Keynes theory and the Great Depression Essay Example | Topics and Well Written Essays - 1250 words

Keynes theory and the Great Depression - Essay Example The Great Depression is believed to have come as a result of the changes in the money supply. The important events that happened in the years between 1929 to 1940 would allow different economists to come up with different theories to explain the Great Depression. Events in the wake of the great depression included the changes in the nominal GNP and the monetary stock, price changes, and the changes in the size of the various elements of the money stock. Few economists such as Friedman and Schwartz were more interested in explaining the original downturn in 1929 that later changed into the Great Depression but however other events such as the stock market crash and the recession period might be contributing factors in the onset of the Great Depression. The decrease in the number of people that would go banking in the early 1930, greatly reduced the money multiplier and the money stock. With regard to this problem, the Federal Reserve was unable to handle the situation through the use of open market operations and giving of loans to banks to facilitate supply of money created a severe situation in the economic activity. Critics argue that this failure policy by the Federal Reserves was as a result of leadership failure. Nevertheless, the recovery of the monetary system between the years 1933-1936 was followed by an economic fall and monetary policy decline in 1937 which the economists believe was as a result of the increase of the required reserve ratio in an attempt to handle the banking system problem.