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Does Monetary Policy Cause The Great Depression?

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The theory that Monetary Policy was at fault in causing the Great Depression is one that is explored by Milton Friedman. In his Great Contraction chapter, Friedman sets the tone that it was the policy of monetary contraction during the years of 1927-1930 that caused the economic collapse. Friedman claims that it was the effect of poor policy making by the Federal Reserve that resulted in the depression. He continues to explain that monetary policy acted independently in its causation rather than a combination of forces. Friedman makes his position clear that the contractionary monetary policy imposed by the Federal Reserve caused a decrease in the money supply in the economy. All told. Friedman further argues that alongside the contractionary …show more content…

He further suggests that the contractionary monetary policy resulted in people ‘hoarding money’ by ‘consuming less’ and so set off the economic depression, as consumption fell, as so did economic productivity, as there was not enough demand to continue boosting the economy. Further on, Friedman also mentions in his book that the Federal Reserve wanted to devalue the stock market, by reducing the availability of bank credit extended to brokers, and so this increase in interest rates that resulted to allow for this policy to be implemented resulted in a decrease in the money supply and so caused the Great Depression. Until further research allowed for economists to understand the extent of the Federal Reserve and the velocity of the money supply in causing the Great Depression, primary interpretations ignored any wrongdoing by the banks, the federal reserve and the control of the money supply. Friedman’s research into the interpretation earned him a Nobel Memorial Prize in Economic Sciences for his work on Monetary history. His theory is contrary to the standard, historical belief on the factors causing the Great

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