Matthew McCaleb Modern America 03/03/2012 Midterm Exam # 3

The Great Depression was one of the most unbearable economic times for our country. From 1929 until the early years of World War II the United States financial system experienced failure on a scale not seen since 1896. Economists offer many explanations for the causes leading up to the depression and offer numerous opinions on how it could have been prevented. This paper will provide three explanations of the causes of the Great Depression: First the Keynesian explanation, second the Monetarist explanation and third the International explanation. According to Caldwell and ODriscoll who have conducted a cogent analysis in response to the different explanations listed above suggest the Keynesian explanation indicates the Great Depression was caused primarily by a fall in total demand. The decline in demand was so severe that adequate demand could be restored only by large increases in government spending. Although the Keynesian explanation suggests increased government spending, evidence in history reveals Roosevelts New Deal did in fact increase spending initially from the top down, and then with the second New Deal from the bottom up which actually increased unemployment and prolonged the depression. Secondly, the Monetarist Explanation has a slightly different interpretation of cause and effect in comparison to the Keynesian diagnosis. According to Caldwell and ODriscoll, Monetarists would argue The Great Depression may have originated in a fall in total demand, but its length and severity resulted primarily from the unwillingness of the Federal Reserve System to prevent bank failures and to maintain a large enough money supply. Epstein and Ferguson (1984) insist that Fed officials knew that contraction was necessary and inevitable. Eventually, when the Fed did act, they argue it was to promote interest of commercial banks, rather than economic recovery.

Finally, the last point made by Caldwell and ODriscoll examine the the International Explanation, which provides us a broader explanation of the cause of the Great Depression indicating the American depression was part of a larger global depression. The depression was particularly severe in the United States because the Federal Reserve System was obligated to follow the rules of the gold standard. In the 1920s and the 1930s countries clung to the gold standard, which obligated themselves to back paper currency with gold reserves, as a shield against hyperinflation. According to Samuelsson so much value was placed in gold that when gold drained out of a country, supplies of money and credit tended to shrink; when a country accumulated gold, they tended to expand. But defending the gold standard caused country after country to suffer banking runs and currency crises. These fed each other and deepened the economic collapse. By 1936, more than two dozen countries had reluctantly jettisoned gold. Once this happened, expansion generally resumed. The Monetarists assertion that lack of oversight and intervention appears correct in analyzing whether or not this dilemma could have been prevented. The proper steps werent taken by the Fed to prevent this depression from escalating, and the lack of leadership in the Fed that would enable it to make effective policies ultimately led to the collapse of the financial system. The three points listed above accompanied with the examples listed with them help us understand the severity of Market failure, and can help us identify positive Fed policies that are implementable in the future.

Works Cited

Caldwell, Jean, and Timothy G. O'Driscoll. "What caused the great depression?" Social cation 71.2 (2007): 70+. Academic OneFile. Web. 2 Mar. 2012.

Edu-

Epstein, Gerald and Thomas Ferguson (1984).Monetary Policy, Loan Liquidation, and Industrial Conflict: The Federal Reserve and the Open Market Operations of 1932.The Journal of Economic History, (December 1984). Vol. 44 , pp 957-983 Samuelson, Robert J. "Revisiting the Great Depression: the role of the welfare state in today's economic crisis recalls the part played by the gold standard in the calamitous 1930s." The Wilson Quarterly 36.1 (2012): 36+. Academic OneFile. Web. 2 Mar. 2012.