Causes of the Great Depression
In their 1963 book "A Monetary History of the United States, 1867–1960", Milton Friedman and Anna Schwartz laid out their case for a different explanation of the Great Depression. Essentially, the Great Depression, in their view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman and Schwartz called "The Great Contraction" — a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. Friedman and Schwartz argue that people wanted to hold more money than the Federal Reserve was supplying. As a result, people hoarded money by consuming less. This caused a contraction in employment and production since prices were not flexible enough to immediately fall. The Fed's failure was in not realizing what was happening and not taking corrective action. In a speech honoring Friedman and Schwartz, Ben Bernanke stated:
Causes of the Great Depression
Austrian economists argue that the Great Depression was the inevitable outcome of the monetary policies of the Federal Reserve during the 1920s. In their opinion, the central bank's policy was an "easy credit policy" which led to an unsustainable credit-driven boom. In the Austrian view, the inflation of the money supply during this period led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. By the time the Federal Reserve belatedly tightened monetary policy in 1928, it was too late to avoid a significant economic contraction. Austrians argue that government intervention after the crash of 1929 delayed the market's adjustment and made the road to complete recovery more difficult.