The Great Depression continues to be a challenge to economic doctrine which is based on the assumption of an equilibrium produced by the uninhibited working of market forces. There may be periodical deviations from such an equilibrium, but it will always be restored after a period of time. The projection of business cycles fits into such a general theory of an economic equilibrium as it postulates a regular sequence of upswings and downturns. Many attempts have been made to fit the Great Depression into such a regular pattern, but its impact was so sharp and unprecedented that it cannot be explained in this way. It seems that it was a unique event and such events can only be explained historically as they defy the laws of economics. Thus economists should have returned to ‘business as usual’, relegating the depression to the dustbin of history. But they continue to be fascinated by it and it has given rise to new departures in the field of economic theory.
First of all the depression has generated an abiding interest in theories concerning money and credit which had earlier played only a marginal role in economic thought. Economists used to concentrate on the exchange of goods, the laws of supply and demand, etc. In this sphere money was presumed to play a neutral role, it was a mere medium of exchange which could not affect the ‘real economy’ in a substantial way. But the depression upset many assumptions concerning the working of market forces in the ‘real economy’. Credit was suddenly contracted, prices fell to such an extent that the law of supply and demand seemed to be irrelevant,