The German Depression of the 1930s: the Role of Monetary Policy, Fiscal Policy, and of the International Business Cycle

In the economic literature there are three different explanations of the origin, the causes, and the length and depth of the 1929-33 world depression. The first one maintains that the depression had a single cause, namely errors in carrying out monetary policy in the United States. It argues that the origin of the depression was in the United States rather than in Europe, its causes were monetary rather than real and that they originated from policy rather than from the nature of institutions, both national and international. This point of view is best represented by Friedman and Schwartz (1963). They argued that the strong and prolonged decline in prices and real output in the world economy is to be attributed mainly to an unprecedented decline in the quantity of money in the United States. This fall in the money stock was largely caused by bank failures in the United States in 1930-33, although they argue it could have been prevented by active monetary policy. Meltzer (1976) also argued that inappropriate Federal Reserve policy in 1929-31 was at the origin of the strong decline in output and prices in the United States and with a lag in the rest of the world. According to Meltzer, this inappropriate monetary policy was due to the Federal Reserve System Board focusing on nominal interest rates and member banks borrowing as a measure of ease and tightness of policy. Hawtrey (1947) also held the view that restrictive monetary policy in the United States and the United Kingdom in 1928 and 1929 were at the origin of the depression. He maintained that France’s large gold acquisitions in those years had a major influence on the degree of restriction of monetary policy in the two reserve currency centres.