15.10.2020 in Exploratory

Great Depression


The Great Depression of 1929-1939, which started off as a US recession and propagated globally, could be traced back to a number of competing as well as mutually reinforcing mechanisms. With the US acting as a major trading counterpart and an informal linchpin of the global setup early on, it should come as little surprise that similar downside incidents were synchronized across the economies most commonly inter-related. In fact, this could be the single most important case for focusing on the US setup as a major explanatory domain in its own right. The present report will build on the implications coming from the key schools of thought as in Walton and Rockoff (424-446) while discerning the applicable detail from a variety of scholarly surveys.

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Root Causes of the Great Depression

To begin with, the Great Depression could be coupled with the major stock market crash of 29 October 1929, which may dually be seen as a symptom or effect hinting at the prior causes as well as their extensions keeping the crisis more of a self-reinforced spiral. On the one hand, this might be an instant of a conventional bubble to be followed by a major burst, whenever the initial expansion pace has not fully been backed by the fundamental performance, or was at odds with one or more margin calls or hurdles. Among other things, irrespective of whether the monetary approach could and should be applied differentially in retrospect (referring to the prior side effects versus posterior solutions), it could now be conjectured that the bulk of the initial share price growth had been fueled by the expectations of this pattern to last for awhile, with long positions being opened on margin. In other words, the initial margins as required by the brokerage agencies were so low and the rollover terms so lenient this acted to distort the incentives and incite further over-investment in stocks.

Needless to say, this could not have fared on the upside indefinitely, with the question being what exactly would serve as the early margin call ushering in a withdrawal. At the outset, this might have to do with the already overheated real sector investmentswhich could in fact be one reason the otherwise rational players were eking out on the faster-growing themes in the first place. Somehow, slowing in the industrial core might have conveyed some decelerating or second-order downside momentum to the stock market, with the low margins soon falling short of backing up the position reversals with.

Banks would in turn increasingly end up confronted with non-performing loans and deposit withdrawals on the weak expectations. In fact, this was becoming more of a self-fulfilling crisis or spiral, with bank runs never subsided by contracted loan issuance, and mounting debt overhang to sagging incomes pointing to deteriorating coverage and showing all the stronger correlation with default risk.

Worse yet, it is this stage that the major schools of thought agree on as the turning point of discontinuous deterioration. In line with the Keynesian standpoint, the demand side was depressed by the banks (not issuing enough loans to keep consumption and new investments high) and the government alike, as the amount of spending was inadequate to bridge the demand gaps with. The construction sector having long been on halt with an eye on the falling prices or profit expectations, the Hoover administration was not willing to allocate nearly as much spending into the public works and infrastructural outlays (thus aggravating the budget deficit) as the Roosevelt programme would posit as necessary and sufficient. In fact, part of the reason could be the Austrian legacy of seeing recessions and crises as a favorable transition vehicle acting to wipe out the less efficient or productive projects, alongside the idle capacities which might have cropped up as the ironic flip-side of prior productivity boost or technology upheaval.

The monetarist paradigm would tend to spot a correlation between the effective monetary mass (subject to velocity that qualifies the liquidity demand) versus the aggregate demand. Alternatively, this quantity-theoretic account positing MV=PQ could be rewritten (after logging and taking the time derivative) as, referring to the respective growth rates or their compensatory trade-offs. For instance, a small deflation (p slightly negative) could be offset by somewhat greater productivity (q positive) while keeping the monetary mass and velocity stationary. However, a major deflation cannot possibly be matched by an adequate increment in technology or knowledge overnight, with monetary manipulation (e.g. impacting the banking network or multiplier) being more feasible as a hedge or recovery means.

More specific to that institutional setup, the Fed was largely blamed in hindsight for failure to increase money supplybe it as a matter of naive correlation with GDP level or as a matter of coping with rollover and liquidity crunch amid bank runs looming large. These days, however, some might be vocal about favoring helicopter money, or direct pumping of liquidity into autonomous demand without channeling it via the banking system or the financial services industry that may at times have favored speculative or unproductive uses or otherwise been too costly to maintain in terms of coping with the moral hazard of bailing it out despite sheer rent seeking.

One other domain could be of particular interest in just how the seemingly remote schoolsin fact as diverse as Marxist, inequality, and productivity concernedconverge around the external impacts that technology had on the incentives. Among other things, once the employers had opted to over-invest in cost cutting (efficiency or productivity) while needing less labor, the employees (i.e. the ultimate consumers) would see their wages down. The implied gap between supply-side productivity versus demand-side purchasing and bargaining power would aggravate to the point the setup collapsed to a lose-lose zero-sum.

What Prolonged the Great Depression

One has to be careful when timing for the structural breaks of the Great Depression with respect to its distinct propagation channels coming into effect as either prior trends or posterior responses to policy solutions. As has been proposed before, a Darwinian stance might have prevailed as a matter of cease-and-desist approaches to intervention, which postponed any systemic decision making over and above the Feds partial means or restrictions being phased in.

For instance, the Gold Standard could be seen as a kind of capital adequacy or margin based coverage that was there to restrain the money multiplier. Simply put, the banking sector would not be able to afford issuing more loans than what had been backed up at 40%. It is straightforward to see that, following the early withdrawals as coupled with conversion into gold as a storage of value amid money-hoarding paying off more handsomely compared to regular investments, this margin was progressively collapsing to a residual so low as to force the Fed to impose a ban on private gold holding.

Simultaneously, this might reveal that the Gold Standard actually had been serving as more of a bottleneck or constraint than a solution, which also sterilized trade or postponed on its recovery. Insofar as trade accounts for a material proportion of the smaller economies external aggregate demand, it is no wonder that slower GDP growth would propagate across the economies involved at many a stage.

One other issue pertained to technology and labor productivity, which two facets are intertwined and cannot easily be upended overnight. In other words, if the more fundamental causes could be attributed to this long-term trend, the related recovery layer would likewise have been lagged. The sad interim outcome is that the policy makers, routinely facing an election cycle and a short-lived horizon of staying in office, may have their incentives distorted to the extent they tended to overlook long-term spending and focus on quick policy multipliers instead.

Ironically, Roosevelts spending bias may, too, have been informed by this rationale among other things, even though the preponderant emphasis could be the expectations and trust leverage he enjoyed which would reverse the investors and consumers incentives amid about as unfavorable or mediocre initial conditions as before. In other words, one way of pinning down the small or slow pre-1933 multiplier effects or minor investment response to low interest rates could be the sheer lack of optimistic expectations in contrast to that coupled with the New Deal no matter (or in addition to) the observable fundamental parameters.

On the one hand, this marks the timeline of the Great Depressions more severe stage ending no later than 1933 albeit followed by a minor recession of 1937-1938 on the weak expectations of reversal or contractionary hedge. On the other hand, the latter may well have fared on the strength of the expectations component much the way the crisis outbreak had lent itself to similar behavioral or expectations underpinning from the outset.

Now, it remains to be seen whether those multipliers could have been boosted even further without a major cost as accruing to an aggressive stance. In effect, it may well be that the contraction or moderate stance was aimed to strike a balance that ultimately had timing implication on top of the lagged and latent outcomes. Among other things, public works would secure long-term projects while ensuring employment that had to do with permanent positive shocks, or were of relevance to expectations as affected by the implied permanent income. No partial or single-shot policies would likely have had similar effects no matter the scale, if only because they would signal noise of little relevance to systemic shifts.

By the same token, apart from this item of government procurements or state contracts for businesses, the arms sales may have ushered in an upheaval during the WWII in their own right. Conspiracy put aside as to what had contributed to global conflicts or who ultimately benefited amidst Europe being shattered and worn out, it is this GDP booster that Krugman (qtd. in Kavoussi) once referred to as a solution in the aftermath of the Great Recession of 2006-2009 following a real estate bubble burst with the suprime loan and bond market crash being seen as a twin crisis.

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One other pillar of delayed recovery might point to the depth of collapse as the initial hurdle accounting for the trade-off between faster growth rates spanning a longer time to recoup the status quo. Insofar as sectors like the real estate effectively captured an entire cluster, recovery or job creation in these distinct yet entangled segments would take longer over a larger vertical scope than it would have in the simpler, single-industry setupsnot least with an eye to complementarity or synergies yet to be embarked on.


Distinguishing between the prior root causes versus the effects of the Great Depression might be a challenge in its own right. Incidentally, the agenda could prove to be even more involved than that bearing in mind their entwined and mutually reinforcing as well as self-fulfilling nature that may have had latent and lagged as opposed to pronounced yet short-lived impacts. Incidentally, not all of the lasting impacts had been targeted, and the same goes for some of the short-term side effects that may still have shaped the incentives. Worse yet, far from any causes could have been made any use of by mere reversale.g. referring to monetary channels acting ex ante versus ex post as well as government spending which, if inadequate or mistimed, had to be supplemented by alternate means at later stages. In the aftermath, it appears that many of the dominant mechanisms have carried over, in which light the stakes of learning the lesson and doing the homework are particularly high now that the digital technology and financial infrastructure have rendered over-reaction commonplace.

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