Bad Monetary Policy by US government was Responsible for Great Depression

Yet that is not what university text books teach. Of course I do not know what the professor teaches. Perhaps he points out the errors in the textbooks. Maybe though students need text books without misinformation. But maybe not. I cannot remember what I was taught in school regarding the Great Depression except that it was a tough time economically. Though I remember hearing about that tough economic time from my parents who lived through it as 10 years olds. Their frugal lifestyle was imprinted along with moral precepts upon me which has benefited me throughout my life.

Most economists attribute the crash to a decade-long quagmire to a series of bad economic policy decisions in the 1920s and ’30s. As former Federal Reserve chairman Ben Bernanke conceded(1) the Fed is now widely recognized as having botched its response to the unfolding events of 1929-1933. Through a string of erroneous policy decisions and inaction, the Fed created the conditions for a monetary contraction and directly exacerbated a collapse of the banking system. Other policy blunders, such as the steeply protectionist Smoot-Hawley Tariff of 1930, added fuel to the fire by triggering a global collapse in international trade. And in 1932, President Herbert Hoover signed a massive hike in federal income tax rates in a misguided attempt to close the budget deficit. Contractionary fiscal policy during a Depression is seldom a good idea.

Turning to the nine most-common US history textbooks, we found a very different story. Monetary explanations of the Great Depression were seldom mentioned at all. Only two of the nine texts mentioned the role of Federal Reserve policies. The protectionist policies of Smoot-Hawley were largely omitted. US history textbooks even neglected doctrinaire Keynesian explanations rooted in an aggregate demand contraction.
(1) FRB Speech, Bernanke -- On Milton Friedman's ninetieth birthday -- November 8, 2002





It had to be said, but it is interesting that a movie from the 1990s about a kid ditching school for a day is more informative about this topic than today’s college history books.


I was taught in school that it was because of the tightening of monetary policies because one party wanted to solve deficit problems throwing us into a depression. At least that is how I remember it.



It is important to recall the Great Depression was not limited to the U.S. but extended across the globe. Poor monetary and fiscal policy in the U.S. certainly exacerbated the problem here, but we were not alone. I recommend the book “Lords of Finance” for a study of central bankers in four countries, including the U.S., and their role in creating the conditions for Great Depression and their response to events.


This isn’t a particularly new insight or something that is hidden in the corner. Milton Freidman advanced this theory back in the 1960s. Friedman of course won the Nobel Prize and was a hugely influential economist. He even wrote a general interest economics column for Newsweek for decades. It is not like no one was talking about this (sorry for the double negative).

The counter argument is more that the Fed didn’t actually cause the Great Depression, but it failed to act in a way that would have blunted the worst of it. Which is more of argument over degree than anything.

It should be noted that Friedman disciple Ben Bernanke was in the captain’s chair for the Great Recession. You can draw your own conclusions about how powerful of an effect monetary policy has on the economy.


I’m not familiar with the textbooks in question, but organizing theories tend to go in and out of fashion, and economics is not immune. Monetarism and Keynesian ideas have been two of the major theories in economics for much of the second half of the 20th century. Friedman is a well-known monetarist, and historically, they’ve blamed mismanagement of the money supply. Others have emphasized the disastrous Smoot-Hawley tariff for its impact on global trade and for touching off a round of tariff hikes that made the problem even worse. For an event of this magnitude and one that was shared across borders, there is likely plenty of blame to go around.


Playing devil’s advocate here for a minute, are these general history textbooks or are they textbooks on the history of economics?

Is it the purpose of a general history course to get deep into the economic reasons behind the Great Depression? I’d argue that might be getting too far into the depths of a difficult issue for something that is more general history book.

Certainly the title of this thread is much too simplistic. Bad monetary policy is almost certainly ONE contributing factor to the Great Depression, but there are others - as ponted out in the italicized portion of the first post here. (Smoot-Hawley, tax increases)

Reading further, it seems like there are precious few explanations in these text books and perhaps the books are limiting their discussions to the more objective facts that the Depression happened and the way it affected the lives of people.

In short, perhaps the reasons for the Depression are too complicated and difficult for a more general history textbook to dig into. They’re just beyond the scope of what the author is trying to accomplish.

Now, to leave the Devil’s advocate position, it would seem to me that it’s not too tough to add a paragraph listing some of the higher probability reasons for the Depression, along with a comment on the complexity of blame issue. Then again, publishers can often exercise quite a bit of editorial control over what makes it in to a text book and what gets cut.



The Great Crash 1929, John Kenneth Galbraith was for years a standard explanation. Galbraith who studied for a summer under John Maynard Keynes. Galbraith also served for a time before the depression on the U.S. Department of Agriculture. Galbraith was familiar with increasing farm debt after WWI. Galbraith pointed out in the book that Agriculture in the United States was a much larger part of the labor (employment). This in turn was part of the cause for the banking failures.

Whether you agree with Galbraith, he is a joy to read.