Did Monetary Forces Cause the Great Depression?

By Peter Temin | Go to book overview
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II The Role of Assumptions and Econometrics in the Analysis of the Depression

THE EXISTING economic literature on the Depression exhibits no agreement on the causes of the Depression. Instead, there are several schools of thought whose views seldom are brought into direct conflict. Friedman and Schwartz have given the best exposition of what I have called the "money hypothesis," and this view will be represented by their exposition. Most other analyses of the Depression have concentrated on one or another of the hypotheses I have grouped together under the name of the "spending hypothesis." Econometric models of the interwar economy have been used extensively to define and refine this hypothesis. But while the implications of the spending hypothesis are brought out, the issue of choosing between the money hypothesis and the spending hypothesis typically is raised only tangentially, if at all. In fact, neither the approach adopted by Friedman and Schwartz nor the econometric approach is a good way to analyze this choice.1

The discussion will be divided into three parts. First, Friedman and Schwartz's account of the money hypothesis will be analyzed. Second, econometric models of the Depression will be compared to each other and to Friedman and Schwartz's account. Third, a model of the supply and demand for money which incorporates features of both hypotheses will be tested against the data. For reasons that will emerge during the

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1
Writers on the international Depression have asserted uniformly that the Depression in the United States was caused within the United States. See Lewis, 1949, p. 52; Lundberg, 1968, p. 74; Kindleberger, 1973, p. 117.

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