Causes of the Great Depression
INTRODUCTION Even after 96 years since the start of the Great Depression, there remains controversy about the causes. It is possible to draw up a list of probable causes but there is no consensus about the relative importance or the interaction of the causal variables. GENERAL APPROACH The basic approach of modern macroeconomic theory is to view a national economy as a relatively stable, self-equilibrating mechanism that is capable of sustained economic growth over a long period. Recessions and inflationary periods occur because of some kind of “external shock” to the system that impacts components of aggregate demand or aggregate supply. In this model, external shocks (exogenous variables) include the sudden and large increase in the cost of vital inputs such as oil, sudden and large changes in competition from imports or fall in the demand for exports, unexpected changes in nominal interest rates, monetary policy by the Fed, and fiscal policy (govern...