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 Smoot-Hawley Tariff Act was instituted by Senator Reed Smoot and Representative Willis C. Hawley, and signed into law by President Hoover, to raise taxes on American imports by about 20 percent during June 1930. This tax, which added to already shrinking income and overproduction in the U.S., only benefitted Americans in having to spend less on foreign goods. In contrast, European trading nations frowned upon this tax increase, particularly since the "United States was an international creditor and exports to the U.S. market were already declining". In response to the Smoot-Hawley Tariff Act, some of America's primary producers and largest trading partner, Canada, chose to seek retribution by increasing the financial value of imported goods favoured by the Americans.