What Made The Great Depression so Great? Part Two

Friedman and Schwartz’s account of the 1930's have become a mainstream view in macroeconomics and has been highly influential to many  economist's research however has not been universally accepted.  Many economists have tried to build upon their view or fill in gaps.

Temin notes that the monetary view suggested by Friedman and Schwartz is not satisfactory. Temin’s view is that the Great Depression was caused by an exogenous decline in investment and consumption behaviour.

Romer and Romer (2012) wrote a paper to fill in the gaps they found in Friedman and Schwartz’s explanation. Their paper demonstrated that for monetary explanation to be correct, it was not enough to state that there were expectations of deflation in the early 1930's but that they must be a result of monetary contraction. Romer and Romer also  state that they suspect that even Friedman and Schwartz would agree that non-monetary forces were also important, especially in the first year of the Great Depression. Romer and Romer express in their paper that they believe Temin’s non-monetary hypothesis is correct.

Bernanke has always been fascinated with the causes of the Great Depression. In one of his papers, he recognises that Friedman and Schwartz deserve credit for highlighting the monetary forces contribution to the Great Depression however expresses that for us to understand the causes of the Great Depression we need to look at the experiences of a wide range of countries.He emphasises the importance of the gold standard and its contribution to the Great Depression. The gold standard explains why the economic decline happened internationally and was not just confined to the United States. The gold standard also helps explain the tight monetary policy. The gold standard was inadequate for the growing economy which caused the money supply to decline. The correlation between the gold standard and the severity of the Great Depression was evident once countries started to leave the gold standard. Those who left the gold standard earlier recovered much quicker.

Source (Why was there deflation during the Great Depression? - Quora)

Britain left the Gold standard 3 years before France and recovered much sooner. Temin and Friedman and Schwartz failed to recognise the importance of the gold standard and its effect on the Great Depression.Bernanke was able to take his research and learn numerous lessons. He expressed that the main lesson from the Great Depression was, “price stability should be a  key objective of monetary policy.”