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Exploring the Great Depression's economic impact, this overview examines various theories explaining its causes, from poor Federal Reserve policies to technological advancements. It also considers the role of public expectations in recovery, the effects of economic inequality, and the influence of the gold standard on exacerbating the crisis.
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Economists Friedman and Schwartz argue that the Great Depression was caused by poor policy decisions by the Federal Reserve
Concept of Debt Deflation
Economist Irving Fisher proposed the concept of debt deflation, where falling prices increase the real value of debt, leading to reduced spending and further price declines
Economist Ben Bernanke emphasized the role of banking crises and credit crunch in exacerbating the economic downturn during the Great Depression
Scholars have highlighted the importance of changes in public sentiment, particularly following the election of President Franklin D. Roosevelt in 1933
President Roosevelt's New Deal policies and departure from the gold standard fostered a sense of optimism and expectation of inflation, which helped to stimulate investment and lower real interest rates
Economists Romer and Eggertsson argue that the abandonment of previous economic orthodoxies, such as the gold standard and pursuit of balanced budgets, played a significant role in changing the economic outlook and contributing to the recovery from 1933 to 1937
The Austrian School of economics blames the Great Depression on the Federal Reserve's expansionary credit policies of the 1920s and subsequent government interventions
Marxist economists view the Great Depression as an inevitable consequence of the contradictions within the capitalist system, such as cyclical crises and overaccumulation of capital
Technological advancements in the early 20th century led to increased productivity but also resulted in labor displacement and a mismatch between production capacity and consumer purchasing power
The imbalance between increased productivity and stagnant wages contributed to overproduction and underconsumption, exacerbating the economic malaise of the late 1920s
The widening gap in wealth and income distribution during the 1920s contributed to the Great Depression by creating insufficient aggregate demand and a speculative stock market bubble
The decision to return to the gold standard in the 1920s imposed deflationary pressures on economies, limiting central banks' ability to respond to economic downturns
The gold standard's rigid monetary framework hindered efforts to stimulate the economy and prolonged the Great Depression by constraining monetary policy
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Friedman & Schwartz's view on the Great Depression
Attributed to poor Federal Reserve policies causing money supply reduction.
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Irving Fisher's debt deflation theory
Falling prices increase debt's real value, leading to less spending and further price drops.
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Bernanke's analysis of banking crises impact
Banking system collapse led to wealth destruction, credit crunch, and reduced spending/investment.
