The causes of the Great Depression and the methods
that led to its demise are many. Some economic historians believe the Great
Depression resulted from the stock market crash of 1929, while others believe
it was caused by the collapse of international trade due to the Smoot-Hawley
Tariff. Some historians chalk the rise of the Depression to government policies,
the failure of the money supply, and bank failures and panics.
The economic theory used to explain the causes of
the Great Depression and its ultimate demise is the Keynesian theory of
economics which John Maynard Keynes created.
Like the start of World War I, which was the
result of decades of heightened militarism, secret alliances, competitive imperialism,
and widespread nationalism, the Great Depression was the result of decades of
economic issues. In the wake of the First World War, countries like Germany and
Austria could not pay the reparations demanded by the winning side. Because of
the loss of funds, countries like the United Kingdom and France could not repay
the loans they took from the United States to fight the German and
Austro-Hungarian Empires.
Keynes, a British economist, believed that the
classical economic approach of laissez-faire economics would end the Depression.
The laissez-faire approach to economics mandates that there should not be
government intervention in the economy. Keynes' theory stated that a loss of consumer
and investor confidence was the reason for the sudden reduction in spending by
consumers and investors.
Keynesian economists believed that to keep from
losing more money, they needed to stay away from the market and hold on to
their real money. Because they had money, they could buy more as the prices of goods
fell.
Keynes is considered one of the greatest economic minds
of the past two centuries. Keynes was part of the Paris Peace Conference and
disagreed that Germany and Austria should pay massive war reparations. He believed
they should spend some but only what they had the "capacity to pay."[1] Like
many, he felt the excessive amount the Germans and Austrians were made to pay exacerbated
the impending international financial problems.
Keynes believed that one way to combat the
post-WWI financial problems was to hire jobless workers to work on infrastructure
projects such as building roads, bridges, and other government-funded projects.
He discussed this approach with President Franklin D. Roosevelt in the 1930s.
In The General Theory of Employment, Interest
and Money, Keynes argued that to rectify the Depression, people needed to
be employed, and governments should practice deficit spending during economic
slowdowns. He believed that governments needed to spend money to stop the financial
crisis the world had succumbed to.
Many in government, including President Herbert
Hoover, ignored Keynes' calls for reform. They were scared of change since the
same process had been in place since the introduction of laissez-faire by its biggest
defender, Adam Smith.
As the Depression wore on and with the United States
had a change in leadership, some appreciated part of Keynes' theory. With unemployment
at a record high, the government had not done much except for the bread lines
that the unemployed would stand in for hours if not days.
Unlike some economists, Keynes' believed that
capitalism needed to be saved, although free-market capitalism needed to be
ratified. He stated that countries needed to create public-works projects. He
believed that reducing relief payments to jobless workers and increasing tax
revenues from companies that supplied projects would balance the cost of public
works projects. Keynes' met with many world leaders, including Franklin D.
Roosevelt and other government officials, Wall Street investors, business
leaders, and university economists.
Finally, in 1936, after the publication of The General Theory of Employment,
Interest and Money, the United States stood up and took notice. While the United States
government had been operating employment programs such as the Works Progress
Administration, Keynes' theories would become further ingrained in the New Deal
plan created by Franklin D. Roosevelt's
administration.
Keynes' theory stated that the United States
government needed to borrow billions of dollars to stabilize the economy.
Roosevelt and his New Deal decided to do half of Keynes' recommendations. This
decision meant unemployment decreased but not as much as Keynes' theory
suggested.
In 1937, Roosevelt's government took a drastic turn.
They decided to balance the budget rather than do more deficit spending. Some job
programs ended, government spending was cut, and taxes were raised. These
policies were in direct opposition to Keynes' suggestions. These policies would
dip the country into a second depression in 1938.
Keynes' continued to debate his position to save
the country's economy, and in the end, his policies would be embraced for a
time. These policies would stay in effect until the beginning of World War II.
Just like in World War I, the United States would remain neutral militarily,
but they would be involved industrially and economically. The United States
would provide aid and loans to Europe, as they did during World War I. Industrial
manufacturing would fire up, creating machines for the war and helping the
United States dig its way out of the Great Depression. Once the United States
got involved in World War II, the country was out of the Depression, and for
the next several decades, the United States would be on firm economic ground.
References
Bernanke, Ben S. “The Macroeconomics of the Great
Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (1995): 1–28.
Keynes, John
Maynard. The General Theory of Employment, Interest and Money. New York,
Harcourt, Brace, 1936.
Skidelsky, Robert. John Maynard
Keynes, 1883–1946: Economist, Philosopher, Statesman. New York: Penguin Books, 2003.
White, Eugene N.
"The Stock Market Boom and Crash of 1929 Revisited." The Journal of Economic Perspectives (1986-1998) 4, no. 2 (Spring, 1990): 67.
[1] Robert Skidelsky, John Maynard Keynes, 1883–1946: Economist, Philosopher,
Statesman. (New York: Penguin Books, 2003), 95.
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