section_path: Causes/Keynesian vs Monetarist view
section_name: Keynesian vs Monetarist view
paragraph_text: Keynesian vs Monetarist view
  
  The two classic competing economic theories of the Great Depression are the Keynesian (demand-driven) and the Monetarist explanation. There are also various heterodox theories that downplay or reject the explanations of the Keynesians and monetarists. The consensus among demand-driven theories is that a large-scale loss of confidence led to a sudden reduction in consumption and investment spending. Once panic and deflation set in, many people believed they could avoid further losses by keeping clear of the markets. Holding money became profitable as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand. Monetarists believe that the Great Depression started as an ordinary recession, but the shrinking of the money supply greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.
  
  Economists and economic historians are almost evenly split as to whether the traditional monetary explanation that monetary forces were the primary cause of the Great Depression is right, or the traditional Keynesian explanation that a fall in autonomous spending, particularly investment, is the primary explanation for the onset of the Great Depression. Today there is also significant academic support for the debt deflation theory and the expectations hypothesis that – building on the monetary explanation of Milton Friedman and Anna Schwartz – add non-monetary explanations.
  
  There is a consensus that the Federal Reserve System should have cut short the process of monetary deflation and banking collapse, by expanding the money supply and acting as lender of last resort. If they had done this, the economic downturn would have been far less severe and much shorter.