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BRITISH ECONOMIC HISTORY
THE GREAT DEPRESSION Was the Great Depression mostly about money? Consider its origin, spread, and end. Introduction Gold standard Deflation Trade shocks Stock market crash Banking failure Labour market failure New Deal Monetary policy Conclusion What - or Who - Started the Great Depression?: L.E. Ohanian
There was a chronic excess of labour in America during the 1930s, and hours worked were 20%
below normal. Both Hoover and Roosevelt's policies raised wages above market clearing levels, keeping employment low1.
Hoover's industrial relations programme: began in the 1920s when he was Commerce Secretary. He helped to create cooperationbuilding industry trade associations, principally designed to prevent 'destructive competition'. Hoover was a strong supporter of unions and high wages; union wages grew by 40% during the 1920s, compare to only 6% for nonunion wages. In 1929 Hoover, acting as mediator, brokered an agreement between employers and unions. The former would maintain nominal wages and engage in worksharing if the latter agreed not to strike or demand further wage increases. During the depths of recession whoever refused to advocate wage cuts as a means of increasing employment2.
Manufacturing output and hours fell by more than 40% in the three years to 1932. Yet, because of deflation, real manufacturing wages rose during the depression. Meanwhile, real agricultural wages fell by 25% over the same period.
Firms were successful at keeping unions out of the workplace, and membership fell from c17% in 1921 to c10% in 1929. Legislation supported increased unionisation in the late 1920s. The Railway Labour Act, supported by Hoover, made collective bargaining compulsory in the rail industry; it also imposed state arbitration.
Government policies allowed labour to increase wages above competitive levels, and this was exacerbated by deflationary monetary policy. Transmission of the Great Depression: P. Temin
Exchange rates fixed by the Gold Standard transmitted negative demand shocks3. Under a system of fixed exchange equilibrium is restored to a deficit nation through internal deflation rather than currency revaluation. Therefore, nations such as Britain had to tighten monetary and fiscal policy in response to an increasing balance of payments deficit, magnifying the effects of global contraction.
1 What - or Who - Started the Great Depression?: L.E. Ohanian 2 What - or Who - Started the Great Depression?: L.E. Ohanian 3 Transmission of the Great Depression: P. Temin
The US had accumulated vast reserves of gold during the 1920s and incurred no penalty for doing so.
Spain avoided the effects of the depression by never going on Gold.
Germany abandoned the Gold Standard in July 1931, immediately putting pressure on sterling and forcing the Bank of England to raise rates. Despite this, and loans from France and the US, Britain was forced off of Gold later that year, and rapidly reduced interest rates in early 1932. Panic spread across the Atlantic to the US and, as the Fed began to haemorrhage gold, it raised rates sharply in October 19314. Deflation and Depression - An Empirical Link?: A. Atkeson
Atkeson has found a moderate link between deflation and depression, when examined in isolation. However, beyond the Great Depression, there is no identifiable link between the two5. The Macroeconomics of the Great Depression: B.S. Bernanke
No country exhibited significant economic recovery whilst remaining on the Gold Standard. Those nations which left had greater freedom to initiate expansionary monetary policies.
The policy of sterilising increases in US gold reserves meant that, between June 1928 and June 1930, gold reserves rose more than 10% and the nation's monetary base shrank by 6%; this level of monetary tightening was exceptional6.
Falling price levels raised real wages, and employers responded by cutting the size of their workforces. There was worldwide deflation between 1930 and 1931; after this, countries remaining on Gold experienced markedly higher deflation than those off. The Nation in Depression: C.D. Romer
Why was the US harder hit by the Depression than other nations?
The initial fall in industrial production in the US and the UK was more concentrated in consumer goods (rather than investment) than in other countries7.
The US had a peak to trough fall in industrial production of 62%, three times greater than the UK. It was also one of the slowest nations to regain its prerecession production levels.
Unexpected deflation raises the value of existing debt and the risk of default, restricting credit and depressing the economy further.
Monetary policy tightening in 1929 was as much an attempt to cool a stock market bubble as it was a requirement of the Gold Standard. However, higher interest rates in the US did mean that other Gold nations had to follow suit.
We must look beyond monetary policy for explanations for the recession's severity, as the rises in real interest rates in the US were far smaller than those in 1919/20.
High levels of uncertainty post the Wall Street Crash meant that consumers and producers immediately cut off their spending on durable goods. Romer says that the market bubble and subsequent bursting was the primary trigger of recession.
Over the four years to 1934 more than 9000 US banks suspended operations, incurring stockholders losses equivalent to 2.4% of GNP. A corollary of this was a rapid decline in the money supply and a rise in real interest rates. The emphasis on small, local banking in America made the 4 Transmission of the Great Depression: P. Temin 5 Deflation and Depression - An Empirical Link?: A. Atkeson 6 The Macroeconomics of the Great Depression: B.S. Bernanke 7 The Nation in Depression: C.D. Romer
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