Lesson 6 of 7
The undisputed facts
Four accounts of one episode agree about far more than the argument between their supporters suggests. Setting out the overlap first makes the rest legible.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- All four accounts accept the record: output more than halved, the money stock fell by a third, banks failed in waves, and the contraction ran 43 months.
- All four accept that the financial system's collapse mattered, and none treats the stock market crash on its own as the cause.
- Even the sharpest disagreements are narrower than they look. Keynes accepts that boom investment disappoints; Bernanke accepts the monetary account; Hayek and Rothbard accept that the money stock fell.
Read the partisans and you get four incompatible worlds. Read the sources and you find a large shared middle. This lesson sets out the middle, because the disagreement is only interesting once you know where it starts.
What nobody in this course disputes
Five agreed points
-
The magnitudes. Industrial production more than halved between mid-1929 and March 1933, the contraction lasted 43 months, and the stock of money fell 35.2 percent.
-
The banking collapse mattered. Every account treats the failures of 1930 to 1933 as consequential rather than incidental, though they differ about the channel.
-
The crash was not the cause. Nobody in these lessons argues that the October 1929 fall in share prices explains what followed. Galbraith, whose subject is the crash, is explicit that it went on for years afterwards.
-
Boom-era investment disappointed. Keynes describes boom investment made in expectation of a yield it will not earn, which is a different claim from the Austrian one and is not its opposite.
-
The accounts overlap. Bernanke describes his own work as complementary to Friedman and Schwartz, and says there is much support for the monetary view.
Where the shared ground is widest
On the facts, entirely. None of the four disputes the published series in the first lesson of this course, and all four of the authors read here cite figures from the same small set of sources.
On the banking system, nearly. Friedman and Schwartz make bank failures the mechanism that turned a mild monetary decline into a sharp one. Bernanke makes them the mechanism that destroyed lending relationships. Rothbard's own theory places fractional reserve banking at the centre. Keynes's chapter is the least concerned with banks, and even there the collapse of asset values is doing similar work.
Where the agreement is narrower than it looks
On the boom. Keynes's description of an investment made in expectation of 6 percent that will actually yield 2 is not the Austrian claim that capital went into the wrong stages. But both say that some of what was built during the boom was a mistake made during the boom, and that the disillusion afterwards is a revision of an earlier error rather than a fresh one.
That is not agreement about the mechanism. It is agreement about where in time to look for at least part of the answer, which is more than the usual summary of either position allows.
Where the disagreement is real
Three places, and they are the subject of the next lesson.
Whether the misallocation of capital during the 1920s did substantial explanatory work, or whether the boom was ordinary and everything decisive happened after 1929.
Whether the monetary collapse was a cause or a consequence of the contraction.
And whether the length of the depression is explained by obstructed adjustment, by monetary policy, by the persistence of low expected yields, or by the destruction of credit channels.
Check yourself
Which of these is agreed across all four accounts?
- That the Federal Reserve could have prevented the depression
- That the banking failures of 1930 to 1933 were consequential rather than incidental, though the accounts differ about the channel
- That the 1920s boom was a credit boom
Show the answer
Answer: B.
They also agree on the published magnitudes and that the October 1929 fall in share prices does not on its own explain what followed.What does Keynes say about boom-era investment?
- That it is always correctly priced
- That an essential characteristic of the boom is investment made in expectation of a yield it will not earn
- That there is no such thing as a boom
Show the answer
Answer: B.
That is not the Austrian claim about which stages the capital went into, but it does agree that part of the answer lies in the boom.How does Bernanke describe his relationship to Friedman and Schwartz?
- As a refutation of their account
- As complementary to it, while saying there is much support for the monetary view
- As unrelated work on a different period
Show the answer
Answer: B.
His reservations are about sufficiency, not about whether the monetary collapse mattered.Sources
- Friedman and Schwartz, 'Money and Business Cycles', Review of Economics and Statistics, 1963, reprinted in The State of Monetary Economics, National Bureau of Economic Research, 1965, for the bank failures as the mechanism converting a mild monetary decline into a sharp one.
- Bernanke, 'Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression', National Bureau of Economic Research working paper 1054, January 1983, introduction, for his description of his work as complementary to Friedman and Schwartz and for his statement that there is much support for the monetary view.
- Keynes, The General Theory of Employment, Interest and Money, 1936, book VI, chapter 22, section III, for the boom characterised by investment made in expectation of a yield it will not earn, and for the disillusion that follows.
- Rothbard, America's Great Depression, 1963, part one, chapter 1, for the credit contraction discussed at length as a secondary feature of depression.
- Galbraith, The Great Crash, 1929, 1955, for the observation that the market went on falling for more than two years after 1929.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The misunderstanding in the example is invented as an illustration of a common one. It attributes nothing to any author.
- Listing agreement is not a claim that the accounts are compatible. They are not, on the points named at the end of this lesson, and the next lesson is about what would separate them.
- Four accounts is a selection. Others exist, including explanations resting on international monetary arrangements and on the gold standard, and none of those is treated in this course.