The Great Depression

What caused the end of the Great Depression? I am currently reading "Meltdown" by Dr Thomas Woods, and "The Great Depression" by Murray Rothbard. Both readings give a contrary description than I remember learning in high school.

I don't remember learning what caused the Great Depression in the first place. I don't blame my teachers, because maybe it was just my lack remembrance. In any event, Meltdown shows according to the Austrian theory of the business cycle that artificial credit creation/expansion is the genetic culprit here. The inflationary credit expansion lowers the interest rate, which in a free market system is the entrepreneurial gauge on current consumer demand. That is, if the interest rate is naturally low, it is because an large amount of wealth is in savings, indicating consumers are lowering consumption in the present in exchange for future consumption. This knowledge allows entrepreneurs to make educated investments that will better satisfy consumer demand.

However, if the interest rate is artificially low, entrepreneurs are misled into making business decisions that do not actually meet real consumer trends and as such lead to malinvestment. The force of the mistake is not fully felt until later however, and in the meantime, the accessibility of cheap credit creates a "bubble" in which there is an illusion of wealth. The artificially low interest rate allows for widespread malinvestment and entrepreneurial error.

Woods and Rothbard, engaging in more detail with historical data, show this to be the genetic cause of the depression (and the "boom-bust" cycle in general). The Great Depression, however, it is said, could have been severely reduced in time and severity had not the Government intervened with continued influence into the market. This will be the next fun topic for the next post.