOP protective policy wasn't going to deliver the goods anymore.

[pbrower2a]

The first catastrophe was the speculative boom that devoured what would have been funds for industrial and commercial investment. Speculative booms feed on themselves until there are no further people buying in. That fits the Austrian theory.

The second catastrophe was the breakdown of the financial system because of bank runs that happened as the Fed withdrew money from circulation. Banks were unable to meet withdrawals, and depositors were burned. "Money in the bank" became meaningless. Payrolls went unmet; bills could not be paid. Businesses failed as a result.

Of course people cut back out of fear, reducing consumer spending. State and local governments cut back on spending as such seemed prudent and necessary. The Federal Government at first tried to become more efficient, but it could cut back only so far. That is the Keynesian disaster.

The Marxists seem to be out in the cold on this one.  The solution was the mitigation of capitalism which followed after three years of bumbling. There was no design, and no plot to ruin the working class to enrich the economic elites.     

[brucejoel99]

Why does there have to be a "best" explanation? Why not all of the above?

There was a bubble in the late-1920s, the Fed raised interest rates, the economy slowed and the government was running balance budgets, the farming crisis put banks under severe pressure, consumers couldn't make up for reduced business and government investment, a painful recession occurred 1929-1930 that could have been reversed by government stimulus or more aggressive interest rate cuts, the collapse of BoUS and Caldwell in 1930 tipped us into deflation with no government response, then when the Creditanstalt event happened and a run on U.S. gold happened in 1931, the Fed raised interest rates thus leading to the Chicago banking panic in the summer which led to a domino effect across the whole country, and the government was too little too late (and arguably made things worse with Smoot-Hawley by further reducing trade across the 1930 - 1932 period) across the whole time period until March 1933.

All of these are interrelated and magnified each other, and no single one can be argued to have set it off.

[LAKISYLVANIA]

Hot take: all of them.

Marxist because capitalism is unstable and markets are subject to ups & downs, crashes and periods of huge growth, sometimes regardless of who's in power, esp. when those have free market policies. That doesn't necessarily mean that communism is the way to go, but that we need a tightly controlled market with investments and going in debt in crisisses, and more austerity policies in periods of growth to balance budgets.

Keynesian is correct, Monetarist is correct and it was also a correction to the economic policies of 1920.

[pbrower2a]

Mix of Monetarist and Keynesian

Hoover bungled the monetarist response. He made inchoate gestures toward Keynesian solutions, only to give up on them too early. The Austrians have an explanation of the speculative boom which naturally went bust, but they have no explanation of how to get an economic recovery (just take the hit and let things take care of themselves in the "sweet bye-and-bye". The Marxist explanation would seem to suggest that capitalism is always in crisis, except that capitalism isn't always in crisis.