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The Great Depression

The Great Depression
Of 1930.
William Cunningham
Strayer University

To my amazement the Great Depression serves as a natural debating point that "justifies" or "refutes" various economic policies. The Great Depression and the New Deal are complex topics that are open to many interpretations. The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world.

Seeing the order in which events actually occurred dispels many myths about the Great Depression. One of the greatest of these myths is that government intervention was responsible for its onset. Truly massive intervention began only under the presidency of Franklin Roosevelt in 1933, who was sworn in after the worst had already hit. Although his New Deal did not cure it, all the leading economic indicators improved during his tenure.

To understand the Great Depression, it is important to know the theories of John Maynard Keynes. Keynes is known as the "father of modern economics" because he was the first to accurately describe some of the causes and cures for recessions and depressions.

In a normal economy, Keynes said, there is a circular flow of money. My spending becomes part of your earnings, and your spending becomes part of my earnings. For various reasons, however, this circular flow can falter. People start hoarding money when times become tough; but times become tougher when everyone starts hoarding money. This breakdown results in a recession.

To get the circular flow of money started again, Keynes suggested that the central bank, the Federal Reserve System, should expand the money supply. This would put more money in people's hands (through the multiplier effect), inspire consumer confidence, and compel them to start spending again.

A depression, Keynes believed, is an especially severe recession in which people hoard money no matter how much the central bank tries to expand the money supply. In...