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The Great Depression. By: Peter Temin 1994. 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
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The Great Depression By: Peter Temin 1994
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
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
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.”
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 tanksGreat 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
A New Deal Policy Regime ChangeReverse 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
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