The Great Depression

1. The Great Depression By: Peter Temin 1994

2. Real and Imagined Causes • The Shock that destabilized the world economy was World War I. • Changed pattern of international debts and lending • US from debtor to world’s creditor • Led to expansion and collapse of agriculture • End of mass immigration Reestablished Gold Standard @ Old Rates • Structural imbalances of payments • Mandated deflation rather than devaluation for foreign exchange deficits

3. Real and Imagined Causes • Agriculture Collapse? • Over extension, geographically and financially • Reduced Immigration? • Reduced population growth  slowed growth • Under consumption? • Housing and Automobile purchases drop • Contractionary Monetary Policy • Attempt to arrest speculative boom in stock prices • Deflation and Keynes effect: Ms/Pup when P down • Deflation and Mundell effect: wait to spend if πe negative • Real rate of interest is high

4. Banking Failures and Deflation • Stock Market Crash? • Reduced wealth  Depressed consumer expenditures • But other crashes were withstood nicely • Smoot-Hawley Tariff? • Reduced imports /reduced demand for American exports • But tariff should have been expansionary • Bank Failures and Debt Deflation Death Spiral • Temin: “Deflation causes Depression.”

5. Devaluation • 1931: Germany and Britain break golden fetters • Germany: Run on RM/Can’t borrow  Exchange controls • Britain: Contagion  Run on £  Floating  Depreciation • Neither abandon gold standard policies  deflation • Sep ’31: Expectation $ will follow  rush to sell $ • Fed holds firm  Economy tanksGreat Depression • Discount Rate Up • Accelerated decline in money supply. • Lowest rate of monetary growth during depression in Oct ‘31 • 1932: grudging Fed bond purchases: Start/Stop • RFC: Rescue Wall Street, not Main Street • Gold standard mindset prevails

6. A New Deal Policy Regime ChangeReverse deflation expectations • April ‘33: Roosevelt leaves gold and starts to devalue • Dollar depreciates 30-45% against the Pound • Recovery Begins: Stock & farm Prices Up...Y up slowly • First New Deal • Reform Banking System • Glass-Steagall—reduce power of “money trust”/FDIC • Control production  “socialism”? • NIRA/AAA – hours down/wages up/cartelized prices up • Real wage up  Reduced hiring  Persistent unemployment • Explanation: Efficiency Wage??? Insider – Outsider? • Second New Deal: Redistribution  Social Security, etc. • Mistake of ’37  Deflationary expectations redux

7. Was New Deal Expansionary? • Depends on expectations and their strength • Did NIRA raise πemore than it constrained output? • Did monetary expansion matter in liquidity trap? • Was 1938 policy reversal intended or passive response to gold inflows from Europe primed for war? • Was fiscal policy expansionary or restrained? • Temin’s Biographical Note: the major sources • Friedman & Schwartz/Kindleberger • Temin’s Own: Did Monetary Forces?/Lessons/___ + Wigmore • Eichengreen and Sachs / Eichengreen (Fetters) • Miscellaneous sources on bank reform/NIRA/AAA • Add: Cole & Ohanian/Eggertsson • Add: Bernanke/Romer