Causes, Causation and the Great Depression

In response to Milton Friedman and Anna Schwarz’s account of the monetary origins of the Great Depression of the early 1930s, Peter Temin queried whether monetary forces or deficiencies in expenditure caused the Great Depression. The chapter evaluates these works in the context of support-bargaining and money-bargaining. ‘Causation’ is linked to the use of a frame of reference; the frame determines the cause. Friedman and Schwarz identify the cause of the Great Depression in the structure of the Federal Reserve, which gave authority over decisions to regional Reserve Banks that lacked the necessary understanding of monetary issues. As a result, the Federal Reserve System failed to react as required to the emerging depression. Depressions arise from the contraction of money-bargaining chains. The chains perform a similar function in regulation of economies as the concept of the ‘stock of money’ used by Friedman and Schwarz, though the chains have the dynamism of money flows, while the ‘stock’ has the static character of balance sheets. Reductions in credit provision by banks give rise to contraction of chains. Chains also contract when large companies fail or industries contract. Such an explanation is akin to the debt deflation theory of Irving Fisher.