How did the great depression start?
The Theory At The Time The economic view at the time of the Great Depression was that economies were self-correcting and that the economy may need to go through a period of liquidation before new growth could take place in an economically healthy way. (Delong 1991:32) Economists of this opinion believed that deflation would correct the excesses of the previous economic boom and that the economy would right itself just as it had in the recessionary periods of the late 19th and early 20th centuries. In their view, the economy would reach equilibrium at a lower level of wages and prices. (Meltzer 2003: 278) This was not just the view in the US but included people connected to all the major central banks in the western world. (Meltzer 2003: 278) This consensus followed from the prevailing economic consensus at the time and from Say’s law, which says that supply creates its own demand. In this view, there should never be recession due simply to inadequate aggregate demand. [edit] Keynesian
The cause of the Great Depression is still in great debate, and there is no single explanation behind which most economists rally. Breaking the information down, it comes down to this: The 1920’s had a wealthy, gilded veneer, and the general mood of the country corresponded to this belief that the country was in an economic upswing. The stock market was climbing, and it was expected to continue to do so. However, people were investing in part to make a quick buck, but also for the prestigious status that accompanied investing. Neither of these result in a stable economy. Furthermore, subtle economic clues were ignored, such as productivity and consumption. Many public policies were influenced by economists who believed that the market was always self correcting, and therefore officials adopted a cavalier attitude with money. The Federal Reserve Board kept discount rates low, which encouraged excessive and irresponsible investment.
