How Did The War Lead To The Great Depression

Historians have concluded, that the economic impact of the first World War caused the Great Depression in the1930s. Yet they disagree as to whether exogenous shocks or economic stagnation following the war lead to the depression. Peter Temin, Christina Romer and Michael Calamaris believe that a series of monetary shocks during the late 1920s, that had their origins during and after the great war, turned an economic downturn of 1929 into the depression of the 30s. Temin argues that the “collapse of US agriculture coupled with a reliance on the gold standard, and the Mundell effect, struck the United States simultaneously and shocked its economy to create a depression that eventually spread worldwide.” However the historians differ as to how important monetary forces were in causing the depression, While Temin believes the impact was significant and finds support from Romer, Calamaris takes a more cautious view. He concludes that while international monetary forces posited by Temin played a role in causing the crisis of the 1930s, exogenous disturbances in the market for money balances were also important in explaining as to why the downturn of 1929 turned into a depression. On the other hand,
1) The decline of the agricultural industry,2) the stubborn refusal of American and European central banks to change their economic policies, and 3) the adherence to the gold standard. He connects the decline of the US agricultural sector to WWI, because, US farmers produced excess crops to feed Europe’s armies, but in doing so they put heavy strain on the farmland and eroded away the soils of the great plains. When the war ended, demand for US produce declined and the agricultural sector collapsed following the dust bowl. Figure 1.1 supports Temin’s conclusion, since, United States wheat prices declined from 2.45$ per bushel to.49$ between 1920 and 1932.