Macroeconomics Of The Great Depression

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The Great Depression was a macroeconomic catastrophe that had far-reaching effects into nearly every sector of the worldwide economy, causing high rates in unemployment and declines in output, prices, and personal income in most industrialised nations. Due to the tragic nature of the period, much time and energy has been spent examining the causes that led a recession similar to other historical episodes to become a long lasting and infamous depression. Recent research indicates that while fiscal policy failures most likely initially brought about an economic downturn, it was deepened and prolonged by the failures of central bank monetary policies due to inaction on the part of the Federal Reserve (Bernanke, 1983). However, detractors from this monetarist position claim that the problem relative to money in the economy at the time was actually a result of the problematic interwar gold standard (Hamilton, 1987). By first examining the monetarist view as advocated by Friedman and Schwartz then examining the gold standard hypothesis, it becomes clear that while a substantial fall in money supply did occur during the years of the depression, such a fall should be attributed to the difficulties encompassed by the international gold standard rather than irresponsibility and inaction on the part of the Federal Reserve (Friedman and Schwartz, 1993; Eichengreen 1992). The beginning of the descent into the depression began with the Great Crash in October 1929. Though real output had already started falling slightly prior to the Great Crash, it can still be tied to the dramatically accelerated fall in output that followed it. Immediately prior to the crash, from August 1929 to October 1929, industrial production had only slightly declined by 1.8 per cent. Immediately following the crash, production fell an astonishing 9.8 per cent, only to be followed by a further

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