The Great Depression is one of the most severe economic downturn that happened in the world history. It dates back to the early 90’s in the United States. However, it had a domino effect on other rich and poor nations. Many macroeconomists such as Irving Fisher, Milton Friedman and John Maynard Keynes have worked on the Great Depression. There is a divergence of opinions among economists as to what caused the depression. Hence, this led to the emergence of various schools of thoughts which sought to explain this economic phenomenon.
The Keynesians were of the view that the lack of spending could be attributed to The Great Depression. In fact, during this era, the economy witnessed a significant fall in the level of spending. This triggered an economic slowdown as firms made workers redundant as they were forced to cut their production plans. As a result, the income and employment level dropped drastically. Franklin D. Roosevelt (political leader at that time) tried to remedy the situation by spending more on farm subsidies. Unfortunately, the US economy did not pick up as the sum spent was barely sufficient. Keynes proposed that to deal with such a depression, the government has to inject large sums of money to revive the economy.
On the other hand, monetarists such as Milton Friedman argued that a series of banking crises (October 1930- March 1933) contributed to the Great Depression. He claimed that the crises forced one-third of all banks (including the New York Bank of The US) to leave the market and monetary contractions by 35%. This created havoc and eventually culminated into a deflation (a situation whereby there is a sustained fall in the general price level of goods and services). Prices dropped by 33%. As a consequence, consumers kept delaying their purchases as they expected that prices will fall further and hoarded their money which proved to be fatal to the economy. Little had been done by the Federal Reserve (the central banking system in the United States) to address the matter. If they had intervened by lending money to those banks, bought bonds on the open market and the implemented expansionary policies, the bank runs could have been avoided and the economy could have been saved from collapsing.