The Great Depression began with the Wall Street Crash on October, 1929, and rapidly spread worldwide. The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth and personal advancement. Although its causes are still uncertain and controversial, the net effect was a sudden and general loss of confidence in the economic future. The usual explanations include numerous factors, especially high consumer debt, ill-regulated markets that permitted overoptimistic loans by banks and investors, the lack of high-growth new industries, which all interacted to create a downward economic spiral of reduced spending, falling confidence, and lowered production.
The apparent contradictions depicted by historians is prevalent when considering the causes of the Great Depression and moreover, how far certain events caused it. During the thirties, it was unsure what the cause was, with Keynes arguing that it was a combination of a decline in spending in along with excessive which caused the Great Depression, this view was also reflected by Roosevelt who sought to pump money into the US economy which did little to aid the financial situtation. Many dismissed the proposal of the Wall Street Crash causing the Great Depression, with economists saying with only 1.5 million shareholders and 600’000 speculators, how could they cause a depression in a country as large as America. However, the ‘bull market’ had been financed by loans, which in 1929 amounted to $8.5 billion, so when banks and businesses started to recall loans after a drop in share prices, many were unable to repay, causing the closure of many banks and the huge impact felt among the whole of America. In addition, there were the reduction in money supply, created by the Federal Reserve, alongside with the overproduction and under consumption of commodities with in the economy.
Timoshenko, an agricultural historian, thought the fundamental explanation was a combination of overproduction and a fall in the price of agriculture commodities. This is contrast to both Friedman and Schwartz, who both wrote about the Great Depression being due to the Monetary policy employed by the Federal Reserve. Additionally, Hillstrom explanation was due to the Wall Street Crash in 1929, and the impact this had on banks and businesses throughout America.
Part (a) To what extent was the Wall Street Crash the main cause of the Great Depression
There are no decisive factors when looking at the causes of the Great Depression, but was instead a combination of factors. One of the problems when looking at the causes is the outright disagreement between historians, especially when looking from different time periods. However, there are some consistent features which run throughout main historical viewpoints on the causes of the Great Depression
Firstly, in 1929 the Wall Street Crash occurred in October. America’s pursuit of peace and affluence after World War One began brightly as the economy grew, mainly due to the introduction of electricity but also due to an increase in consumerism within America. People started to take their money out of banks and into the stock market, with consumer credit growing from $2.6bn in 1920 to $7.1bn in 1929. The stock market became particularly attractive for the middle class, especially due to its steady rise; Irving Fisher famously proclaimed, “Stock prices have reached what looks like a permanently high plateau.”. It was seen as a sure fire way to make money by much of the American population. Stocks rose quicker than before in the summer of 1929, even though some analysts had earlier expressed concern for a forthcoming crash. Roger Babson told business executive in New York that “sooner or later a crash is coming and it may be terrific…factories will shut down…men will be thrown out of work…the vicious cycle will get in full swing, and the result will be a serious business depression”. This shocked brokers as they watched the market with a heightened sense of nervousness and some even began to reign in their loans. Once the markets did crash, in the coming years 13 million people would be unemployed as much of the money people previously had was taken away in the crash, leaving America in the worst Depression it had experienced. The disaster made America much more vulnerable to the economic problems that had been lurking for much of the decade. The soaring market had been masking other mistakes by the US. It not only wiped billions from people, it left companies closing, confidence beaten and unemployment rising.
The actions on Wall Street are always synonymous with the Great Depression, however historians have often disputed how it actually caused it. Firstly, many people had invested their money into the stock exchange, including the middle class. Originally, it was deemed to be just for banks, however, with the rapid increase in stock prices, many middle class members got involved as it was seen as a safe and easy place to make money. From 1921 to September 1929, the Dow Jones Industrial Average increase six-fold from 63 to 381. In conjunction, Calvin Coolidge, the president at the time, thought that these levels would be sustained as he said, ‘No Congress of the United States ever assembled has met with a more pleasing prospect than that which appears at the present time.’ One of the reasons why the Crash was a main cause of the depression, was due to the number and type of people it impacted. 13 million shares were sold on October 1929 which shows the monstrous quantity of people it must have impacted. Furthermore, because it was mainly the middle class and banks this brought with it larger implications. The middle class underpinned the American, especially their consumption. Factories relied on their consumption so they would be able to continue to produce. Moreover, as it impacted upon banks, people were unable to take out loans, meaning consumption and investment only dropped further. It not only acted as a trigger for the Great Depression, but also acted as an amplification in deepening the problems which America faced.
However, The Wall Street Crash wasn’t the only cause of the Great Depression. For example, overproduction and agriculture both contributed to the depression. Peter Temin states that, after the war, ‘agriculture had gone from prosperity to poverty.’ Many historians and economist alike tend to separate the agrarian economy from the causes of the Great Depression. However, economists in the early 30’s stated that the fall in farmer’s income only worsened the demand within the American economy. This was only exacerbated, said W. Arthur Lewis, as the decrease in prices actually dried up investment so the purchasing power of exporters was diminished. During the War, farmers had substantially increased their production to support war-time demand for agricultural crops. After the War, production slowed, but it wasn’t as slow as the decline in growth of population. This left excess stock for many farmers, which caused the price of crop to decline. In Jakob Madsen’s paper, ‘Agricultural Crises’, he claims that the overproduction leads to an increase in vulnerability to shocks in demand. This disequilibrium created the fall in agricultural prices during the depression. Prices peaked at the start of the century, in 1917, however, on the eve of the Great Depression, the average price was almost 15% lower than that of 1910-1913. Agriculture further provides evidence for the disparity between wealth, where farmers in South Carolina were earning about 10% of those in California. American farmers borrowed $2,000 million in mortgages, and whilst they were easy to obtain, the farmers had virtually no way to repay the loans back. Many were evicted and the workers they employed were sacked as a result. Both of these two examples in conjunction, provide evidence for the wider impact that overproduction within the agrarian economy had. Primarily, socially it increased unemployment while it emphasised the decline in welfare, which was typified by the increase in wage inequality throughout America, for many farmers across America. Both of these examples only exemplify the social impact of the Wall Street Crash.
Moreover, the Government monetary policy was also a main cause of the Great Depression. Traditionalist views on the causes of the Great Depression tended to ignore the importance of the money supply. Contrary to this, Monetarists regard the Great Depression as “in fact a tragic testimonial to the importance of monetary forces.”. Monetarists don’t blame the Federal Reserve for the cause of the repression, but instead for the cause of the Depression. The US economic cycle had been going through booms and bust in the lead up to 1929, but in 1928-1932, the Federal Reserve did not act to provide liquidity to banks suffering runs. This policy resulted in a contraction of the money supply, the US money supply fell by over a third between 1929 to 1933. When this money shortage caused runs on banks, the Federal Reserve maintained its true bill policy, and refused to lend money to banks in the way that had cut short the 1907 repression. Due to this policy, it resulted in a series of bank failures in which one-third of all banks vanished.
Overall, the extent to which the Wall Street Crash was the main cause of the Great Depression, entirely depends on your economic leaning. If you align yourself with a monetarist mind-set, then you will see more of an importance with the monetarist viewpoint. Certainly, the Wall Street Crash was hugely impactful in causing the Great Depression. However, it was an event that accelerate the chain of events, without the Crash, the Depression would have still likely occurred.
Part (b) Differing Interpretations
Timoshenko, Hillstrom, Friedman and Schwartz all have different view on the extent to which the Wall Street Crash was the main cause of the Great Depression.
Firstly, Timoshenko argues that the fall in prices of agricultural commodities were a primary factor in the shifts in supply and demand in the lead up to the Depression. Under the large burden of interest payments, agricultural producing countries were obliged to make large efforts to make sure a favourable balance of merchandise trade was in place. Many would encounter difficulties in their attempt to increase the quantity of exports, because of falling prices and new barriers to exports, it meant that agricultural economies had to cut their imports. Not only did this narrow the market for exportation of manufactured goods, it also meant that agricultural exports were often undervalued while maintaining a large level of output. Production had been augmented for agricultural commodities and consequently stocks were accumulated above the normal level and their prices tended to fall. However, if prices were sustained, this was due to borrowing, which was mostly from abroad. Imports for many countries were becoming more and more favourable which only lead them into a deficit on their balance of payments. Due to both borrowing and a worsening Balance of Payments, the balance of trade for America had was till in a surplus in the 1928-1929 agricultural season but was in a large deficit for many other countries, such as Australia whose had dropped by $147 million. The drop was mainly caused by an increase in imports as well as a decrease in the value of their exports. This hit America particularly hard, as the countries they imported lots of produce to, were now in a deficit, meaning they wanted to reduce their imports, leading to the exacerbation of overproduction within the American agrarian economy.
Timoshenko also argues the borrowing pertinent to agriculture was also an associated problem when looking at the causes of the Great Depression. Even when overproduction was being felt countries were able to borrow from abroad to finance this. An example is Canada, who were able to finance the carry-over of wheat and to therefore cease the decline of wheat prices, which had been falling since 1924-25. In conjunction, the departure of the gold standard by many countries, allowed them to devalue their currency, which caused a financial strain in these countries, which coupled with unfavourable crops in 1929, brought about the collapse of 1929-1930. This collapse only enhanced the problem, causing a further decline in prices. This decline meant countries such as Germany, who were financially under strain and were unable to borrow, were put under immense pressure when trying to improve their balance of payments. This meant that many countries outside of Europe, were put under abnormal strain, such as America. Europe had taken out many loans from America after the War, which they were now wanting to be reimbursed, but they were unable to repay them, causing a downward spiral of the world economy.
Hillstrom puts forward a very different interpretation. Hillstrom argues that the main cause was in fact the Wall Street Crash. Firstly, he argues that the Crash was the main cause due to the illusion of high price levels which were meant to be sustainable. New York was a metropolis and home to one of the world’s leading financial centres, the New York Stock Exchange and following a speculative boom in the late 1920’s, thousands of Americans had joined the speculation of the increasing price levels. This is the primary reason Hillstrom says, as to why the Wall Street Crash was a major cause of the Great Depression. He explains that due to the sustained rise in general price levels within the NYSE, it wasn’t only banks that were investing but also the middle class American’s. This meant that once the crash did occur, it didn’t only primarily impact banks, but also the middle class of America, which was the driving force of the American economy. Moreover, he argues that due to the crash, there was a period of selling of high volume shares. Not only did this increase the volatility and vulnerability of the market, but it also meant many companies experienced undervalued shares, which meant they were often forced to closed down. This assimilation of a large involvement of the middle class and falling share prices, lead to the Wall Street Crash causing a recession, that not only impacted upon the banks and their closures, but also on the welfare of the society from which America’s economy was built on. This is why, Hillstrom says, that the Wall Street Crash had such a large impact, as it caused the major consumers within the economy to cease buying of goods and services, which only slowed down the economy even more. Moreover, Hillstrom points to the Wall Street Crash as exacerbating the problem caused by the Federal Reserve, as it took money out of the system. It did this as it halted the spending of many people, which meant less investment was occurring. This only added to the downward spiral the American economy was on.
For Friedman and Schwartz, the Federal Reserve’s monetary policy was largely to blame as a cause of the Great Depression. Firstly, they argued that it was due to the Federal Reserve’s failure to carry out its assigned role as the lender of last resort. Rather than providing liquidity through loans, the Fed instead watched as banks closed. The Federal Reserve, Freidman and Schwartz said, could have offset the decrease in money supply created by bank failures by engaging in bond purchases, but they didn’t. “The (Federal Reserve) System could have provided a far better solution by engaging in large-scale open market purchases of government bonds”, from Free to Choose by Friedman. This meant they would have provided banks with the additional money to meet demands of their depositors. Secondly, they compounded this reason by also stating the Fed ignored its main responsibility, which it had previously taken away from the commercial banks, and that this was the primary cause of the Great Depression. The Fed had failed to stop the money supply from falling so dramatically. As more and more people wanted to liquidate their money, it simply reduced prices to a level at which intended purchases matched intended sales. This caused people trying to pass loans from one person to another, which can only be done by lowering the price of the asset, which only compounded the problem of the falling prices. They argue that it was the money supply which was the main cause of the Great Depression. They portray it causing a deflation of prices, which only exacerbated the problems felt in the Wall Street Crash.
Overall, it’s the conflicting interpretations which create controversy. While Timoshenko, believes it was the decline in prices of agricultural commodities, which contradicts with the viewpoint of Hillstrom, who believes it was in fact the weakening of share prices due to the Wall Street Crash. Furthermore, Friedman and Schwartz both comprehend it being due to the role of the Monetary policy, implemented by the Federal Reserve.
Part (c) Explain the differences you have identified
These different interpretations can be explained in a number of ways. The question asked is very much economics based, which means my sources are conflicting due to the nature of the economic historians and their school of thought, in conjunction with what type of historian they are. This caused an array of different interpretations as my three sources all had different natures regarding their authors. Firstly, Timoshenko was an agricultural economist, meaning he would often focus on how the agriculture and output would impact the economy. This is why the whole source is solely focused on the role the decline in agriculture, in both prices and output and how it led to the Great Depression. Friedman and Schwartz were both classical economists who had a particular focus on monetary policy. This is pivotal, as in the source, they both displayed attributes of the Keynesian school of thought, indicating that government intervention may have been best. This makes the source more useful as it gives it validity, as they are willing to contradict their own viewpoints even when being high-profile monetarist economists. Moreover, Anna Schwartz was regarded as one of the best scholars of monetarist economics, which is why they both would hold this view which is different to the other historians and their sources and it furthers the legitimacy of the sources. Hillstrom was a social historian, which led this source to be much more focused on how society was impacted. This is why he writes about the Wall Street Crash being the main cause, as from a societal point of view it was the obvious event to blame as it had the largest impact on society as a single event. It led to drastic unemployment and also the closure of many banks across the country, while also having an international social impact.
Secondly, they all wrote in different time periods. Timoshenko wrote in 1933, which was only 4 years after the Wall Street Crash. This meant he wasn’t able to use all the other sources, or be influenced by the longevity of the Great Depression, in making his decision on the main causes of the Great Depression. However, it meant that he was able to experience the causes, but he wasn’t able to use the wide array of resources produced in the years following the Great Depression. Hillstrom wrote his book in 2009. Due to the long time between the Depression and the writing of the book, Hillstrom was able to use all the sources available, while also having the added benefit of hindsight when forming his own opinion. However, due to the time lapse, it implies that Hillstrom was likely using many secondary resources, which would alter his interpretation depending what he thought of the writing he was reading. Moreover, the period he was writing in was encapsulated by the Great Recession, which may have been an influence on his opinions, both regarding the causes and the duration of the Great Depression. Lastly, Friedman and Schwartz wrote in 1963, so their views would have been shaped by their surroundings. Essentially, this would be due to America’s successful use of fiscal policy at the start of the 1960’s which may have further emphasised their own view, that monetary policy was detrimental in the US economy at the start of the Great Depression.
The nature of the source is also a determinant in their differing interpretations. Timoshenko’s book is just about the relationship between Agriculture and the Great Depression. This means he was unlikely to consider many other options when determining his view, while also limiting his research on other areas, especially considering the time in which he wrote his book. Hillstrom’s book was very much an overview of the social aspects between 1920-1940. A longer time period and a broader outlook, meant this source possibly went for the discernible decision when deciding what the main cause of the Great Depression was, as Hillstrom was a social historian, so the cause that impacted society would be the most apparent to him. Moreover, Friedman and Schwartz’s’ book had a much clearer focus when deciding on what their topic was going to be. As they were both Monetarists in their field, their book had a clear vision, shared in Timoshenko’s book, which allowed them to go into great depth especially considering the length of the book. The chapter I used also had a large focus on the Great Depression, focusing on the years 1929-1933, which only gave it a clearer focus and clarity. As they were both monetarists, this meant that they believed that the government had failed to control the supply of money in the economy, which is usually achieved by targeting both inflation and interest rates. This is antithetical to the Keynesian view in which he advocated increased government spending and lower tax rates in order to increase demand. Milton Friedman had criticised the Keynesian view in that he believed the government could only achieve lower tax rates and higher spending if it was able to control the money supply.
Clearly, there are an array of reasons concerning why the historians disagree. Whether it was the access to sources, the time period written in, the nature of the source or their own views on economics and history, as these all played a role in forming the different interpretations.
Part (d) Conclusion
Deriving the main causes of the Great Depression is difficult for two reasons. Primarily, it is down to a combination of factors meaning a primary cause is harder to ascertain. Secondly, the sources studied on this occasion are often dictated by a degree of bias the author feels towards certain ideologies, which makes finding a clear and balanced argument difficult. Overall, the main cause wasn’t the Wall Street Crash, as this instead acted as a tipping point from which it started. The Wall Street Crash did start the recession, but there were more pivotal factors in causing the Great Depression.
Hillstrom’s view that the Wall Street Crash was the main cause of the Great Depression, while plausible, has little substance to it. While he was right that it did impact much of America, especially the heart of their economy, he was wrong in the sustained impact this would have. Instead I feel as though the Wall Street Crash was an event which accelerated the process, instead of being a pivotal cause. This meant that Hillstrom’s view, while still important in the process of causing the Great Depression, was in fact a short term cause, instead of being an underlying long term cause.
Freidman and Schwartz’s book was not only very detailed but also had access to a wide array of sources. The two experts in their field propose a compelling case for the cause of the Great Depression, and its relation to the monetary policy employed by the United States. However, I think they both failed to recognise the other possible causes also having an impact, and possibly over emphasised the impact of monetary supply, especially after 1929.
Timoshenko, while still lacking in balance, was able to portray a much clearer image than the two other sources. His was very directed and his intent was clear. While being convincing in his writing, and also being in recognition of the external factors within the United States Economy, it allows Timoshenko to also create an international cause for the Great Depression. He was able to link in other nations and showed their relevance where necessary to his argument. His main falter is the time period it was written, as he was probably limited in what he could focus on.
When deciding upon my sources, I settled on them due to their analytical nature and their decisiveness in opinion. When analysed further, I found, certainly Hillstrom’s piece, was often quite vague in its points, and lacked a decisive justification for its points. This had only led me to believe that the Crash was merely a system as opposed to a main cause of the Great Depression.
In the final analysis, the Wall Street Crash was a pivotal cause, but wasn’t the main cause. I consider to be in between both Timoshenko and Friedman & Schwartz, in that it was a conglomeration of both overproduction and the reduction in money supply with in the United States that were the main causes of the Great Depression.