Fear, Folly, & the Great Depression

The Great Depression all but came to an end as World War II started. Since that time, economists and historians have endeavored to solve the problem of this global economic catastrophe. Furthermore, the constant search for a solution regarding the Great Depression is not limited to the global economic market of the 1930’s. Rather, the world’s best and brightest minds have approached this problem as a sort of economic Rosetta Stone. One in which the answer to all future economic puzzles might stem from. Therefore, if we can identify the catalyst for such a disaster, then perhaps it is possible for our modern society to avoid a similar pitfall in the future. In response, several theories attempt to provide an overarching answer to the global economic crisis of the 1930’s.

The first cause of the Great Depression which Bernake’s addresses in his article, “The Macroeconomics of the Great Depression: A comparative Approach”, relates to monetary factors. First, Bernake points out that for some time economists pointed out the contraction of money supply and demand was the primary force which drove the economy into a state of depression. [1] Furthermore, Bernake provides a more inclusive summary of the downturn when he argues that the world’s contraction of monetary supply during this period was not merely the result of a single circumstance. Rather, Bernake argues that the depression was the “unintended result of an interaction of poorly designed institutions, shortsighted policy-making, and unfavorable political and economic conditions.” [2] Next, Bernake identifies the decision made by various governments worldwide to either adhere to or abandon the gold standard as a significant contributing factor to the Great Depression. Furthermore, he points out that “to an overwhelmingly degree, the evidence shows that countries who left the gold standard recovered from the Depression more quickly than countries that remained on gold.” [3]

Yet, as one considers each of the economic causes which Bernake provides as the catalyst for the Depression, it is increasingly evident that Bernake recognizes that “historical, political, and philosophical”[4] matters were of at least equal if not greater importance than those which could be stamped with a dollar sign alone. For example, Bernake cites states that “a particularly destabilizing aspect of this process was the tendency of fears about the soundness of banks and expectations of the exchange-rate devaluation to reinforce each other.”[5] Here, once we are able to look past the technical jargon as it relates to the purely economic issues at hand, we can identify language which is deeply rooted in human emotion rather than the cold logic and penny pinching explanations that an Ebeneezer Scrooge might provide as an explanation for the Depression.

Now, to provide a clear and concise summary of these so-called nonmonetary causes and effects of the Great Depression we must turn to another article by Ben S. Bernake. In his article, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression”, Bernake takes a brief detour from the monetary matters of the mind and focuses on money as it relates to the heart. Most notably, Bernake discusses the failure of the banking system which often led to a so-called “run on the banks”, which is merely a physical representation of the fear and panic which many individuals felt in relation to the economy and its ability to provide a secure and stable future for them and their loved ones. According to Bernake, “In a run, fear that a bank might fail induces depositors to withdraw their money, which in turn forces liquidation of the bank’s assets.”[6] Furthermore, our author demonstrates how a “fear of runs led to large withdrawals of deposits, precautionary increase in reserve-deposit ratios, and an increased desire by banks for very liquid or rediscountable assets.”[7] In short, the people’s perception of the banks and their reliability, or lack thereof, not only exacerbated Depression: it was a force for change. Here, one is reminded of the fact that the Latin word, credo, from which we derive our term credit, is most accurately translated as belief or faith. For those who struggled through the Depression it was a lack of faith in the banks, politicians, and policies of the time that truly made the economic downturn of this era “Great”.

 For us to properly define and analyze the Great Depression: its causes, problems, and future preventatives. We must consider both sides of the proverbial coin regarding the matter. On the one hand, the monetary aspects which can be calculated and confined to clear cut definitions regarding what, in fact worked, and that which did not economically. On the other hand, we must consider the perceptions and feelings of the public that lay hidden underneath the crisis. One in which fear and anxiety had a real say in the matter. Only when the marriage of these two considerations is complete in our investigation into this social and economic debacle can we begin to see a way forward into the future. One in which our hearts, minds, and wallets align to bring about peace and prosperity for all in our time.

[1] Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.”

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.”

[7] Ibid.