Rethinking the Monetary Theory of the Trade Cycle and the Great DepressionDRAFTASSC

Was the Great Depression preceded by a period of excessive monetary expansion? The answer to this question would provide support for either the Monetarist view of the Great Depression as it currently stands or a view that incorporates the Austrian analysis, but not both. In this paper, we question the original calculations by Friedman and Schwartz (1963), which have since become the orthodox position. First, we consider the aggregate price level between 1921 and 1929. Next, we consider the relevant components of the money supply. Finally, we calculate the monetary expansion. We find that the money supply increased by 54.77% from 1921 to 1929. Furthermore, the bulk of this expansion took place in the market for loanable funds. These results are wholly consistent with the Austrian Business Cycle theory. As a result, we suggest the current view of the Great Depression be modified to include monetary-induced malinvestment. * We are very thankful for the comments provided by Lawrence H. White, Steven G. Horwitz, and Peter J. Boettke. We also thank the Mercatus Center at George Mason University for generously supporting this research. Any remaining errors are our own. † Email: [email protected] Address: Department of Economics, George Mason University, MSN 3G4, Fairfax, VA 22030 WORKING PAPER 1 Do Not Quote