Non-Monetary Theory of the Cause of the Great Depression and Its Demise

"Ex- tenant farmer turned day laborer, 1930s."

This image shows the gritty poverty of farmers who had to leave their profession and take lower-paying jobs during and after the Great Depression. 

 

"Dust Bowl Farmers During the Depression."

This image shows a group of unemployed farmers waiting for jobs during the Great Depression. Going from an independent, busy farmer to the boredom and tedium of constant poverty without work must have been beyond difficult.

Introduction

    There are many theories as to the main causes leading into the Great Depression. For this blog post discussion, I am examining one of the non-monetary theories of the cause of the Great Depression and correlating information. Additionally, I will be examining the New Deal's role, led by a strong American President and a strong Congress, in helping the economy recover from the Great Depression. The non-monetary theories about the origins of the Great Depression diverge from the traditional bank failure theories in the sense that non-monetary theories tend to focus on market supply, demand, psychological factors, and external factors such as wars and returning, disabled veterans. Non-monetary theories take a look at the broader picture of the causes of the Great Depress, in other word. These non-monetary theories do not necessarily leave out the importance of bank failures or money, rather, they simply look to an alternate formula to the traditional theories that combine several factors for a wider explanation and analysis.

Macroeconomic Output Theory: Non-Monetary Cause of the Great Depression

    In the late 1920s leading into the very early 1930s, there were a series of bank failures, sometimes known as bank panics. (1) Now, this is where many historians seem to stop and explain that this naturally led into the Great Depression. (2) However, economic historians such as Ben Bernanke argue that this is not the sole cause of the financial depression. Bernanke argues that there were many factors that happened all at the same time in the "macroeconomy" to cause the Great Depression. (3) First, Bernanke argues that the bank failures of the late 1920s and 1930s initially showed signs of improvement as banks and investors settled down and let their nerves relax a bit. (4). However, just as these conditions began to show signs of improvement, a macroeconomic phenomenon in the form of a reduction in economic output turned a banking downturn into the Great Depression, starting in 1930-1933. (5) This reduction in economic output took form in bankruptcies across all demographics and classes, and suddenly, credit and the ability to gain credit to cover drastic price changes caused what may have been a minor recession to suddenly steamroll into the Great Depression. (6) Falling prices in all sectors such as farming and other industries meant that profits were drastically reduced, causing massive "debtor insolvency." (7) Now, this is not to place blame on the farmers or farming industry for the Great Depression. (8) One of the theories of the Great Depression that Bernanke and other economic historians such as Giovanni Federico reject is that agriculture was not the primary cause of the Great Depression, and farmers were not the ones making the main financial runs on "rural banks" that turned into a mainstream crisis. (9) (10) Instead, some of these same economic historians argue that the Great Depression was a result of a highly "imbalanced" supply and demand problem that began in World War 1. (11) This agriculture supply and demand problem originated when farmers were encouraged to exponentially increase production to provide food for armies in World War I and the citizens of those nations. (12) Once the war ended, the production in agriculture was still high, leading to plummeting prices across the world. (13) The contraction of the agriculture market, combined with the return of injured veterans who were not able to perform at their previous levels of output, combined with the bank panic in the late '20s and early '30s, were all theories of how the Great Depression came about, and lend credence to the non-monetary or the discredit of the monetary-only theories of the Great Depression. Additionally, there are psychological factors that economic historians say affected the onset of the Great Depression. The perceived weakness of the federal reserve, the perception of financial panics, and overall fear of large people groups over these aforementioned issues likely contributed to the onset of the Great Depression as well. (14). Eventually, these factors combined to depress the Gold Standard internationally, leading to a protracted and much more complex financial crisis. 

The End of the Great Depression

    Ben Bernanke argues that the end of the Great Depression came about directly due to the New Deal implementation under President Roosevelt in 1933, where the Federal government began heavy intermediary action to remedy the Great Depression. (16) Economic historian Eric Rauchway argued that FDR's heavy-handed approach to remedying the Great Depression inspired confidence amongst the American people and other international leaders, leading to a change from a fear-reactive response to a pro-active, unified response to the financial crisis. (17) Had FDR and Congress' response to the crisis been lighter, the world could have seen it as less effective. (18) This new confidence among the American people led to FDR's unparalleled presidential tenure. (19) The New Deal, led by FDR and Congress, helped to bring about the ultimate demise of the Great Depression by not only inspiring confidence, but by providing hope in the form of government assistance and jobs programs meant to put America back to work (20) (21)

Footnotes:

1. Ben S. Bernanke. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression." The American Economic Review 73, No. 3, 257.

2. Ibid, 257. 

3. Ibid, 257.

4. Ibid, 257. 

5. Ibid, 257.

6. Ibid, 257.

7. Ibid, 260. 

8. Giovanni Federico. "Not Guilty? Agriculture in the 1920s and the Great Depression." The Journal of Economic History 65, No. 4, 949.

9. Ibid, 949. 

10. Ben Bernanke. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," 260.

11. Giovanni Federico. "Not Guilty? Agriculture in the 1920s and the Great Depression," 951. 

12. Ibid, 951.

13, Ibid, 951. 

14. Ibid, 952.

15. Ben Bernanke. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," 274. 

16. Ibid, 272.

17. Eric Rauchway. Great Depression and the New Deal: A Very Short Introduction. Cary: Oxford University Press, Incorporated, 2008, 17.

18. Ibid, 17. 

19. Ibid, 17. 

20. Ibid, 17.

21. Ben S. Bernanke. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," 257.

Bibliography:

Anonymous. "Dustbowl Farmers During the Great Depression." Accessed February 10, 2022. Controversial Topics (controversialdocumentaries.blogspot.com). 

Anonymous. "Ex-tenant Farmer Turned Day Laborer, 1930s." Accessed February 10, 2022.  d7172c74943bf817364dd2a53d82c260--vintage-denim-vintage-farm.jpg (736×775) (pinimg.com). 

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” The American Economic Review 73, No. 3 (1983): 257–76. http://www.jstor.org/stable/1808111. 

Federico, Giovanni. "Not Guilty? Agriculture in the 1920s and the Great Depression." The Journal of Economic History 65, No. 4 (12, 2005): 949-76, http://ezproxy.liberty.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fscholarly-journals%2Fnot-guilty-agriculture-1920s-great-depression%2Fdocview%2F216456024%2Fse-2%3Faccountid%3D12085. 

Rauchway, Eric. Great Depression and the New Deal: A Very Short Introduction. Cary: Oxford University Press, Incorporated, 2008. Accessed February 10, 2022. ProQuest Ebook Central.