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
The United States government and the Federal Reserve did not do that during the 1929‑32 slide into the Great Depression The existence of "liquidationism" played a key part in motivating public policy decisions not to fight the gathering Great Depression. An increasingly common view among economic historians is that the adherence of some Federal Reserve policymakers to the liquidationist thesis led to disastrous consequences. Regarding the policies of President Hoover, economists Barry Eichengreen and J. Bradford DeLong point out that the Hoover administration's fiscal policy was guided by liquidationist economists and policy makers, as Hoover tried to keep the federal budget balanced until 1932, when Hoover lost confidence in his Secretary of the Treasury Andrew Mellon and replaced him. Hoover wrote in his memoirs he did not side with the liquidationists, but took the side of those in his cabinet with "economic responsibility", his Secretary of Commerce Robert P. Lamont and Secretary of Agriculture Arthur M. Hyde, who advised the President to "use the powers of government to cushion the situation". But at the same time he kept Andrew Mellon as Secretary of the Treasury until February 1932. It was during 1932 that Hoover began to support more aggressive measures to combat the Depression. In his memoirs, President Hoover wrote bitterly about members of his Cabinet who had advised inaction during the downslide into the Great Depression: