What Caused the Great Depression?

 




In a prior post (here), I took a Systems Theory perspective to defining the Great Depression. From that perspective (Path A here), there really wasn't a Great Depression, as such, but rather an Economic Bubble that started with World War I (WWI) and ended when the Bubble was popped by the Stock Market Crash of 1929. 

From Another perspective (Path B here) something bad did (or did not) happen that created a massive economic collapse. Path B is the conventional explanation which led to a vast literature (see the Notes below) driven by Monetary Theory, Keynesian Theory and other perspectives (Systems Theory is not one of the conventional perspectives). 

In this post, I look at Path B more carefully. I eliminate the two dominant historical controllers in the US_E20 Model (US2 and US3) to show that, without them, there was no Crash. The biggest shock to US1 is from US3 which involves the  Unemployment, the Federal Reserve, the Stock Market and Government Expenditure.























Notes

Kindleberger, C (2013) The World in Depression (1929-1939).

Kindleberger, C (2005) Manias, Panics and Crashes. 



Arrighi, G. (1994) The Long Twentieth Century


Jahan, S. et. al. (2014) What is Keynesian Economics




USGD Measurement Model




The three dominant component state variables in the US_E20 Model are: US1 = Overall Growth excluding the Banking System (O.B.) and Immigration (IMM.US.), US2 = (I + CPAPER + FFR + EPR + WPI + OB + P.FUELS  - LU) and US3 = (LU + TBILL + P.FED.FUNDS + V.NYSE + K.US. - GNP.G  - M1 - P.W.AG - IMM.US). 

The two Historical Controllers (US2 and US3) are complicated: US2 controls Unemployment-Business Conditions and US3 controls Unemployment-FED-Stock Market-Money Supply activity.

USGD MM Indicator Codes and Data Sources



USGD Model US Input


The causes of the Crash are US3 and US4. 

US3 = (0.4216L+0.24278TBILL+0.3847FFR+0.3312VNYSE+0.2174K-0.2549G-0.2181M1-0.24190WAG-0.2477IMM)

US4 = (0.2627I+0.2258X+0.3586SP500+0.3993VNYSE+0.398QH+0.2130IMM-0.3496G-0.2249FFR-0.21000EPR-0.2170PFUEL)


USGD Model No Nothing



Eliminating US2-US3


Input Shock Decomposition









USGD Model W Input


Preventing the crash would have involved following the unfolding Malthusian Crisis in Europe after WWI (unlikely)

AIC Statistics




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