THIS CHAPTER begins the task of confronting the alternate explanations of the Great Depression in the spending hypothesis and the money hypothesis. It examines the initial parts of the stories where the factors that precipitated the Depression are described. These factors need to be examined from two points of view. First, were they independent of the fall in income, so that they could have been a cause--as opposed to a result or a part--of the Depression? And second, what were their effects? The two hypotheses are tested in turn.
A problem arises immediately when we turn to this test. It is not at all clear what it means to precipitate a depression. In particular, there are two meanings one could attach to this term with respect to the Great Depression. One could ask either about the causes of the down- turn in 1929 or about the causes of the great severity of this downturn relative to others the economy has experienced. In one case, the deviation of the economy from a trend path is being explored; in the other, the deviation from a "normal" depression.1
Since our interest lies in explaining why the Great Depression was different than other economic downturns, we choose the second definition. The downturn which started in the second quarter of 1929 might not have turned into the Great Depression.2 The economy is always deviating in one way or another from its trend. And we do not lavish equal attention upon all deviations. The 1930s are of interest because____________________