Causes
of the Great Depression
The causes of the Great Depression in the early 20th
Century are a matter of active debate among economists, and are part of the larger debate about economic crises, although the popular
belief is that the Great Depression was caused by the 1929 crash of the stock market.
The specific economic events that took place during the Great Depression have been studied
thoroughly: a deflation in asset and commodity
prices, dramatic drops in demand and credit, and disruption of trade,
ultimately resulting in widespread unemployment and hence poverty. However,
historians lack consensus in determining the causal relationship
between various events and the government economic policy in
causing or ameliorating the Depression.
Current theories may be broadly classified into two main
points of view and several heterodox points of view.
First, there are demand-driven theories, such as Keynesian economics
and Institutional economists
who argue that the recession was caused by underconsumption
and over-investment (thereby causing an economic bubble).
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 therefore became
profitable as prices dropped lower and a given amount of money bought ever more
goods, exacerbating the drop in demand.
Second, there are the monetarists, who believe that the Great Depression
started as an ordinary recession, but that significant policy mistakes by
monetary authorities (especially the Federal Reserve),
caused a shrinking of the money supply which greatly exacerbated the economic
situation, causing a recession to descend into the Great Depression. Related to
this explanation are those who point to debt deflation
causing those who borrow to owe ever more in real terms.
There are also various heterodox theories
that reject the explanations of the Keynesians and monetarists. Some new classical macroeconomists have
argued that various labor market policies imposed at the start caused the
length and severity of the Great Depression. The Austrian school of economics
focuses on the macroeconomic effects of money supply
and how central banking decisions can lead to malinvestment. Marxian economists
view the Great Depression, with all other economic crises, as a symptom of the classism and instability inherent in the capitalist
model.
General theoretical
explanations
Mainstream theories
Keynesian
Economist John Maynard Keynes in
1936 argued that there are many reasons why the self-correcting mechanisms that
many economists claimed should work during a downturn might not work. In his
book The General Theory of Employment, Interest
and Money, Keynes introduced concepts that were
intended to help explain the Great Depression. One argument for a
non-interventionist policy during a recession was that if consumption fell due to savings,
the savings would cause the rate of interest to fall. According to the
classical economists, lower interest rates would lead to increased investment
spending and demand would remain constant.
However, Keynes argues that there are good reasons why
investment does not necessarily increase in response to a fall in the interest
rate. Businesses make investments based on expectations of profit. Therefore,
if a fall in consumption appears to be long-term, businesses analyzing trends
will lower expectations of future sales. Therefore, the last thing they are
interested in doing is investing in increasing future production, even if lower
interest rates make capital inexpensive. In that case, the economy can be
thrown into a general slump due to a decline in consumption.[1] According to Keynes, this self-reinforcing
dynamic is what occurred to an extreme degree during the Depression, where bankruptcies were common and investment, which requires a
degree of optimism, was very unlikely to occur. This view is often
characterized by economists as being in opposition to Say's Law.
The idea that reduced capital investment was a cause of
the depression is a central theme in Secular stagnation theory.
Keynes argued that if the national government spent more
money to recover the money spent by consumers and business firms, unemployment
rates would fall. The solution was for the Federal Reserve System to “create
new money for the national government to borrow and spend” and to cut taxes
rather than raising them, in order for consumers to spend more, and other
beneficial factors.[2] Hoover chose to do the opposite of what
Keynes sought to be the solution and allowed the federal government to raise
taxes exceedingly to reduce the budget shortage brought upon by the depression.
Keynes proclaimed that more workers could be employed by decreasing interest
rates, encouraging firm to borrow more money and make more products. Employment
would prevent the government from having to spend any more money by increasing
the amount at which consumers would spend. Keynes’ theory was then confirmed by
the length of the Great Depression within the United States and the constant
unemployment rate. Employment rates began to rise in preparation for World War
II by increasing government spending. “In light of these developments, the
Keynesian explanation of the Great Depression was increasingly accepted by
economists, historians, and politicians”.[2]
Monetarist
In their 1963 book A Monetary History of the United States,
1867–1960, Milton Friedman
and Anna Schwartz laid out their case for a different explanation
of the Great Depression. Essentially, the Great Depression, in their view, was
caused by the fall of the money supply. Friedman and Schwartz write: "From
the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock
of money fell by over a third." The result was what Friedman calls the
"Great Contraction" — a period of falling income, prices, and
employment caused by the choking effects of a restricted money supply. Friedman
and Schwartz argue that people wanted to hold more money than the Federal
Reserve was supplying. As a result people hoarded money by consuming less. This
caused a contraction in employment and production since prices were not
flexible enough to immediately fall. The Fed's failure was in not realizing
what was happening and not taking corrective action.[3]
After the Depression, the primary explanations of it
tended to ignore the importance of the money supply. However, in the monetarist
view, the Depression was “in fact a tragic testimonial to the importance of
monetary forces.”[4] In their view, the failure of the Federal Reserve to
deal with the Depression was not a sign that monetary policy was impotent, but
that the Federal Reserve implemented the wrong policies. They did not claim the
Fed caused the depression, only
that it failed to use policies that might have stopped a recession from turning
into a depression.
During the post-Civil War period and continuing into the
early 20th century, the US and Europe had generally adopted a government-mandated
gold standard. The US economy during this period went through a number of
cycles of boom and bust. The depressions often seemed to be set off by bank
panics, the most significant occurring in 1873, 1893, 1901, 1907, and 1920.[5] Before the 1913 establishment of the Federal Reserve,
the banking system had dealt with these crises in the U.S. (such as in the Panic of 1907) by suspending the convertibility of
deposits into currency. Starting in 1893, there were growing efforts by
financial institutions and business men to intervene during these crises,
providing liquidity to banks that were suffering runs. During the banking panic
of 1907, an ad-hoc coalition assembled by J. P. Morgan successfully intervened in this way, thereby
cutting off the panic, which was likely the reason why the depression that
would normally have followed a banking panic did not happen this time. A call
by some for a government version of this solution resulted in the establishment
of the Federal Reserve.[6]
But in 1928–32, the Federal Reserve did not act to
provide liquidity to banks suffering runs. In fact, its policy contributed to
the banking crisis by permitting a sudden contraction of the money supply.
During the Roaring Twenties, the central bank had set as its primary goal
"price stability", in part because the governor of the New York
Federal Reserve, Benjamin Strong, was a disciple of Irving Fisher, a tremendously popular economist who
popularized stable prices as a monetary goal. It had kept the number of dollars
at such an amount that prices of goods in society appeared stable. In 1928,
Strong died, and with his death this policy ended, to be replaced with a real bills doctrine
requiring that all currency or securities have material goods backing them.
This policy permitted the US money supply to fall by over a third from 1929 to
1933.[7]
When this money shortage caused runs on banks, the Fed
maintained its true bills policy, refusing to lend money to the banks in the
way that had cut short the 1907 panic, instead allowing each to suffer a
catastrophic run and fail entirely. This policy resulted in a series of bank
failures in which one-third of all banks vanished.[8] According to Ben Bernanke,
the subsequent credit crunches led to waves of bankruptcies.[9] Friedman said that if a policy similar to
1907 had been followed during the banking panic at the end of 1930, perhaps
this would have stopped the vicious circle of the forced liquidation of assets
at depressed prices. Consequently, the banking panics of 1931, 1932, and 1933
might not have happened, just as suspension of convertibility in 1893 and 1907
had quickly ended the liquidity crises at the time.”[10]
Monetarist explanations had been rejected in Samuelson's
work Economics,
writing "Today few economists regard Federal Reserve monetary policy as a
panacea for controlling the business cycle. Purely monetary factors are
considered to be as much symptoms as causes, albeit symptoms with aggravating
effects that should not be completely neglected."[11] According to Keynesian economist Paul Krugman, the work of Friedman and Schwartz became
dominant among mainstream economists by
the 1980s but should be reconsidered in light of Japan's Lost Decade of
the 1990s.[12] The role of monetary policy in financial
crises is in active debate regarding the 2007–2012 global financial
crisis; see Causes of the 2007–2012
global financial crisis.
Heterodox theories
Austrian School
Austrian economists argue that the Great Depression was
the inevitable outcome of the monetary policies of the Federal Reserve during
the 1920s. In their opinion, the central bank's policy was an "easy credit
policy" which led to an unsustainable credit-driven boom. In the Austrian
view, the inflation of the money supply during this period led to an
unsustainable boom in both asset prices (stocks and bonds) and capital goods. By the time the Federal Reserve belatedly
tightened monetary policy in 1928, it was too late to avoid a significant
economic contraction.[13] Austrians argue that government intervention
after the crash of 1929 delayed the market’s adjustment and made the road to
complete recovery more difficult.[14]
Acceptance of the Austrian explanation of what primarily
caused the Great Depression is compatible with either acceptance or denial of
the Monetarist explanation. Austrian economist Murray Rothbard,
who wrote America's Great
Depression (1963), rejected the Monetarist explanation.
He criticized Milton Friedman's assertion that the central bank failed to
sufficiently increase the supply of money, claiming instead that the Federal
Reserve did pursue an inflationary policy when, in 1932, it purchased $1.1
billion of government securities, which raised its total holding to $1.8
billion. Rothbard says that despite the central bank's policies, "total
bank reserves only rose by $212 million, while the total money supply fell by
$3 billion". The reason for this, he argues, is that the American populace
lost faith in the banking system and began hoarding more cash, a factor very
much beyond the control of the Central Bank. The potential for a run on the
banks caused local bankers to be more conservative in lending out their
reserves, which, according to Rothbard's argument, was the cause of the Federal
Reserve's inability to inflate.[15]
Friedrich Hayek, another prominent
Austrian economist, disagreed with Rothbard's criticism of the Monetarist
explanation. In 1975, Hayek admitted that he made a mistake in the 1930s in not
opposing the Central Bank's deflationary policy and stated the reason why he
had been ambivalent: "At that time I believed that a process of deflation
of some short duration might break the rigidity of wages which I thought was
incompatible with a functioning economy.[16] In 1978, he made it clear that he agreed
with the point of view of the Monetarists, saying, "I agree with Milton
Friedman that once the Crash had occurred, the Federal Reserve System pursued a
silly deflationary policy", and that he was as opposed to deflation as he
was to inflation.[17] Concordantly, economist Lawrence White argues that the business cycle theory of
Hayek is inconsistent with a monetary policy which permits a severe contraction
of the money supply.
Marxian
Marxists generally argue that the Great Depression
was the result of the inherent instability of the capitalist model.[18]
Total debt to GDP levels in the U.S. reached a high of
just under 300% by the time of the Depression. This level of debt was not
exceeded again until near the end of the 20th century.[19]
Jerome (1934) gives an unattributed quote about finance
conditions that allowed the great industrial expansion of the post WW I period:
Probably never before in this country had such a volume
of funds been available at such low rates for such a long period.[20]
Furthermore, Jerome says that the volume of new capital
issues increased at a 7.7% compounded annual rate from 1922–29 at a time when
the Standard Statistics Co.'s index of 60 high grade bonds yielded from 4.98%
in 1923 to 4.47% in 1927.
There was also a real estate and housing bubble in the
1920s, especially in Florida, which burst in 1925. Alvin Hansen stated that housing construction during the
1920s decade exceeded population growth by 25%.[21] See also:Florida land boom of the 1920s
Irving Fisher argued that the predominant factor leading
to the Great Depression was over-indebtedness and deflation. Fisher tied loose
credit to over-indebtedness, which fueled speculation and asset bubbles.[22] He then outlined nine factors interacting
with one another under conditions of debt and deflation to create the mechanics
of boom to bust. The chain of events proceeded as follows:
- Debt
liquidation and distress selling
- Contraction
of the money supply as bank loans are paid off
- A
fall in the level of asset prices
- A
still greater fall in the net worths of business, precipitating
bankruptcies
- A
fall in profits
- A
reduction in output, in trade and in employment.
- Pessimism
and loss of confidence
- Hoarding
of money
- A
fall in nominal interest rates and a rise in deflation adjusted interest
rates.[22]
During the Crash of 1929 preceding the Great Depression,
margin requirements were only 10%.[23] Brokerage firms, in other words, would lend
$9 for every $1 an investor had deposited. When the market fell, brokers called
in these loans, which could not be paid back. Banks began to fail as debtors
defaulted on debt and depositors attempted to withdraw their deposits en masse,
triggering multiple bank runs. Government guarantees and Federal Reserve
banking regulations to prevent such panics were ineffective or not used. Bank
failures led to the loss of billions of dollars in assets.[24]
Outstanding debts became heavier, because prices and
incomes fell by 20–50% but the debts remained at the same dollar amount. After
the panic of 1929, and during the first 10 months of 1930, 744 US banks failed.
(In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion
in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.[25]
Bank failures snowballed as desperate bankers called in
loans, which the borrowers did not have time or money to repay. With future
profits looking poor, capital investment and construction slowed or
completely ceased. In the face of bad loans and worsening future prospects, the
surviving banks became even more conservative in their lending.[24] Banks built up their capital reserves and
made fewer loans, which intensified deflationary pressures. A vicious cycle
developed and the downward spiral accelerated.
The liquidation of debt could not keep up with the fall
of prices it caused. The mass effect of the stampede to liquidate increased the
value of each dollar owed, relative to the value of declining asset holdings.
The very effort of individuals to lessen their burden of debt effectively
increased it. Paradoxically, the more the debtors paid, the more they owed.[22] This self-aggravating process turned a 1930
recession into a 1933 great depression.
Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank,
have revived the debt-deflation view of the Great Depression originated by
Fisher.[26][27]
Economist Steve Keen revived the Debt-Reset Theory
after he accurately predicted the 2008 recession based on his analysis of the
Great Depression, and recently[when?]
advised Congress to engage in debt-forgiveness or direct payments to citizens
in order to avoid future financial events.[28]
Some people have recently[when?] claimed that high levels
of private debt may have caused the Great Depression.[29][30][31]
Non-debt deflation
In addition to the debt deflation there was a component
of productivity deflation that had been occurring since the The Great Deflation of
the last quarter of the 19th century.[32] There may have also been a continuation of
the correction to the sharp inflation caused by WW I.
Oil prices reached their all time low in the early 1930s
as production began from the East Texas Oil Field,
the largest field ever found in the lower 48 states. With the oil market
oversupplied prices locally fell to below ten cents per barrel.[33] See: Causes of the Great
Depression#Productivity shock
Productivity shock
The
first three decades of the 20th century saw capital investment and economic
output surge with electrification, mass production
and the increasing motorization of transportation and farm machinery. The
resultant rapid growth in productivity meant there was a lot of excess
production capacity, with falling prices and numerous manufacturing plant
closures.[20][34] As a consequence, the work week fell
slightly in the decade prior to the depression.[35][36][37] The depression led to additional large
numbers of plant closings.[20]
“It
cannot be emphasized too strongly that the [productivity,
output and employment] trends we are describing are long-time trends and were
thoroughly evident prior to 1929. These trends are in nowise the result of the
present depression, nor are they the result of the World War. On the contrary,
the present depression is a collapse resulting from these long-term trends.”[38] M. King Hubbert
In the book Mechanization
in Industry, whose publication was sponsored by the National Bureau of
Economic Research, Jerome (1934) noted that whether mechanization tends to
increase output or displace labor depends on the elasticity of demand for the
product.[20] In addition, reduced costs of production
were not always passed on to consumers. It was further noted that agriculture
was adversely affected by the reduced need for animal feed as horses and mules
were displaced by inanimate sources of power following WW I. As a related
point, Jerome also notes that the term "technological unemployment"
was being used to describe the labor situation during the depression.[20]
“Some portion of the increased unemployment which
characterized the post-War years in the United States may be attributed to the
mechanization of industries producing commodities of inelastic demand.”[20] Fredrick C. Wells, 1934
Sometime after the peak of the business cycle in 1923,
more workers were displaced by productivity improvements than growth in the
employment market could meet, thereby causing unemployment to slowly rise after
1925.[39][34]
The dramatic rise in productivity of major industries in
the U. S. and the effects of productivity on output, wages and the work week
are discussed by a Brookings Institution sponsored book.[32]
Corporations decided to lay off workers and reduced the
amount of raw materials they purchased to manufacture their products. This
decision was made to cut the production of goods because of the amount of
products that were not being sold.[2]
Joseph Stiglitz and Bruce Greenwald suggested that it was a
productivity-shock in agriculture, through fertilizers, mechanization and
improved seed, that caused the drop in agricultural product prices. Farmers
were forced off the land, further adding to the excess labor supply.[40]
The prices of agricultural products began to decline
after WW I and eventually many farmers were forced out of business, causing the
failure of hundreds of small rural banks. Agricultural productivity resulting
from tractors, fertilizers and hybrid corn was only part of the problem; the
other problem was the change over from horses and mules to internal combustion
transportation. The horse and mule population began declining after WW 1,
freeing up enormous quantities of land previously used for animal feed.[20][41][42]
The rise of the internal combustion engine and increasing
numbers of motorcars and buses also halted the growth of electric street
railways.[43]
The years 1929 to 1941 had the highest total factor productivity
growth in the history of the U. S., largely due to the productivity increases
in public utilities, transportation and trade.[44]
Disparities in wealth and
income
Economists such as Waddill Catchings, William Trufant Foster, Rexford Tugwell, Adolph Berle (and later John Kenneth Galbraith),
popularized a theory that had some influence on Franklin D. Roosevelt.[45] This theory held that the economy produced
more goods than consumers could purchase, because the consumers did not have
enough income.[46][47][48] According to this view, in the 1920s wages
had increased at a lower rate than productivity. Most of the benefit of the
increased productivity went into profits, which went into the stock market bubble
rather than into consumer purchases. Thus the unequal distribution of wealth
throughout the 1920s caused the Great Depression.
According to this view, the root cause of the Great
Depression was a global overinvestment while the level of wages and earnings
from independent businesses fell short of creating enough purchasing power. It
was argued that government should intervene by an increased taxation of the
rich to help make income more equal. With the increased revenue the government
could create public works to increase employment and ‘kick start’ the economy.
In the USA the economic policies had been quite the opposite until 1932. The Revenue Act of 1932
and public works programmes introduced in Hoover's last year as president and
taken up by Roosevelt, created some redistribution of purchasing power.[48][49]
The stock market crash made it evident that banking
systems Americans were relying on were not dependable. Americans looked towards
insubstantial banking units for their own liquidity supply. As the economy
began to fail, these banks were no longer able to support those who depended on
their assets – they did not hold as much power as the larger banks. During the
depression, “three waves of bank failures shook the economy.”[50] The first wave came just when the economy
was heading in the direction of recovery at the end of 1930 and the beginning
of 1931. The second wave of bank failures occurred “after the Federal Reserve
System raised the rediscount rate to staunch an outflow of gold”[50] around the end
of 1931. The last wave, which began in the middle of 1932, was the worst and
most devastating, continuing “almost to the point of a total breakdown of the
banking system in the winter of 1932–1933”[50] The reserve banks led the United States into
an even deeper depression between 1931 and 1933, due to their failure to
appreciate and put to use the powers they withheld – capable of creating money
– as well as the “inappropriate monetary policies pursued by them during these
years”.[50]
Gold Standard
According to the gold standard theory of the Depression,
the Depression was largely caused by the decision of most western nations after
World War I to return to the gold standard at the pre-war gold price. Monetary
policy, according to this view, was thereby put into a deflationary setting
that would over the next decade slowly grind away away at the health of many
European economies.[
This post-war policy was preceded by an inflationary
policy during World War I, when many European nations abandoned the gold
standard, forced by the enormous costs of the war. This resulted in
inflation because the supply of new money that was created was spent on war,
not on investments in productivity to increase demand that would have
neutralized inflation. The view is that the quantity of new money introduced largely
determines the inflation rate, and therefore, the cure to inflation is to
reduce the amount of new currency created for purposes that are destructive or
wasteful, and do not lead to economic growth.
After the war, when America and the nations of Europe
went back on the gold standard, most nations decided to return to the gold
standard at the pre-war price. When Britain, for example, passed the Gold
Standard Act of 1925, thereby returning Britain to the gold standard, the
critical decision was made to set the new price of the Pound Sterling at parity with the pre-war
price even though the pound was then trading on the foreign exchange market at
a much lower price. At the time, this action was criticized by John Maynard Keynes
and others, who argued that in so doing, they were forcing a revaluation of
wages without any tendency to equilibrium. Keynes' criticism of Winston Churchill's form of the return to
the gold standard implicitly compared it to the consequences of the Versailles Treaty.
One of the reasons for setting the currencies at parity
with the pre-war price was the prevailing opinion at that time that deflation
was not a danger, while inflation, particularly the inflation in the Weimar
Republic, was an unbearable danger. Another reason was that those who had
loaned in nominal amounts hoped to recover the same value in gold that they had
lent .Because of the reparations that Germany had to pay France, Germany began a
credit-fueled period of growth in order to export and sell enough goods abroad
to gain gold to pay the reparations. The U.S., as the world's gold sink, loaned
money to Germany to industrialize, which was then the basis for Germany paying
back France, and France paying back loans to the U.K. and the U.S. This
arrangement was codified in the Dawes Plan.
In some cases, deflation can be hard on sectors of the
economy such as agriculture, if they are deeply in debt at high interest rates
and are unable to refinance, or that are dependent upon loans to finance
capital goods when low interest rates are not available. Deflation erodes the
price of commodities while increasing the real liability of debt. Deflation is
beneficial to those with assets in cash, and to those who wish to invest or
purchase assets or loan money.
More recent research, by economists such as Peter Temin, Ben Bernanke and Barry Eichengreen,
has focused on the constraints policy makers were under at the time of the
Depression. In this view, the constraints of the inter-war gold standard magnified the initial economic shock and
were a significant obstacle to any actions that would ameliorate the growing
Depression. According to them, the initial destabilizing shock may have
originated with the Wall Street Crash of 1929 in
the U.S., but it was the gold standard system that transmitted the problem to
the rest of the world.[51]
According to their conclusions, during a time of crisis,
policy makers may have wanted to loosen monetary
and fiscal policy, but such action would threaten the
countries’ ability to maintain their obligation to exchange gold at its
contractual rate. The gold standard required countries to maintain high
interest rates to attract international investors who bought foreign assets
with gold. Therefore, governments had their hands tied as the economies
collapsed, unless they abandoned their currency’s link to gold. Fixing the
exchange rate of all countries on the gold standard ensured that the market for
foreign exchange can only equilibrate through interest rates. As the Depression
worsened, many countries started to abandon the gold standard, and those that
abandoned it earlier suffered less from deflation and tended to recover more
quickly.[52]
Richard Timberlake,
economist of the free banking school and protégé of Milton Friedman,
specifically addressed this stance in his paper Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy,
wherein he argued that the Federal Reserve actually had plenty of lee-way under
the gold standard, as had been demonstrated by the price stability policy of New York Fed governor Benjamin Strong,
between 1923 and 1928. But when Strong died in late 1928, the faction that took
over dominance of the Fed advocated a real bills doctrine, where all money had to be
represented by physical goods. This policy, forcing a 30% deflation of the
dollar that inevitably damaged the US economy, is stated by Timberlake as being
arbitrary and avoidable, the existing gold standard having been capable of
continuing without it:
This
shift in control was decisive. In accordance with the precedent Strong had set
in promoting a stable price level policy without heed to any golden fetters,
real bills proponents could proceed equally unconstrained in implementing their
policy ideal. System policy in 1928–29 consequently shifted from price level
stabilization to passive real bills. “The” gold standard remained where it had
been—nothing but formal window dressing waiting for an opportune time to
reappear.[53]
Economic historians (especially Friedman and Schwartz) emphasize
the importance of numerous bank failures. The failures were mostly in rural
America. Structural weaknesses in the rural economy made local banks highly
vulnerable. Farmers, already deeply in debt, saw farm prices plummet in the
late 1920s and their implicit real interest rates on loans skyrocket.
Their land was already over-mortgaged (as a result of the
1919 bubble in land prices), and crop prices were too low to allow them to pay
off what they owed. Small banks, especially those tied to the agricultural
economy, were in constant crisis in the 1920s with their customers defaulting
on loans because of the sudden rise in real interest rates; there was a steady
stream of failures among these smaller banks throughout the decade.
The city banks also suffered from structural weaknesses
that made them vulnerable to a shock. Some of the nation's largest banks were
failing to maintain adequate reserves and were investing heavily in the stock
market or making risky loans. Loans to Germany and Latin America by
New York City banks were especially risky. In other words,
the banking system was not well prepared to absorb the shock of a major
recession.
Economists have argued that a liquidity trap might have contributed to
bank failures.[citation
needed]
Economists and historians debate how much responsibility
to assign the Wall Street Crash of 1929. The timing was right; the magnitude of
the shock to expectations of future prosperity was high. Most analysts believe
the market in 1928–29 was a "bubble" with prices far higher than
justified by fundamentals. Economists agree that somehow it shared some blame,
but how much no one has estimated. Milton Friedman concluded, "I don't
doubt for a moment that the collapse of the stock market in 1929 played a role
in the initial recession".[54]
The idea of owning government bonds initially became
ideal to investors when Liberty Loan drives encouraged this possession in
America during World War I. This strive for dominion persisted into the 1920s.
After World War I, the United States became the world’s creditor and was
depended upon by many foreign nations. “Governments from around the globe
looked to Wall Street for loans”.[55] Investors then started to depend on these
loans for further investments. Chief counsel of the Senate Bank Committee,
Ferdinand Pecora, disclosed that National City executives were also dependent
on loans from a special bank fund as a safety net for their stock losses while
American banker, Albert Wiggin, “made millions selling short his own bank
shares”.[55]
Economist David Hume stated that the economy became
imbalanced as the recession spread on an international scale. The cost of goods
remained too high for too long during a time where there was less international
trade. Policies set in selected countries to “maintain the value of their
currency” resulted in an outcome of bank failures.[56] Governments that continued to follow the
gold standard were led into bank failure, meaning that it was the governments
and central bankers that contributed as a stepping stool into the depression.
The debate has three sides: one group says the crash
caused the depression by drastically lowering expectations about the future and
by removing large sums of investment capital; a second group says the economy was
slipping since summer 1929 and the crash ratified it; the third group says that
in either scenario the crash could not have caused more than a recession. There
was a brief recovery in the market into April 1930, but prices then started
falling steadily again from there, not reaching a final bottom until July 1932.
This was the largest long-term U.S. market decline by any measure. To move from
a recession in 1930 to a deep depression in 1931–32, entirely different factors
had to be in play.[57]
Protectionism
Protectionism, such as the Smoot–Hawley Tariff Act,
is often indicted as a cause of the Great Depression, with countries enacting
protectionist policies yielding a beggar-thy-neighbor
result.[58][59] The Smoot–Hawley Tariff Act
was especially harmful to agriculture because it caused farmers to default on
their loans. This event may have worsened or even caused the ensuing bank runs
in the Midwest
and West that caused the collapse
of the banking system. A petition signed by over 1,000 economists was presented
to the U.S. government warning that the Smoot-Hawley Tariff Act would bring
disastrous economic repercussions; however, this did not stop the act from
being signed into law.
Governments around the world took various steps into
spending less money on foreign goods such as: “imposing tariffs, import quotas,
and exchange controls” (Eichengreen, B.). These restrictions formed a lot of
tension between trade nations, causing a major deduction during the depression.
Not all countries enforced the same measures of protectionism. Some countries
raised tariffs drastically and enforced severe restrictions on foreign exchange
transactions, while other countries condensed “trade and exchange restrictions
only marginally”.[60]
“Countries that remained on the gold standard, keeping
currencies fixed, were more likely to restrict foreign trade.” These countries
became more competitive and “resorted to protectionist policies to strengthen
the balance of payments and limit gold losses.” They hoped that these
restrictions and depletions would lead them towards economic recovery. On the
other hand, countries that chose to alleviate the gold standard, allowing
fluidity in their currencies, experienced economic recovery and “benefited from
gold inflows”.[60]
There were three options left that could lead economies
back to recovery. These options were: “wage and price deflation to restore
external and internal balance at the current gold parity; trade and payments
restrictions to limit spending on imports and reduce gold outflows; or
abandoning the gold standard and allowing the exchange rate to depreciate”.[60]
Some economists argue that protectionism was not a cause
but a reaction to the
depression,[59] with protectionism policies being adopted by
countries holding to the gold standard rather than having floating exchange rates:
countries on the gold standard could not cut interest rates or act as lender of last resort
because they would run out of gold, while countries off the gold standard could
cut interest rates and print fiat money. In this interpretation, protectionism
served to change the terms of trade for countries whose monetary policy was constrained by the
gold standard.
International Debt
Structure
When the war came to an end in 1918, all European nations
that had been allied with the U.S. owed large sums of money to American banks,
sums much too large to be repaid out of their shattered treasuries. This is one
reason why the Allies
had insisted (to the consternation of Woodrow Wilson) on demanding reparation
payments from Germany and Austria–Hungary.
Reparations, they believed, would provide them with a way to pay off their own
debts. However, Germany and Austria-Hungary were themselves in deep economic
trouble after the war; they were no more able to pay the reparations than the
Allies were able to pay their debts.
The debtor nations put strong pressure on the U.S. in the
1920s to forgive the debts, or at least reduce them. The American government
refused. Instead, U.S. banks began making large loans to the nations of Europe.
Thus, debts (and reparations) were being paid only by augmenting old debts and
piling up new ones. In the late 1920s, and particularly after the American
economy began to weaken after 1929, the European nations found it much more
difficult to borrow money from the U.S. At the same time, high U.S. tariffs were making it much more
difficult for them to sell their goods in U.S. markets. Without any source of
revenue from foreign exchange to repay their loans, they began to default.
Beginning late in the 1920s, European demand for U.S.
goods began to decline. That was partly because European industry and
agriculture were becoming more productive, and partly because some European
nations (most notably Weimar Germany) were suffering serious
financial crises and could not afford to buy goods overseas. However, the
central issue causing the destabilization of the European economy in the late
1920s was the international debt structure that had emerged in the aftermath of
World War I.
The high tariff walls such as the Smoot–Hawley Tariff Act
critically impeded the payment of war debts. As a result of high U.S. tariffs,
only a sort of cycle kept the reparations and war-debt payments going. During
the 1920s, the former allies paid the war-debt installments to the U.S. chiefly
with funds obtained from German reparations payments, and Germany was able to
make those payments only because of large private loans from the U.S. and
Britain. Similarly, U.S. investments abroad provided the dollars, which alone
made it possible for foreign nations to buy U.S. exports.
The Smoot-Hawley Tariff Act was instituted by Senator
Reed and Representative Willis C. Hawley, and signed into law by President
Hoover, to raise taxes on American imports by about 20 percent during June
of1930. This tax, which aided towards the exceedingly damaged American income
and overproduction, was only beneficial towards the Americans in having to
spend less on foreign goods. In contrast, European trading nations frowned upon
this tax increase, particularly since the “United States was an international
creditor and exports to the U.S. market were already declining”.[60] In response to the Smoot-Hawley Tariff Act,
some of America’s primary producers and largest trading partner, Canada, chose
to seek retribution by increasing the financial value of imported goods
favoured by the Americans.
In the scramble for liquidity that followed the 1929
stock market crash, funds flowed back from Europe to America, and Europe's
fragile economies crumbled.
By 1931, the world was reeling from the worst depression
of recent memory, and the entire structure of reparations and war debts
collapsed.
Population dynamics
In 1939, prominent economist Alvin Hansen discussed the decline in population growth
in relation to the Depression.[61] The same idea was discussed in a 1978
journal article by Clarence Barber, an economist at the University of Manitoba.
Using "a form of the Harrod model" to analyze the Depression, Barber
states:
"In
such a model, one would look for the origins of a serious depression in
conditions which produced a decline in Harrod's natural rate of growth, more
specifically, in a decline in the rate of population and labour force growth
and in the rate of growth of productivity or technical progress, to a level
below the warranted rate of growth."[62]
Barber says, while there is "no clear evidence"
of a decline in "the rate of growth of productivity" during the
1920s, there is "clear evidence" the population growth rate began to
decline during that same period. He argues the decline in population growth
rate may have caused a decline in "the natural rate of growth" which
was significant enough to cause a serious depression.[62]
Barber says a decline in the population growth rate is
likely to affect the demand for housing, and claims this is apparently what
happened during the 1920s. He concludes:
"the
rapid and very large decline in the rate of growth of non-farm households was
clearly the major reason for the decline that occurred in residential
construction in the United States from 1926 on. And this decline, as Bolch and
Pilgrim have claimed, may well have been the most important single factor in
turning the 1929 downturn into a major depression."[63]
Among the causes of the decline in the population growth
rate during the 1920s were a declining birth rate after 1910[64] and reduced immigration. The decline in
immigration was largely the result of legislation in the 1920s placing greater
restrictions on immigration. In 1921, Congress passed the Emergency Quota Act,
followed by the Immigration Act of 1924.
Factors that majorly contributed to the failing of the
economy since 1925, was a decrease in both residential and non-residential
buildings being constructed. It was the debt as a result of the war, less
families being formed, and an imbalance of mortgage payments and loans in
1928–1929 that mainly contributed to the decline in the amount of houses being
built. This caused the populate growth rate to decelerate. Though
non-residential units continued to be built “at a high rate throughout the
decade”, the demands for such units were actually very low[50]
Role of economic policy
Calvin Coolidge (1923–1929)
There is an ongoing debate between historians to what
extent Coolidge´s laissez-faire hands-off attitude has contributed to the
Great Depression. Despite a growing rate of bank failures he did not heed
voices that predicted the lack of banking regulation as potentially dangerous.
He did not listen to members of Congress warning that stock speculation had
gone too far and he ignored criticisms that workers did not participate
sufficiently in the prosperity of the Roaring Twenties.[65]
Leave-it-alone
liquidationism (1929–1933)
From the point of view of today's mainstream schools of
economic thought, government should strive to keep some broad nominal aggregate
on a stable growth path (for proponents of new classical macroeconomics
and monetarism, the measure is the nominal money supply; for Keynesian economists it
is the nominal aggregate demand
itself). During a depression the central bank should pour liquidity into the banking
system and the government should cut taxes and accelerate spending in order to
keep the nominal money stock and total nominal demand from collapsing.[66]
The United States government and the Federal Reserve did not do that during the
1929‑32 slide into the Great Depression[66] The existence of "liquidationism"
played a key part in motivating public policy decisions not to fight the
gathering Great Depression. An increasingly common view among economic
historians is that the adherence of some Federal Reserve policymakers to the
liquidationist thesis led to disastrous consequences.[67] Regarding the policies of President Hoover,
economists like Barry Eichengreen and J. Bradford DeLong
point out that the Hoover administration’s fiscal policy was guided by
liquidationist economists and policy makers, as Hoover tried to keep the
federal budget balanced until 1932, when Hoover lost confidence in his
Secretary of the Treasury Andrew Mellon and replaced him.[68][69][70] Hoover wrote in his memoirs he did not side
with the liquidationists, but took the side of those in his cabinet with
"economic responsibility", his Secretary of Commerce Robert P. Lamont and Secretary of
Agriculture Arthur M. Hyde, who advised the President
to "use the powers of government to cushion the situation".[71] But at the same time he kept Andrew Mellon
as Secretary of the Treasury until February 1932. It was during 1932 that
Hoover began to support more aggressive measures to combat the Depression.[72] In his memoirs, President Hoover wrote
bitterly about members of his Cabinet who had advised inaction during the
downslide into the Great Depression:
|
“
|
The leave-it-alone liquidationists headed
by Secretary of the Treasury Mellon ... felt that government must keep its
hands off and let the slump liquidate itself. Mr. Mellon had only one
formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate
real estate” ... “It will purge the rottenness out of the system. High costs
of living and high living will come down. People will work harder, live a
more moral life. Values will be adjusted, and enterprising people will pick
up the wrecks from less competent people.”[66]
|
”
|
Before the Keynesian
Revolution, such a liquidationist theory was a common
position for economists to take and was held and advanced by economists like Friedrich Hayek, Lionel Robbins Joseph Schumpeter, Seymour Harris
and others.[70] According to the liquidationists a
depression is good medicine. The function of a depression is to liquidate
failed investments and businesses that have been made obsolete by technological
development in order to release factors of production (capital and labor) from
unproductive uses. These can then be redeployed in other sectors of the
technologically dynamic economy. They pointed to the short duration of the Depression of 1920–21
was due to the policy of letting the liquidation occur and argued that the
crisis had laid the groundwork for the prosperity of the later 1920s. They pushed
for deflationary policies (which were already executed in 1921) which – in
their opinion – would assist the release of capital and labor from unproductive
activities to lay the groundwork for a new economic boom. The liquidationists
argued that even if self-adjustment of the economy took mass bankruptcies, then
so be it.[70] Postponing the liquidation process would
only magnify the social costs. Schumpeter wrote that it[66]
|
“
|
... leads us to believe that recovery is
sound only if it does come of itself. For any revival which is merely due to
artificial stimulus leaves part of the work of depressions undone and adds,
to an undigested remnant of maladjustment, new maladjustment of its own which
has to be liquidated in turn, thus threatening business with another [worse)
crisis ahead.
|
”
|
Despite liquidationist expectations, a large proportion
of the capital stock was not redeployed and vanished during the first years of
the Great Depression. According to a study by Olivier Blanchard
and Lawrence Summers, the recession caused a
drop of net capital accumulation to
pre-1924 levels by 1933.[73]
Criticism
Economists such as John Maynard Keynes
and Milton Friedman suggested that the
do-nothing policy prescription which resulted from the liquidationist theory
contributed to deepening the Great Depression.[68] With the rhetoric of ridicule Keynes tried
to discredit the liquidationist view in presenting Hayek, Robbins and
Schumpeter as
|
“
|
...austere and puritanical souls [who]
regard [the Great Depression] ... as an inevitable and a desirable nemesis on
so much "overexpansion" as they call it ... It would, they feel, be
a victory for the mammon of unrighteousness if so much prosperity was not
subsequently balanced by universal bankruptcy. We need, they say, what they
politely call a 'prolonged liquidation' to put us right. The liquidation,
they tell us, is not yet complete. But in time it will be. And when
sufficient time has elapsed for the completion of the liquidation, all will
be well with us again...
|
”
|
Milton Friedman stated that at the University of Chicago
such “dangerous nonsense” was never taught and that he understood why at
Harvard —where such nonsense was taught— bright young economists rejected their
teachers' macroeconomics, and become Keynesians.[66] He wrote:
|
“
|
I think the Austrian business-cycle theory
has done the world a great deal of harm. If you go back to the 1930s, which
is a key point, here you had the Austrians sitting in London, Hayek and
Lionel Robbins, and saying you just have to let the bottom drop out of the
world. You’ve just got to let it cure itself. You can’t do anything about it.
You will only make it worse.… I think by encouraging that kind of do-nothing
policy both in Britain and in the United States, they did harm.[68]
|
”
|
Economist Lawrence White,
while acknowledging that Hayek and Robbins did not actively oppose the
deflationary policy of the early 1930s, nevertheless challenges the argument of
Milton Friedman, J. Bradford DeLong et
al. that Hayek was a proponent of liquidationism. White argues that the
business cycle theory of Hayek and Robbins (which later developed into Austrian business cycle
theory in its present-day form) was actually not
consistent with a monetary policy which permitted a severe contraction of the
money supply. Nevertheless, White says that at the time of the Great Depression
Hayek "expressed ambivalence about the shrinking nomimal income and sharp
deflation in 1929–32".[74] In a talk in 1975, Hayek admitted the
mistake he made over forty years earlier in not opposing the Central Bank's
deflationary policy and stated the reason why he had been ambivalent: "At
that time I believed that a process of deflation of some short duration might
break the rigidity of wages which I thought was incompatible with a functioning
economy."[16] Three years later, Hayek strongly criticized
the Fed's sudden contraction of money early in the Depression and its failure
to offer banks liquidity:
|
“
|
"I agree with Milton Friedman that
once the Crash had occurred, the Federal Reserve System pursued a silly
deflationary policy. I am not only against inflation but I am also against
deflation. So, once again, a badly programmed monetary policy prolonged the
depression."[17]
|
”
|
Herbert Hoover (1929–1933)
Unemployment
rate in the US 1910–1960, with the years of the Great Depression (1929–1939)
highlighted; accurate data begins in 1939.
Economic policy
Historians gave Hoover credit for working tirelessly to
combat the depression and noted that he left government prematurely aged. But
his policies are rated as simply not far-reaching enough to address the Great
Depression. He was prepared to do something, but nowhere near enough.[75] Hoover was no exponent of laissez-faire. But
his principal philosophies were voluntarism, self-help, and rugged individualism. He
refused direct federal intervention. He believed that government should do more
than his immediate predecessors (Warren G. Harding, Calvin Coolidge) believed. But he was not
willing to go as far as Franklin D. Roosevelt
later did. Therefore he is described as the "first of the new
presidents" and "the last of the old".[76]
Hoovers first measures were based on voluntarism by
businesses not to reduce their workforce or cut wages. But businesses had
little choice and wages were reduced, workers were laid off, and investments
postponed. Hoover urged bankers to set up the National Credit Corporation so that big banks could
help failing banks survive. But bankers were reluctant to invest in failing
banks, and the National Credit Corporation did almost nothing to address the
problem.[77] In 1932 Hoover reluctantly established the Reconstruction Finance
Corporation, a Federal agency with the authority to lend
up to $2 billion to rescue banks and restore confidence in financial
institutions. But $2 billion was not enough to save all the banks, and bank runs and bank failures continued.[78]
Federal spending
Federal
spending in millions of dollars (1910–1960). The time period of the Hoover
administration, the New Deal and World War II are highlighted.
J. Bradford DeLong
explained that Hoover would have been a budget cutter in normal times and
continuously wanted to balance the budget. Hoover held the line against
powerful political forces that sought to increase government spending after the
Depression began for fully two and a half years. During the first two years of
the Depression (1929 and 1930) Hoover actually achieved budget surpluses of
about 0.8% of gross domestic product
(GDP). In 1931, when the recession significantly worsened and GDP declined by
15%, the federal budget had only a small deficit of 0.6% of GDP. It was not
until 1932 (when GDP declined by 27% compared to 1929-level) that Hoover pushed
for measures (Reconstruction Finance
Corporation, Federal Home Loan Bank Act,
direct loans to fund state Depression relief programs) that increased spending.
But at the same time he pushed for the Revenue Act of 1932
that massively increased taxes in order to balance the budget again.[72]
Uncertainty was a major factor, argued by several
economists, that contributed to the worsening and length of the depression. It
was also said to be responsible “for the initial decline in consumption that
marks the” beginning of the Great Depression by economists Paul R. Flacco and
Randall E. Parker. Economist Ludwig Lachmann argues that it was pessimism that
prevented the recovery and worsening of the depression [79] President Hoover is said to have been
blinded from what was right in front of him.
Economist James Deusenberry
argues economic imbalance was not only a result of World War I, but also of the
structural changes made during the first quarter of the Twentieth Century. He
also states the branches of the nation’s economy became smaller, there was not
much demand for housing, and the stock market crash “had a more direct impact
on consumption than any previous financial panic”[80]
Economist William A. Lewis describes the conflict between
America and its primary producers:
|
“
|
Misfortunes (of the 1930’s) were due
principally to the fact that the production of primary commodities after the
war was somewhat in excess of demand. It was this which, by keeping the terms
of trade unfavourable to primary producers, kept the trade in manufactures so
low, to the detriment of some countries as the United Kingdom, even in the
twenties, and it was this which pulled the world economy down in the early
thirties….If primary commodity markets had not been so insecure the crisis of
1929 would not have become a great depression....It was the violent fall of
prices that was deflationary.[81]
|
”
|
The stock market crash was not the first sign of the
Great Depression. “Long before the crash, community banks were failing at the
rate of one per day”.[55] It was the development of the Federal
Reserve System that misled investors in the ‘20s into relying on federal banks
as a safety net. They were encouraged to continue buying stocks and to overlook
any of the fluctuations. Economist Roger Babson tried to warn the investors of
the deficiency to come, but was ridiculed even as the economy began to
deteriorate during the summer of 1929. While England and Germany struggled
under the strain on gold currencies after the war, economists were blinded by
an unsustainable ‘new economy' they sought to be considerably stable and
successful.[55]
Since the United States decided to no longer comply with
the gold standard, “the value of the dollar could change freely from day to
day”.[56] Although this imbalance on an international
scale led to crisis, the economy within the nation remained stable.
The depression then affected all nations on an
international scale. “The German mark collapsed when the chancellor put
domestic politics ahead of sensible finance; the bank of England abandoned the
gold standard after a subsequent speculative attack; and the U.S. Federal
Reserve raised its discount rate dramatically in October 1931 to preserve the
value of the dollar”.[56] The Federal Reserve drove the American
economy into an even deeper depression.
Tax policy
In 1929 the Hoover administration responded to the
economic crises by temporarily lowering income tax rates and the corporate tax
rate.[82] At the beginning of 1931, tax returns showed
a tremendous decline in income due to the economic downturn. Income tax
receipts were 40% less than in 1930. At the same time government spending
proved to be a lot greater than estimated.[82] As a result the budget deficit increased
tremendously. While Secretary of the Treasury Andrew Mellon urged to increase
taxes, Hoover had no desire to do so since 1932 was an election year.[83] In December 1931, hopes that the economic
downturn would come to an end vanished since all economic indicators pointed to
a continuing downward trend.[84] On January 7, 1932, Andrew Mellon announced
that the Hoover administration would end a further increase in public debt by
raising taxes.[85] On June 6, 1932, the Revenue Act of 1932
was signed into law. It raised taxes on all brackets, tripling the tax rate on
the poorest, and on the wealthy he increased taxes from 25% to 63%.[86][87] The higher taxes were first to be paid for
the fiscal year 1933 when coincidently the long recession
ended.
Franklin Delano Roosevelt
(1933–1945)
USA
GDP annual pattern and long-term trend, 1920–40, in billions of constant
dollars.
The New Deal was Roosevelt´s response to the Great
Depression. The reception is mixed. While some historians and economics argue
that the New Deal was the key to recovery others argue that it prolonged the
Great Depression.
In a survey of economic historians conducted by Robert
Whaples, Professor of Economics at Wake Forest University,
anonymous questionnaires were sent to members of the Economic History Association. Members were asked to either disagree, agree, or agree with
provisos with the statement that read: "Taken as a whole, government
policies of the New Deal served to lengthen and deepen the Great
Depression." While only 6% of economic historians who worked in the
history department of their universities agreed with the statement, 27% of
those that work in the economics department agreed. Almost an identical percent
of the two groups (21% and 22%) agreed with the statement "with
provisos" (a conditional stipulation), while 74% of those who worked in
the history department, and 51% in the economic department disagreed with the
statement outright.[88]
Arguments for key to
recovery
According to Peter Temin, Barry Wigmore, Gauti B. Eggertsson and Christina Romer the biggest primary impact
of the New Deal on the economy and the key to recovery and
to end the Great Depression was brought about by a successful management of
public expectations. Before the first New Deal measures people expected a
contractionary economic situation (recession, deflation) to persist.
Roosevelt's fiscal and monetary policy regime change helped to make his policy
objectives credible. Expectations changed towards an expansionary development
(economic growth, inflation). The expectation of higher future income and
higher future inflation stimulated demand and investments. The analysis
suggests that the elimination of the policy dogmas of the gold standard,
balanced budget and small government led endogenously to a large shift in
expectation that accounts for about 70–80 percent of the recovery of output and
prices from 1933 to 1937. If the regime change would not have happened and the
Hoover policy would have continued, the economy would have continued its free
fall in 1933, and output would have been 30 percent lower in 1937 than in 1933.[89][90]
Arguments for prolongation
of the Great Depression
In the new classical macroeconomics
view of the Great Depression large negative shocks caused the 1929–1933
downturn –including monetary shocks, productivity shocks, and banking shocks –
but those developments become positive after 1933 due to monetary and banking
reform policies. According to the model Cole-Ohanian impose, the main culprits
for the prolonged depression were labor frictions and productivity/efficiency
frictions (perhaps, to a lesser extent). Financial frictions are unlikely to
have caused the prolonged slump.[91][92]
In the Cole-Ohanian model there is a slower than normal
recovery which they explain by New Deal policies which they evaluated as
tending towards monopoly and distribution of wealth. The key economic paper
looking at these diagnostic sources in relation to the Great Depression is Cole
and Ohanian’s work. Cole-Ohanian point at two policies of New Deal: the National Industrial
Recovery Act and National Labor Relations Act
(NLRA), the latter strengthening NIRA’s labor provision. According to
Cole-Ohanian New Deal policies created cartelization, high wages, and high
prices in at least manufacturing and some energy and mining industries. Roosevelts policies
against the severity of the Depression like the NIRA, a “code of fair
competition” for each industry were aimed to reduce cutthroat competition in
a period of severe deflation, which was seen as the cause for lowered
demand and employment. The NIRA suspended antitrust laws and permitted
collusion in some sectors provided that industry raised wages above clearing
level and accepted collective bargaining with labor unions. The effects of cartelization can be seen as the basic
effect of monopoly. The given corporation produces too little,
charges too high of a price, and under-employs labor. Likewise, an increase in
the power of unions creates a situation similar to monopoly. Wages are too high
for the union members, so the corporation employs less people and, produces
less output. Cole-Ohanian show that 60% of the difference between the trend and
realized output is due to cartelization and unions.[91] Chari, Kehoe, McGrattan also present a nice
exposition that’s in line with Cole-Ohanian. .[92]
This type of analysis has numerous counterarguments
including the applicability of the equilibrium business cycle to the Great
Depression.[93]
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38. Jump up ^ Jerome, Harry (1934). Mechanization in Industry, National Bureau
of Economic Research<For the several industries studied industry
expansion offset most of the productivity gains that would otherwise have
resulted in many more job losses than actually occurred. To prevent rising
unemployment the laid off workers would have to have changed industries, but it
was noted that even if workers were successful at such a change the time
typically took 18 months or more. The employment statistics for the 1930 census
reflect conditions after the start of the depression so the actual employment
situation prior to the depression is unknown.>
40. Jump up ^ Ayres, R. U.; Ayres, L. W.; Warr, B. (2002).
Exergy,
Power and Work in the U. S. Economy 1900–1998, Insead's Center For the
Management of Environmental Resources, 2002/52/EPS/CMER<Fig.
4 in Appendix>From one-sixth to one-quarter of all land had been used to
grow animal feed.
41. Jump up ^ Atack, Jeremy; Passell, Peter (1994). A New Economic View of American History.
New York: W.W. Norton and Co. pp. 574–6. ISBN 0-393-96315-2
43. Jump up ^ [Alexander J.] (2011). A Great Leap Forward: 1930s Depression and U.S. Economic Growth.
New Haven, London: Yale University Press. ISBN 978-0-300-15109-1
44. Jump up ^ David M. Kennedy, 'Freedom From Fear, The
American People in Depression and War 1929–1945, Oxford University Press, 1999,
ISBN 0-19-503834-7, pp. 122, 123
46. Jump up ^ Allgoewer, Elisabeth (May 2002). "Underconsumption theories and Keynesian economics. Interpretations
of the Great Depression". Discussion paper no. 2002-14.
47. ^ Jump up to: a b
Peter Clemens, Prosperity, Depression and the New Deal: The USA 1890–1954,
Hodder Education, 2008, ISBN 978-0-340-965887, p. 108
49. ^ Jump up to: a b c d e
Chapter 15: The Great Depression. (1999). Growth of the International Economy
1820–2000 (pp. 226–34). Taylor & Francis Ltd / Books.
52. Jump up ^ Gold Standards and the Real Bills Doctrine
in U.S. Monetary Policy, RICHARD H. TIMBERLAKE http://www.econjournalwatch.org/pdf/TimberlakeIntellectualTyrannyAugust2005.pdf
54. ^ Jump up to: a b c d
Chernow, R. (2009, Oct 23). Everyman's financial meltdown. New York Times
(1923-Current File). Retrieved from http://search.proquest.com/docview/1030683641?accountid=11233; http://sfx.scholarsportal.info/guelph?url_ver=Z39.88-2004&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&genre=article&sid=ProQ:ProQ%3Ahnpnewyorktimes&atitle=Everyman%27s+Financial+Meltdown&title=New+York+Times+%281923-Current+file%29&issn=03624331&date=2009-10-23&volume=&issue=&spage=A35&au=Chernow%2C+Ron&isbn=&jtitle=New+York+Times+%281923-Current+file%29&btitle=
55. ^ Jump up to: a b c
Temin, P. (2010). The Great Recession & the Great Depression. Daedalus, 139(4),
115–24.
57. Jump up ^ Protectionism and the Great Depression, Paul Krugman, New York Times, November 30, 2009
58. ^ Jump up to: a b The
protectionist temptation: Lessons from the Great Depression for today, VOX, Barry Eichengreen, Douglas Irwin, 17
March 2009
59. ^ Jump up to: a b c d
EICHENGREEN, B., & IRWIN, D. A. (2010). The Slide to Protectionism in the
Great Depression: Who Succumbed and Why?. Journal Of Economic History, 70(4),
871–97.
60. Jump up ^ Hansen, Alvin (1939). Economic Progress and Declining Population
Growth. ISBN 978-1162557823<Originally
printed in a journal. Reprinted 2004, 2010>
61. ^ Jump up to: a b
Barber, Clarence L. "On the Origins of the Great Depression", Southern Economic Journal, January,
1978, 44(3), pp. 432–56.
62. Jump up ^ Barber, Clarence L. "On the Origins of
the Great Depression", Southern
Economic Journal, January 1978, 44(3), pp. 432–56. See also Bolch, B. W.
and J. D. Pilgrim, "A Reappraisal of Some Factors Associated with
Fluctuations in the United States in the Interwar Period." Southern Economic Journal, January
1973, pp. 327–44.
63. Jump up ^ Longman, Philip (2004). The Empty Cradle: How Falling Birthrates
Threaten World Prosperity And What to Do About It. p. 87. ISBN 0-465-05050-6.
64. Jump up ^ Melvin I. Urofsky, The American Presidents: Critical Essays, ISBN 0-8153-2184-8, p. 391
65. ^ Jump up to: a b c d e J.
Bradford De Long, "Liquidation" Cycles: Old Fashioned
Real Business Cycle Theory and the Great Depression,
National Bureau of Economic Research, Working Paper No. 3546, p. 1
66. Jump up ^ White, Lawrence (2008). "Did Hayek and
Robbins Deepen the Great Depression?". Journal of Money, Credit, and Banking 40 (40): 751–768. doi:10.1111/j.1538-4616.2008.00134.x
67. ^ Jump up to: a b c
White, Lawrence (2008). "Did Hayek and Robbins Deepen the Great
Depression?". Journal of Money,
Credit and Banking 40 (40): 751–768. doi:10.1111/j.1538-4616.2008.00134.x
68. Jump up ^ J. Bradford De Long, "Liquidation" Cycles: Old Fashioned Real Business Cycle Theory
and the Great Depression, National Bureau of
Economic Research, Working Paper No. 3546, p. 5
69. ^ Jump up to: a b c
Randall E. Parker, Reflections on the
Great Depression, Elgar publishing, 2003, ISBN 978-1843763352, p. 9
72. Jump up ^ J. Bradford De Long, "Liquidation" Cycles: Old Fashioned
Real Business Cycle Theory and the Great Depression,
National Bureau of Economic Research, Working Paper No. 3546, p. 33
73. Jump up ^ Lawrence White, The Clash of Economic Ideas: The Great Policy Debates and Experiments
of the 20th Century (Cambridge University Press), p. 94.
74. Jump up ^ Peter Clemens, Prosperity, Depression and the New Deal: The USA 1890–1954,
Hodder Education, 4. Auflage, 2008, ISBN 978-0-340-965887, pp. 110–11
75. Jump up ^ Peter Clemens, Prosperity, Depression and
the New Deal: The USA 1890–1954, Hodder Education, 4. Auflage, 2008, ISBN 978-0-340-965887, p. 120
76. Jump up ^ Peter Clemens, Prosperity, Depression and the New Deal: The USA 1890–1954,
Hodder Education, 4. Auflage, 2008, ISBN 978-0-340-965887, p. 113
77. Jump up ^ Peter Clemens, Prosperity, Depression and
the New Deal: The USA 1890–1954, Hodder Education, 4. Auflage, 2008, ISBN 978-0-340-965887, p. 114
78. Jump up ^ Houck, D. W. (2000). RHETORIC AS CURRENCY:
HERBERT HOOVER AND THE 1929 STOCK MARKET CRASH. Rhetoric & Public Affairs,
3(2), 155–81.
79. Jump up ^ Barber, C. L. (1978). "On the Origins
of the Great Depression". Southern
Economic Journal, 44(3), 432.
85. Jump up ^ The Concise Encyclopedia of Economics: The
Great Depression http://www.econlib.org/library/Enc/GreatDepression.html
87. Jump up ^ Robert Whaples, "Where Is There
Consensus Among American Economic Historians? The Results of a Survey on Forty
Propositions", Journal of
Economic History, Vol. 55, No. 1 (Mar., 1995), pp. 139–54 in JSTOR
88. Jump up ^ Gauti B. Eggertsson, Great Expectations and the End of the
Depression, American Economic Review 2008, 98:4,
1476–1516
89. Jump up ^ The New York Times, Christina Romer, The Fiscal Stimulus, Flawed but Valuable,
October 20, 2012
90. ^ Jump up to: a b
Cole, Harold L., and Lee E. Ohanian. "The Great Depression from a
Neoclassical Perspective." N.p., n.d. Web. <http://www.minneapolisfed.org/research/qr/qr2311.pdf>.
91. ^ Jump up to: a b
Chari, V. V., Patrick J. Kehoe, and Ellen R. McGrattan. "Accounting for
the Great Depression." N.p., n.d. Web. <http://www.minneapolisfed.org/research/qr/qr2721.pdf>.
92. Jump up ^ De Vroey, Michel R. "Real Business
Cycle Theory and the Great Depression: The Abandonment of the Abstentionist
Viewpoint." N.p., n.d. Web. <http://www.econ.umn.edu/~tkehoe/classes/DevroeyPensieroso.pdf>.
References
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Steve 2001. Debunking Economics
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History of the Federal Reserve Volume I: 1913–1951 Chicago
University Press, Chicago, IL
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Murray N. A History of Money and Banking in the
United States: The Colonial Era to World War II (2002)
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Eugene N. "The Stock Market Boom and Crash of 1929 Revisited" Journal of Economic Perspectives,
Vol. 4, No. 2 (Spring, 1990), pp. 67–83; examines different theories
Social Plugin