The Great Depression Notes

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 co-operation-building 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 non-union wages. In 1929 Hoover, acting as mediator, brokered an agreement between employers and unions. The former would maintain nominal wages and engage in work-sharing 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.

- 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 re-gain its pre-recession 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 system particularly vulnerable to shocks and bank runs, more so given the unwillingness of the Fed to provide emergency liquidity⁸.

- Soon after his election, Roosevelt used emergency powers granted by congress to allow the dollar to substantially depreciate, significantly expanding the money supply.

Business Cycle Co-Movement – Evidence from the Great Depression: Mathy & Meissner

- Trade relationships and the exchange rate regime both contributed to the transmission of negative shocks during the interwar period.

Financial Factors in the...

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