1. 1 BrianHaines
Was the Great Depression an inevitable consequence of the Wall Street Crash?
It is guaranteed that when a student produces work that includes explaining the negative
aspects of the 1930s, particularly the rise of Hitler, they will refer to the economic hardships,
such as that of American unemployment rising to ‘25 percent’1 that depicts the Great
Depression. They will then link this directly back to the Wall Street Crash of 1929 as though
the two episodes are bound together in one large event. This essay is to examine whether this
is fair and valid. Analysing four of the focal themes that historians have provided as causing
the Depression, the 1960s argument on Federal monetarism in the late 1920s; the poor
condition of the American economy in the 1920s, the 1970s historiographical movement
towards analysis of the poor world financial condition; and lastly the psychology of
Americans after the 1929 financial collapse, this essay will argue that the Great Depression
was not an inevitable consequence of the Wall Street Crash in itself. The poor condition of
the American and global economies provided settings that were bound to cause much longer
term deterioration in world finance. The Wall Street Cash for the most part was only the
trigger for things to come. The poor conditions pre-Wall Street Crash fused with the failure of
federal economic policy and the psychology of the American people, post-the crash, to make
the Great Depression.
It was not the Wall Street Crash by itself that caused the Great Depression of the 1930s.
Instead it was the monetary policies initiated by the Federal Reserve (the central bank of
America) before and after the Great Crash that turned a recession into a long term depression.
This argument comes from the two pioneer supporters of monetarism policy for the cause of
the Great Depression- Milton Friedman and Anna Schwartz. These two historians argued that
the Federal Reserve, because of its acknowledgement in 1928 and 1929 that the American
stock market was floating too high, and was therefore inclined to collapse, wished to curb
speculation and calm things down. In their attempt to achieve this, the Federal Reserve
undertook a policy of reducing the supply of money to the American people. Naturally, this
1 ‘Monetary Policy in the Great Depression:What the Fed Did, and Why’, Federal Reserve Bank of St. Louis
Review, http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf;consulted
06/01/2014

2. 2 BrianHaines
resulted in a demand for currency from the public. However, this high demand from the
American people resulted in fear of the effects of deflation, unemployment, and lower wages.
As a result the public started to undertake hoarding. This action meant that the idea of
consumption which represents the ‘Roaring Twenties’ came to an end. Schwartz and
Friedman supported their argument by providing a figure of ‘13 per cent’2 in the reduction of
velocity of money (the frequency at which one certain currency is used to buy products
produced in nation where the currency is used). For both, this reduction in consumption
resulted in a contraction of employment and production because, the need for employees for
businesses reduced. The negative impact on the American economy, through this reduction of
wages or complete employment, spread through all sectors of society. Friedman and
Schwartz’s conclusion therefore was that the Federal Reserve far too aggressive contraction
policy, rather than the Wall Street Crash on its own, caused the Great Depression.
The monetarist argument has faced a huge amount of revision. Dietmar Rothermund claims
that ‘big government’, whereby the state has a strong involvement and influence in the
function of the national economy, did not exist in the late 1920s and early 1930s. This
argument is supported with the statistic showing that the Federal Government claimed only
‘2.5 per cent’3 of the Gross National product (the total market value of all products produced
in a certain country in a single year), whereas a larger figure of ‘7.5 per cent’4 of GDP was
claimed by local level government. This brings into doubt the willingness of the Federal
Reserve and the American government to largely influence the American economy through
contraction. This critique continues with Friedman’s most acclaimed reviewer, Peter Temin.
Temin criticises the work of Friedman and Schmitz by arguing that monetarist failure by the
Federal Reserve, through causing a contraction in the currency velocity, would have resulted
in a sudden quick spike in short-term interest rates. He further adds that if monetarist policy
had caused the contraction that eventually caused the chaos of the Great Depression then this
spike would have been exponentially large, and as a result easily noticeable. Interest levels
through the inter-war period show short-term American interest rates increased from ‘3 per
cent’5 in 1927, when the monetarists argue the contraction of money supply began, to a peak
2 Milton.Friedman, The Great Contraction 1929-1933 (Princeton University Press,1964),p. 23
3 Dietmar. Rothermund, The Global Impact of the Great Depression (Routledge, 1996),p.49
4 Dietmar. Rothermund., The Global Impact of the Great Depression (Routledge, 1996)
5 ‘Monetary Policy in the Great Depression
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf

3. 3 BrianHaines
of ‘less than 5 per cent’6 at the end of 1929. Long-term rates, peaking in 1929 and 1932,
generally remained at a constant level of ‘about 3 per cent from 1927 and 1935.7 Temin’s
critique that interest rates did not spike does have support with these figures, and the
argument of the Great Depression being caused by monetarism contraction is weakened.
Though there are problems for the monetarist historians, their argument is still relevant.
Support for their argument is provided in the form of a graph from David Wheelock’s
work, Monetary Policy in the Great Depression (1992). Wheelock’s graph presents the level
of real GDP (the total market value of all the recognised goods and services in a single year)
and the money supply in the United States between 1900 and 1945. The 1929 crash shows a
huge drop in American GDP, which is matched with a drop in the American money supply.
This contrasts to the 1920-21 recession, which is significant because this economic bump did
not turn into depression. Though the 1921 recession created a drop in GDP, by 1923 the level
was once again on the increase. This matches a general constant of ‘3.6 billion dollars’8 kept
in circulation in the American economy. Though not showing absolute proof a direct
causation, it does show a strong correlation between keeping the American economy out of
depression whilst being in the critical period of a recession, and keeping a large supply of
money in the economy. The contraction of the American money supply after 1928 did
contribute to the Great Depression of the 1930s, but it did not cause the Great Depression in
itself.
As well as being critiqued from the 1970s, the monetarist argument has been developed by
historians in the decades since, such as Temin, Ben Bernanke and Dietmar Rothermund. This
review has rightly focused on the support for the claim that a focal part of the cause of the
Great Depression was because of the continued use of the Gold Standard in America. The
Gold Standard, which was the policy by which nations fixed their currency to the price of
gold, resulted in a strong level for each currency; and the promise of fixed international
exchange rates, which were expected to remove uncertainty in trade. The problem was that
6 Monetary Policy in the Great Depression
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf
7 Monetary Policy in the Great Depression
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf
8 ‘Monetary Policy in the Great Depression
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf;

4. 4 BrianHaines
this economic policy required countries to keep interest rates at a high level, whilst keeping
the currency level to the amount of gold in the country. Bernanke particularly argues that this
forced America away from initiating expansionary economic initiatives that could have
meant the beginning of early prosperity for the United States, not depression. This modern
monetarist analysis does have weight, with data showing a comparison between nations that
were forced to leave the standard and the time it took them to start on the path towards
financial recovery. Countries, such as Britain and Japan, that left the Gold Standard in 1931
showed near immediate improvement in their economies. Directly in 1931 Japan showed
rapid increase in its industrial production, so that by 1932 it had reached its 1929 level.
Britain, though slightly slower compared to Japan, started an early recovery and reached its
pre-1929 industrial production level by 1934. The United States left the Gold Standard in
1932 and, like the other two nations, began an immediate recovery; though its late movement
off meant that its industrial production did not reach its 1929 levels even in 1937.9 However,
it must be remembered that the Gold Standard would not have caused the Great Depression
by itself. If it could have then America’s depression would have dominated the 1920s.
Rather, the other factors which united with monetarism, and particularly the Gold Standard,
to cause the Great Depression need to be analysed.
So far this essay has examined the 1960s monetarism argument and the Gold Standard
revision of the 1970s. This essay has argued that the Federal Reserve economic policy of the
late 1920s and early 1930s, and the continuation of America on the Gold Standard, were not
the sole causes of the Great Depression. Instead poor monetarist actions interacted with other
sources to cause the Great Depression. This essay is to now look at one of these other causes,
the poor condition of the American economy before the Wall Street Crash.
A group that gains large attention from historians, such as Derek Aldcroft; Christina Romer,
Reis Ronald and Brian Duignan, when revising the condition of the American economy in the
1920s is that of those involved in agriculture. These historians explained the problems in
agriculture as resulting from the effects of First World War. The conflict, resulting in nation’s
having a high demand for agricultural goods, caused high prices in this sector of America.
With belief of future prosperity, farmers took out loans to invest in more land and improved
technology for the benefit of increased production and even better incomes. The problem
9 Milton.Friedman, The Great Contraction, p. 152

5. 5 BrianHaines
arose when the post-war world did not follow this expectation, motivated by the recovery of
European and Russian agricultural production. The demand for American agriculture
reduced, and along with this the price for agricultural goods dropped ‘50 percent from June
1920 through 1921, and stayed low throughout the decade’10. With this surprising reduction
in income, farmers found it difficult to pay back the loans they had taken out, and as a result
faced economic hardship. Mark Tauger highlights this hardship in the American south, where
farmers sometimes earned only ‘14 cents a day’11. This argument is emphasised when
remembered that ‘20 per cent’12 of the American labour force was directly involved in the
agricultural industry. To have such a high percentage of people within such a weak industry
supports the idea of a weak American economy in the 1920s. Therefore it could easily be
argued that the Great Depression, for a good proportion of the American people, had already
started by the mid-1920s. This would weaken the role of the Wall Street Crash’s role as
forcing the Great Depression in the 1930s.
Barry Eichengreen presents an argument that even those in the 1920s who were not involved
in agriculture, but in the new industries, faced financial problems. There is no doubt that the
1920s marked the growth of the importance for consumer goods. This statement is supported
with the statistic of the growth of sales in vehicles. In 1919 the number of motorcars sold was
‘2 million’13. By the time of the crash in 1929 the number increased to more than ‘5
million’14. The number of trucks bought between 1920 and 1928 increased from ‘1 million’15
to ‘3 million’16. This consumer culture could mean difficulties for the economy as a whole if
the demand for consumer goods quickly declined. This argument is illustrated with a good
representation of economies: industrial production. The year 1927 showed a short stagnation
in production with only 2.6 in Logarithms, whereas 1929 showed a peak of 2.8.17 This
coincided with Henry Ford’s decision to close his automobile production line for 6 months
for preparation for the beginning of production of the Model-A. Eichengreen argues that it is
only natural that in times of uncertainty towards the economy consumers wish to take more
10Mark. Trauger, Agriculture in World History (Routledge, 2010) p.226
11 Mark. Trauger, Agriculture in World History, p.226
12 Peter. Temin., Did Monetary Forces Cause the Great Depression? (W.W. Norton & Company, 1975), p. 172
13 Barry.Eichengreen, ‘The Origins and Nature of the Great Slump Revisited’, The Economic History Review, vol.
45, no.2 (1992)
14 Barry.Eichengreen, ‘The Origins and Nature’, The Economic History Review, p.215
15 Dietmar. Rothermund, The Global Impact of the Great Depression (Routledge, 1996), p. 49
16Dietmar. Rothermund, The Global Impact, p. 21
17 Christina.D.Romer, ‘The Nation in Depression’, Journal of Economic Perspectives, vol. 7, no. 2 (1993), p. 21

6. 6 BrianHaines
care on their spending and cut back first on the things they believe are luxuries, primarily
consumer goods, whilst focusing on food goods and others that are always required.
Thus Eichengreen’s argument that the American market of the 1920s was not stable and
likely to leave to mass contraction of spending, and thus unemployment, seems a valid
one. Here the common conception of the 1920s American economy as not just strong but
booming before the crash of 1929 has been reviewed towards more of a pessimistic picture.
This argument further weakens the role that the Wall Street Crash played in making the Great
Depression an inevitable event. Instead the Great Depression is an inevitable period
generating largely from this poor 1920s financial condition. The Wall Street Crash acts as a
trigger, along with the monetarist policy, to cause the Great Depression.
Studies, particularly by Peter Fearon and Derek Aldcroft, have stopped focussing solely on
America as the cause of the Depression, and have moved to looking at the world economy as
a whole, particularly the European economies during the 1920s and into the early-1930s.
What is pictured is a more pessimistic view of the 1920s that contrasts to the ideas of
American general excitement and prosperity that generally comes to mind when thinking of
the period. Aldcroft’s focal argument is that the Great Depression was going to happen once
the crash of 1929 occurred because of the continued policy of contraction; but more
importantly because of the fragile condition of the world economies before 1929. For
Aldcroft, there was not as big financial boom as has traditionally been argued. He supports
this claim with high figures of ‘2.5 million’18 unemployed respectably in Britain, Germany
and Italy at the end of 1925, and the inability for European nations to keep inflation low.
Additionally, France, as an example, had structural problems with ‘1:3 of Frenchmen’19
linked to agricultural work but receiving only ‘18 per cent’20of the total national income,
suggesting that too many resources were focused towards too low productive areas. Even
where there was slight prosperity it was, for the most part, fragile, emphasising the part that
borrowing of American money to the rest of the world took. In total America, by the
beginning of the 1930s, credited ‘3.3’21 billion dollars to economically desperate countries,
the German Republic being the most famous taking ‘800 million marks’22 throughout the
1920s, however there were other countries. Hungary, is an example, that in 1928 produced
18 Derek. Aldcroft, From Versailles to Wall Street, 1919-1929 (Allen Lane, 1977),p. 101
19 Derek. Aldcroft, From Versailles, p. 4
20 Derek. Aldcroft, From Versailles, p.10
21 Derek. Aldcroft, From Versailles, p.217
22 Eberhard. Kolb, The Weimar Republic (Routeledge, 1984), p. 60

7. 7 BrianHaines
out payments on capital services of ‘40 per cent’23 of the total capital inflow, and Estonia
where the figure was ‘70 per cent’24. Aldcroft’s well-founded central conclusion is that the
borrowing to large parts of the world in the 1920s, which did help Europe, for example in
increasing its industrial production after 1925 by more than ‘20 per cent’25, created ‘an
illusion of soundness and stability which did not exist in reality.’26The world was secure, and
the cracks kept hidden, as long as the borrowing continued. With the economic failure in
1929, when lending was forced to cease, the foreign economies were left to fight for
themselves, whilst repaying all they had borrowed from America. Naturally this caused
situations such as in Germany, where unemployment enlarged to ‘5 million’27 by 1931. This
process was generally the same for many other countries in Europe.
This movement from solely looking at the events of the inter-war period in America to
looking more at the global economic conditions has again revaluated the traditional,
responsible, part that the Wall Street Crash has played . Instead a larger picture of long-term
poor finance seems valid for making the Great Depression near to inevitable. The crash of
1929, for the most part, represents only the possibility as a trigger for these poor conditions to
take effect, and for the Great Depression to take hold.
So far this essay has examined three themes around what caused the Great Depression, of
monetarist policy around the Wall Street Crash, the fragile condition of the American
economy in the 1920s and the temperamental world economy in the 1920s. For the most part
this essay has focused on those in power and their responsibility for the Great Depression,
and weakened the role that the Wall Street Crash had in making the Great Depression an
inevitable event. Despite this, it must not be forgotten that individuals do have some part to
play in financial crisis. This last section will examine the psychology of the American people
after the 1929 crash, and its importance for causing the Great Depression. Reis Ronald
provides a statistic that ‘9 out of 10 Americans’28 were not affected directly by the 1929
23 Derek. Aldcroft, From Versailles, p.254
24 Derek. Aldcroft, From Versailles, p.254
25 Derek. Aldcroft, From Versailles, p.188
26 Derek. Aldcroft, From Versailles, p.245
27 Anthony. Nicholls,Weimar and the Rise of Hitler (PalgraveMacmillan,1969),p.151
28Reis. Ronald,The Great Depression and the New Deal: America’s Economy in Crisis, (Chelsea House
Publications,2011), p.21

8. 8 BrianHaines
financial stock collapse, because they did not own stock. Rather, as Duignan argues, it was a
fear by the public to spend. The crash, though not largely affecting people directly, gave
people shock and fear for the security of their prosperity. As a result, people wished to hold
onto their wealth and this led to a decline in demand of goods, employment, and production.
This in turn produced more fear, and a negative economic spiral developed. This argument
does have strength with Schwartz’s data showing industrial production, money income, real
income and consumerism levels all dramatically decreasing in early 1930. This suggests that
the Wall Street Crash was, though only a part of a combination of conditions that resulted in
the Great Depression, still a cause.
This essay has examined the main historiographical debates over what caused the Great
Depression during the 1930s. First looking at the 1960s monetarist argument of Friedman and
Schwartz, then analysing the conditions of the American economy and the global economy,
this essay finished with a look at the more traditional view of the Great Depression: that it
was caused by a lack of consumerism resulting from the Wall Street Crash. The argument
produced is that fragility in both the 1920s American and European economies, alongside the
lack of spending from the psychology of fear, and the Federal Reserve financial policy, made
the perfect combination for a depression that would impact America, and the world, in the
1930s. The Great Depression would not have occurred without all these conditions working
together; alone they were too weak of an influence. The key was when, at the end of 1929
and until the early 1930s, they were all included.

9. 9 BrianHaines
Bibliography:
Aldcroft. Derek, From Versailles to Wall Street, 1919-1929 (Allen Lane, 1977)
Bernanke. Ben, The Macroeconomics of the Great Depression: A Comparative Approach
(National Bureau of Economic Research, 1994)
Duignan, Brian, The Great Depression (Rosen Education Service, 2012)
Eichengreen. Barry, ‘The Origins and Nature of the Great Slump Revisited’, The Economic
History Review, vol. 45, no.2 (1992)
Galbraith. John Kenneth, The Great Crash of 1929, (Mariner Books, 1997)
Kindleberger. Charles, The World in Depression 1929-1939 (University of California Press,
1986)
Kolb. Eberhard, The Weimar Republic (Routeledge, 1984)
Milton. Friedman, The Great Contraction 1929-1933 (Princeton University Press, 1964)
Nicholls. Anthony, Weimar and the Rise of Hitler (Palgrave Macmillan, 1969)
Ronald. Reis, The Great Depression and the New Deal: America’s Economy in Crisis,
(Chelsea House Publications, 2011)
Romer. Christina D., ‘The Nation in Depression’, Journal of Economic Perspectives, vol. 7,
no. 2 (1993)
Rothermund. Dietmar, The Global Impact of the Great Depression (Routledge, 1996)
Temin. Peter, Did Monetary Forces Cause the Great Depression? (W.W. Norton &
Company, 1975)
Temin. Peter, ‘Transmission of the Great Depression’, The Journal of Economic
Perspectives, vol. 7, no.2 (1993)

10. 10 Brian Haines
Trauger. Mark, Agriculture in World History (Routledge, 2010)
‘Causes of the Great Depression’, Forthcoming in the Encyclopaedia Britannica,
http://elsa.berkeley.edu/~cromer/great_depression.pdf;consulted 06/01/2014
‘Monetary Policy in the Great Depression: What the Fed Did, and Why’, Federal Reserve
Bank of St. Louis Review,
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf;consulted
06/01/2014