The Course of the Great Depression

3590 Words May 18th, 2000 15 Pages
The October 1987 collapse in stock prices conjured visions of 1929 and the Great Depression. Focus on this period is natural because the 32 percent decline in stock values between the market closes of October 13 and 19, 1987, was of the magnitude of--indeed, it actually exceeded--the October 1929 debacle. Focus on this period is also appropriate because, despite all that has been learned since to help assure economic stability, we cannot be completely confident that history will not repeat itself. Consequently, this first section reviews events of the Depression era.
The stock market Crash of October 1929 is frequently credited with triggering the Depression. The decline was severe and extended; from their peak in September 1929, stock
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And in the absence of significannot efforts to offset these failures, the money supply (of which 92 percent consisted of bank deposits) fell by 31 percent between 1929 and 1933.

Unlike monetary policy and related financial disturbances, fiscal policy did not play a particularly significannot role during the Depression. Federal government spending, including transfer payments, was small before and during the 1929-1933 period. Moreover, changes in tax and spending policies, and resulting fluctuations in the budget deficit, were generally minor. Perhaps fiscal policy could have done more to combat the Depression; in the event, it was not a major factor.

Causes of the Depression

Keynesian Explanation
There is not, at this point, anything approaching a consensus on the causes of the depth and duration of the Depression. With the passage of time, the Keynesian view that an inexplicable contraction in spending--business investment and personal consumption--led to the collapse in economic activity has fallen into disfavor. A contraction in spending did of course occur, but showing that the decline was a cause rather than a reaction to a deeper economic malady is difficult.
Some claim the stock market collapse of October 1929 was the cause of the spending contraction, but the evidence is suspect. Quantitatively, the decline in share values, large and persistent as it was during the Depression, does not seem sufficient to generate a

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