The Great Depression: economic black magic I

Abstract

Chapter 10 uses the Great Depression as an example of economic black magic. When it occurred, there was very little understanding about macroeconomics. Economics at that time was almost entirely microeconomics. Everyone was totally bewildered as to why the Depression happened. It turns out that this horrible event represented a (hopefully) unique combination of bad luck, fear, and stupid economic policies that reflected ignorance about how an economy functions. The chapter first presents the following facts about the Great Depression: decreases in output; increases in the unemployment rate; deflation; the stock market crash; and how long it took the market to return to its 1929 level. Then it discusses the following causes for the Great Depression: the stock market crash; fear; financial disintermediation; economic Darwinism occurring too rapidly; severe droughts; deflation psychology; the Hawley-Smoot Tariff Act; higher tax rates; and a huge decrease in the money supply.