Many economists explain the Great Depression as a consequence of monetary mismanagement. The more prevalent view focuses on the monetary contraction of the 1930s, a minority view focuses on the manipulation of money and credit in the 1920s. But in both narratives monetary policy plays a central role in the cause of the Great Depression. And if one is so inclined, you don't have to choose between either narrative because both can be invoked for different historical periods. The "cure" for running over a pedestrian with your car, is not to then back up over him again; the "cure" for inflation is not deflation.
But what about non-monetary theories of the Great Depression? For most of the history of economic thought, I would argue that such theories while often popular had little grounding in the logic of economic activity. Underconsumption theories or overproduction theories don't really satisfy the economic imagination, nor do they fit the historical record neatly. Wild swings on optimism and pessimism don't work as explanations. As Larry White has often said in the context of the current financial crisis --- "Yes, people did crazy things. But someone gave them the crazy juice!" That someone, was the Fed and its easy monetary policy through much of the first decade of the 2000s.
But a full story of the current financial crisis would also have to invoke non-monetary factors which both steered the initial misallocations in one direction and not another, and which have prevented an adjustment (read a recalculation) of economic decisions and allocations to be consistent with the underlying realities of economic life. In short, monetary theories must work alongside of non-monetary theories to provide a full account.
But which ones?
Joe Stiglitz offers his explanation in an opinion piece for Vanity Fair. What do you think about the structural explanation?
I have always been persuaded by the narrative provided by Murray Rothbard in America's Great Depression. Not only do I buy the Austrian theory of the manipulation of money and credit in the 1920s, I have always found Rothbard's analysis of the various government programs which prevented the necessary market correction from taking place to be persuasive. In fact, while I know that Rothbard's (and Austrians in general) narrative of the 1920s is often challenged, has there been a good critique of the narrative about how the governmental policies adopted first by the Hoover and then pursued by the Roosevelt administrations prevented the market corrections that were necessary for economic recovery? What substitute for market discipline can be reasonably relied upon during a period of recalculation?
When I read Robert Higgs (my favorite economic historian of the American experience), I see his work as completely consistent with Rothbard (and Friedman for that matter), and focusing on the non-monetary causes of the depth and severity of the Great Depression. But his non-monetary factors are different from those that Stiglitz focuses on.
Gene Smiley's work on the Great Depression provides an excellent overview as well. So whose explanation best fits the facts, and best has parallels to today?
Meta point: If my priors are correct on this issue, but the vast majority of economists cut the opposite way, can this be explained without recourse to (a) an explanation that focuses on shifts in the philosophy of science in middle of the 20th century, and (b) an explanation that focuses on shifts in the philosophy of public administration during the 20th century. In other words, can we explain the rise of Keynesianism within economics and politics without also talking about a shift in the nature of scientific explanation in economics (see Knight "What is Truth in Economics?") and the transformation of public administration (see V. Ostrom, The Intellectual Crisis of American Public Administration) and the unique timing of both?
Methodology matters because it not only defines what is considered a good question, but more importantly what is considered acceptable answers. And political expectations matter because when a discipline is asked to provide something that it is constitutionally incapable of providing, but it must provide it anyway for it success as a policy science it will corrupt the practice of the discipline. The alliance of scientism and statism didn't just effect public policy, but the nature of the practice of the discipline, the selection process for that discipline, and the historical narratives that are accepted and those that are rejected by that discipline. That much said --- all we have is the constant contestation of ideas in that discipline as a hope for self-correction. In short, we have to think harder, dig deeper, write clearer, and in general just work harder to persuade our scientific peers of the correctness of our position. There are no short-cuts, nor end-runs around the profession. Simply put, we have to be better economic thinkers and communicators if we hope to provide a corrective to what we think of as error in thought and practice.