what was the monetary policy during the great depression
Causes of the Great Depression
Building on both the monetary hypothesis of Milton Friedman and Anna Schwartz as well as the debt deflation hypothesis of Irving Fisher , Ben Bernanke developed an alternative way in which the financial crisis affected output . He builds on Fisher 's argument that dramatic declines in the price level and nominal incomes lead to increasing real debt burdens which in turn leads to debtor insolvency and consequently leads to lowered aggregate demand , a further decline in the price level then results in a debt deflationary spiral . According to Bernanke , a small decline in the price level simply reallocates wealth from debtors to creditors without doing damage to the economy . But when the deflation is severe falling asset prices along with debtor bankruptcies lead to a decline in the nominal value of assets on bank balance sheets . Banks will react by tightening their credit conditions , that in turn leads to a credit crunch which does serious harm to the economy . A credit crunch lowers investment and consumption and results in declining aggregate demand which additionally contributes to the deflationary spiral .
Building on both the monetary hypothesis of Milton Friedman and Anna Schwartz as well as the debt deflation hypothesis of Irving Fisher , Ben Bernanke developed an alternative way in which the financial crisis affected output . He builds on Fisher 's argument that dramatic declines in the price level and nominal incomes lead to increasing real debt burdens which in turn leads to debtor insolvency and consequently leads to lowered aggregate demand , a further decline in the price level then results in a debt deflationary spiral . According to Bernanke , a small decline in the price level simply reallocates wealth from debtors to creditors without doing damage to the economy . But when the deflation is severe falling asset prices along with debtor bankruptcies lead to a decline in the nominal value of assets on bank balance sheets . Banks will react by tightening their credit conditions , that in turn leads to a credit crunch which does serious harm to the economy . A credit crunch lowers investment and consumption and results in declining aggregate demand which additionally contributes to the deflationary spiral .