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The '''Great Depression''' was a severe, worldwide economic downturn which lasted from 1929 until around the beginning of [[World War II]] in the early 1940s.

The '''Great Depression''' was a severe, worldwide economic downturn which lasted from 1929 until around the beginning of [[World War II]] in the early 1940s.

{{Friedman-roosevelt-depression}}

{{Friedman-roosevelt-depression}}

 

In the United States (and in most other countries), the Depression had a number of very grave symptoms:

In the United States (and in most other countries), the Depression had a number of very grave symptoms:

* GDP fell drastically, with declines of 30-50% in most countries.  

* GDP fell drastically, with declines of 30-50% in most countries.  

* Politically there was a widespread loss of faith in democracy; many countries turned to authoritarian regimes or dictatorships.

* Politically there was a widespread loss of faith in democracy; many countries turned to authoritarian regimes or dictatorships.

* The political results were negative for governments in power. In Britain this hurt the Labour party; in the U.S. it hurt the Republicans; in Canada it hurt the Liberal party.

* The political results were negative for governments in power. In Britain this hurt the Labour party; in the U.S. it hurt the Republicans; in Canada it hurt the Liberal party.

==Causes==

==Causes==

Advocates of different economic systems have traded blame for the depression. The search for causes is important for two reasons. At the time it determined who was to blame and indicated what remedies were needed.  The political realignment of the [[New Deal Coalition]] could take an anti-business tone because bankers were in bad odor in 1933 (just as they are in 2009).

Advocates of different economic systems have traded blame for the depression. The search for causes is important for two reasons. Socialists tend to call it a failure of the [[free market]] system, while advocates of [[free market]]s blame the depression on government efforts to transform the U.S. economy into [[Socialism]].  The political realignment of the [[New Deal Coalition]] could take an anti-business tone because bankers were in bad odor in 1933 (just as they are in 2009).

In historical terms, the "lessons" of the Great Depression have been applied to preventive measures, and in the [[Financial Crisis of 2008]], helped determine what remedies to apply.

In historical terms, the "lessons" of the Great Depression have been applied to preventive measures, and in the [[Financial Crisis of 2008]], helped determine what remedies to apply.

===Milton Friedman===

===Milton Friedman===

Friedman argues that the depression began as a normal cyclical downturn, but was made much worse when the money supply fell by a third, caused primarily by banking failures in the U.S. The Federal Reserve did not cause the depression, in Friedman's view, but failed to stop those bank failures when it could and should have done so in 1931-33. Economist [[Ben Bernanke]] adopted the Friedman view, and when the [[Financial Crisis of 2008]] hit, Bernanke, as Chairman of the Federal Reserve, made it a central goal to save the major banks using a trillion dollars in cash and credit from the Fed and from the Congressional bailout of October 2008.  

Friedman argues that the depression began as a normal cyclical downturn, but was made much worse when the money supply fell by a third, caused primarily by banking failures in the U.S. The Federal Reserve did not cause the depression, in Friedman's view, but failed to stop those bank failures when it could and should have done so in 1931-33. In Friedman's view, the Federal Reserve failed to do precisely what it was created to do, prevent a contraction in the money supply (monetary deflation). Economist [[Ben Bernanke]] adopted the Friedman view, and when the [[Financial Crisis of 2008]] hit, Bernanke, as Chairman of the Federal Reserve, made it a central goal to save the major banks using a trillion dollars in cash and credit from the Fed and from the Congressional bailout of October 2008.  

===Austrian School===

===Austrian School===

*As documented so well by free-market economists Ludwig von Mises, Friedrich Hayek, and Murray Rothbard, during the 1920s, the Federal Reserve Board, exercising its power to expand the money supply, caused an inflationary binge — an action which created a false aura of prosperity. When the political authorities — faced with this inflationary threat and restrained by the gold standard — finally ceased the monetary expansion near the end of the decade, the inevitable economic hangover was reflected in the 1929 stock market crash and in generally depressed economic conditions. In other words, contrary to the indoctrination which the American people have received from their political authorities, the Great Depression was not the failure of America's free-enterprise system — it was the failure of political manipulation of money and credit.

*As documented so well by free-market economists Ludwig von Mises, Friedrich Hayek, and Murray Rothbard, during the 1920s, the Federal Reserve Board, exercising its power to expand the money supply, caused an inflationary binge — an action which created a false aura of prosperity. When the political authorities — faced with this inflationary threat and restrained by the gold standard — finally ceased the monetary expansion near the end of the decade, the inevitable economic hangover was reflected in the 1929 stock market crash and in generally depressed economic conditions. In other words, contrary to the indoctrination which the American people have received from their political authorities, the Great Depression was not the failure of America's free-enterprise system — it was the failure of political manipulation of money and credit.

== Prelude to the Depression ==

== Prelude to the Depression ==

This doctrine--that in the long run the Great Depression would turn out to have been "good medicine" for the economy, and that proponents of stimulative policies were shortsighted enemies of the public welfare--drew anguished cries of dissent. British economist Ralph Hawtrey scorned those who, like Robbins and Hayek, wrote at the nadir of the Great Depression that the greatest danger the economy faced was inflation. It was, Hawtrey said, the equivalent of "Crying, 'Fire! Fire!' in Noah's flood."  

This doctrine--that in the long run the Great Depression would turn out to have been "good medicine" for the economy, and that proponents of stimulative policies were shortsighted enemies of the public welfare--drew anguished cries of dissent. British economist Ralph Hawtrey scorned those who, like Robbins and Hayek, wrote at the nadir of the Great Depression that the greatest danger the economy faced was inflation. It was, Hawtrey said, the equivalent of "Crying, 'Fire! Fire!' in Noah's flood."  

[[John Maynard Keynes]] also tried to bury the liquidationists in ridicule. [[Milton Friedman]] in the 1930s and early 1940s was an avid keynesian and indeed became a top advisor to the Treasury Department.  In the 1950s he changed positions.  

[[John Maynard Keynes]] also tried to bury the liquidationists in ridicule. [[Milton Friedman]] in the 1930s and early 1940s was an avid Keynesian and indeed became a top advisor to the Treasury Department.  In the 1950s he changed positions.  

However, the "liquidationist" view carried the day. Even governments that had unrestricted international freedom of action--like France and the United States with their massive gold reserves--tended not to pursue expansionary monetary and fiscal policies on the grounds that such would reduce investor "confidence" and hinder the process of liquidation, reallocation, and the resumption of private investment.

However, the "liquidationist" view carried the day. Even governments that had unrestricted international freedom of action--like France and the United States with their massive gold reserves--tended not to pursue expansionary monetary and fiscal policies on the grounds that such would reduce investor "confidence" and hinder the process of liquidation, reallocation, and the resumption of private investment.