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Economic Depressions: Economy
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Economists did not try to determine the causes of business cycles until the increasing severity of economic depressions became a major concern in the late 19th and early 20th centuries. Two external factors that have been suggested as possible causes are sunspots and psychological trends. The sunspot theory of the British economist William Jevons was once widely accepted. According to Jevons, sunspots affect meteorological conditions. That is, during periods of sunspots, weather conditions are often more severe. Jevons felt that sunspots affected the quantity and quality of harvested crops; ... they affected the economy.
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Extreme concentrations of wealth are considered to contribute to economic depressions for two main reasons. First, there is high demand for loans by the large nonwealthy portion of the population; because of the extreme concentration of wealth, these many borrowers do not have substantial assets and the loans tend to be risky. Second, wealth concentrations lead to speculation and risky investments by the very wealthy. Extreme concentrations of wealth hence contribute to unstable economic conditions. The natural economic fluctuations (expansions and contractions) of a free-enterprise capitalist economy are amplified, heightening the likelihood of extreme economic booms and depressions.
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There have been many economic depressions in American History; so many that economists created the term "business cycle" to describe how the economy seemed to collapse approximately every twenty years under unregulated capitalism. Before the term "depression" came into vogue... such economic downturns were referred to as Bank Panics. Three such national depressions occurred during the antebellum period. The three antebellum depressions (in 1819, 1837 and 1857) all show two basic causes.
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In a number of cases, local money systems were introduced in desperation by communities during economic depressions, as an attempt to get the local economy moving. Sometimes the currency automatically depreciates with time--for example losing one percent of its value each day--so that people have a strong incentive to spend it quickly. Local money is a direct challenge to central government monopolies over currency, and central governments typically shut down local money systems as soon as possible.
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In 1929 the standard economic theory suggested that a calamity such as the Great Depression could not happen: the economy possessed equilibrating mechanisms that would quickly move it toward full employment. For example, high levels of unemployment should put downward pressure on wages, thereby encouraging firms to increase employment. Before the Great Depression, most economists urged governments to concentrate on maintaining a balanced budget. Since tax receipts inevitably fell during a downturn, governments often increased tax rates and reduced spending. By taking money out of the economy, such policies tended to accelerate the downturn, though the effect was likely small.
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