Academic journal article South Asian Journal of Management

A Reconsideration of the Great Depression

Academic journal article South Asian Journal of Management

A Reconsideration of the Great Depression

Article excerpt

The recent global financial and economic crisis has put the 1929-33 Great Depression back into the limelight. Looking at the Depression and today's domestic and international arrangements, some have opined that another recession as severe as the Depression is around the corner. Against this backdrop, this paper revisits the events leading to the Depression and discusses the most prominent arguments on the causes, including the Friedman-Schwartz hypothesis, the bank failures in 1920s, and the slump in the VS consumption. The paper continues with a reconciliation of the theories, and finally, ends with an assessment of the possibility of a return of the Depression based on today's considerations. The authors assert that unless there is another disaster of catastrophic proportions, the world will likely be free of such an awful Depression in the 21st century.


The US mortgage crisis which began in 2006 has put back the Great Depression (Depression thereafter) and the recent actions of the US Federal Reserve (Fed) in the limelight.

In a recent online article1, two prominent economists have been making an ongoing comparison of the current economic downturn with the movement in key indicators during the Depression for the world economy and for individual economies. Their findings are that industrial production has tracked that of the 1930s for most countries, and if anything the current downturn appears to be worse, so far, than the downturn of the 1930s.

Logically though, if the current economic downturn is to mimic the Depression, the proximate causes of the Depression must, to a greater or lesser extent, exist now. In this sense, the theoretical underpinnings of the causes of the Depression are important, where their validity or otherwise now could act as a catalyst prompting a more widespread global downturn than we have experienced to date.

There have been many prominent theories on the causal factors of the Depression. One of the objectives of this paper is to recapitulate the much debated controversial theory by Friedman and Schwartz, which links the Fed with the Depression (Bordo, 2003; Christiano et al., 2003), and some foremost critiques against the theory. Other than the theory by Friedman and Schwartz, a review of other prominent theories is also presented.

There seems to be a void in the literature on the Depression. To a certain degree, many studies have concentrated on individual crises, but only a handful have discussed the possibility of another worldwide Depression based on today's domestic and international arrangements. Furthermore, these studies are rigorous and may be incomprehensible to business managers. Thus, this paper also intends to highlight, in basic terms, comparisons between today's arrangements and that of the Depression era to readers who are not rigorously trained in economics.

This paper begins with a brief review of the Depression, followed by the Friedman and Schwartz hypothesis, criticisms against the hypothesis, other theories surrounding the onset of the Depression, a reconciliation of the theories, and finally, ends with a discussion on the possibility of a return of Depression-like conditions in the 21st century.


The accounts of the Depression have been written by Gordon (1999) about the events leading to the New York Stock Exchange crash in October 1929 and the subsequent Depression. With a fall of 12.8% of the Dow Jones index on Monday, October 28, 1929, this crisis marked the sharpest fall in the index up until then and for another 30 years. The following brief account of the events of the Depression is extracted and summarized from Gordon (1999), Mishkin (2004) and Pugel (2004).

In 1928, President Coolidge was optimistic about the prospects for the American economy and the rapid rise in stock values at the New York Stock Exchange was being fueled by low interest rates and good investment prospects. …

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