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Lecture Morys Great Depression

The document summarizes the key causes and consequences of the Great Depression between 1929-mid 1930s. It discusses several unfavorable pre-conditions in the 1920s that contributed to the severity of the crisis, including overproduction in agriculture, rising protectionism, instability in consumer industries in the US, and European reconstruction efforts after WWI. It also analyzes how the crisis developed through a decline in global demand triggered by US monetary tightening in 1928 and the 1929 stock market crash. Countries eventually recovered as abandoning the gold standard allowed monetary reflation, though fiscal stimulus was limited.

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Antonio Aguiar
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41 views17 pages

Lecture Morys Great Depression

The document summarizes the key causes and consequences of the Great Depression between 1929-mid 1930s. It discusses several unfavorable pre-conditions in the 1920s that contributed to the severity of the crisis, including overproduction in agriculture, rising protectionism, instability in consumer industries in the US, and European reconstruction efforts after WWI. It also analyzes how the crisis developed through a decline in global demand triggered by US monetary tightening in 1928 and the 1929 stock market crash. Countries eventually recovered as abandoning the gold standard allowed monetary reflation, though fiscal stimulus was limited.

Uploaded by

Antonio Aguiar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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The Great Depression:

Causes and Consequences

Dr Matthias Morys
University of York
The Great Depression
- Roughly from 1929 (New York Stock Market Crash) to mid-1930s
- Output losses from peak to trough on average 30% (!), but sharp
differences between countries (high dependency on foreign raw
material imports often provided relief, e.g. UK)
- Difference between “recession” and “depression” somewhat unclear
but the Great Depression was certainly the largest (global) recession
ever (in the industrialized period anyway)
- Political consequences of the Great Depression: rise of totalitarian
regimes (Nazi Germany and Fascist Italy; by 1939, the Czech
republic was the only proper democracy left in central and Eastern
Europe)
- Have we learnt from the Great Depression ? Do we rightly label the
post-2008 world as Great Recession ?
Topics
• Unfavourable pre-conditions of the 1920s
• How to explain the quick transmission and the
severity of the crisis ?
• How did countries get out of the Great Depression ?

• American historiography
• European historiography
• British historiography? ‘the great slump’
• Towards a consensus?

• International phenomenon of the 1920s or


contagion from the U.S.?
Unfavourable pre-conditions of the 1920s I
Agriculture
• Overproduction of primary produce
• East European and Russian grain exporters had been disrupted by WW I 
producers elsewhere step into the breach (e.g. Canadian acreage under wheat
was expanded by 80% in WW I)
• When East European grain supplies came back on stream, commodity prices
turned down and land prices collapsed  balance-of-payment problem
• Explains the temptation of protectionism to primary producers after 1929

• Farm prices drastically fall after WWI


• Farmers paid by gov. to make food for allies, creates a huge surplus.
• The price of farm land fell from $69 per acre in 1920 to $31 in 1930
• Farmers unable to repay loans after gov. pulls WWI agricultural contracts
• 6,000 banks close in the West
• President Hoover (1929-1933) vetoes all bills to help farmers

• John Steinbeck: The Grapes of Wrath (1939)


Farm Prices
Instability in food prices
Unfavourable pre-conditions of the 1920s II
Labour markets
• Increased rigidity of labour markets
• UK unemployment almost always above 10% even in 1920s; similar picture for other
European countries but not for the US
• Can we infer increased rigidity of labour markets from consistently high unemployment
rates?
• But: Other measures suggest that declining labour market flexibility were limited mainly to
the US

• suspension of gold convertibility in 1914 and very slow resumption after WW I


• repercussions of war financing make resumption difficult in many countries
• England itself only returns to gold in 1925 after a prolonged discussion on the costs and
benefits of resumption
  Interwar Gold Standard as a system encompassing a large number of countries only
six years long! (1925-1931)

• Labour market rigidity probably better at explaining 1930s than 1920s


• If the nominal exchange rate can no longer change, another variable – the (domestic)
price level – has to curry the burden of adjustment
• But if nominal wages are sticky downwards, adjustment effectively means higher real
wages  the domestic economy becomes uncompetitive
• This tension between external and internal was exacerbated once US monetary policy
turned in a restrictive direction in 1928
Economic reasons why gold standard was
less successful in the interwar period
• change in domestic climate: less willingness to
adjust
(Keynes: gold standard as a ‘barbaric relic’)
 emergence of ‘proto-Keynesian’ ideas, while 19th
century saw the heyday of monetary orthodoxy;
spread of universal suffrage; high unemployment
• underlying shocks bigger in interwar period than 1896
– 1913 (‘belle époque’ of the world economy):
necessity to adjust larger
Unfavourable pre-conditions of the 1920s III:
unbalanced economic growth and shifting consumer baskets

• Point here is instability. Unequal growth. In the 1920s there was a serious lack
of diversification in the American economy of the 1920s. Prosperity had been
excessively dependent on a few basic industries, notably construction and
automobiles.
• In the late 1920s, however, those industries began to decline. Because it could
not be sustained indefinitely? Between 1926 and 1929, expenditure on
construction fell from $11 billion to under $9 billion.
• Automobile sales began to decline somewhat later, but in the first nine months
of 1929 they declined by more than one third.
• Once these two crucial industries began to weaken, there was not enough
strength in the other sectors of the economy to take up the slack. The growth
was in other words fragile and unstable.

• Shift in production and consumption towards consumer durables (motor


vehicles, furniture, household appliances, radios, gramophones)
• Increased vulnerability to cyclical instability
• But: data suggests this shift had not yet reached Europe (but might explain the
severity of the downturn in the US)
Unfavourable pre-conditions of the 1920s IV:
European reconstruction efforts after World War I

Huge devastation across Europe


Paris Peace Conference of 1919/20 force reparations upon Germany,
Austria, Hungary, Bulgaria
The U.S. insisted former allies pay the money. This forced the allies to demand
Germany pay the reparations imposed on her as a result of the Treaty of
Versailles.
Keynes, Economic Consequences of the Peace (1920)

But countries reluctant/unable to pay  emergence of transatlantic


triangular payment system centred around U.S., Germany, France and
Britain (American “Reparations” to Germany, 1919-1933)
European countries force the Federal Reserve to keep interest rates down
Partly explains low Federal Reserve interest rates 1924-1928

no Bank of England leadership / not yet Federal Reserve leadership


little central bank cooperation (?)
adjustment process more difficult due to disintegration of world trade and
end of mass migration (importance of remittances for bop-equilibrium in
many peripheral economies before WW I)
Why was US monetary policy tightened in
1928?
• Growing concern of Federal Reserve over 1920s stock
market speculation
• Yet 1920s stock market development was supported for a
long period by market fundamentals (Bradford de Long)
• Other central banks have to increase interest rates as well;
pre-existing balance-of-payments deficits led to even
stronger monetary tightening abroad (especially in countries
that used to borrow from the US in the 1920s and in primary
exporting countries)
• The Gold Standard turned out as “Golden Fetters”
(Eichengreen)
The downward spiral: How to explain the quick
transmission and the severity of the crisis ?

• Global monetary tightening reduced global demand


• US demand further undermined by 1929 New York stock market
crash
• Demand shock exacerbated by growing importance of consumer
durables
• Decline in labour market flexibility limits economy’s ability to adjust
• Tight money and bankrupt companies lead to widespread banking
failures  loss of deposits + severe disruption to financial
intermediation which undermines efficient allocation of capital
• Balance-of-payments concerns and weakness of domestic demand are
addressed by protectionist policies (beggar-thy-neighbour politics) 
retaliation  end of (the remnants of) free trade with even the UK
becoming protectionist
How did countries get out of the Great
Depression ?
Keynesian economics suggests that both fiscal expansion and
monetary expansion can help overcome a shortfall of
aggregate demand
• Massive fiscal stimulus? No (Middleton 1981; Brown
1956); re-armament in late 1930s comes after the countries
under consideration were lifted out of the recession
• Monetary stimulus?
Eichengreen 1992: abandoning the gold standard paved the
way for reflating the economies
Eichengreen himself agrees, however, that this tool was
not used as much as it could (and should) have been
Was there really a sustained monetary
expansion?

• Urban (2008) suggests that the 1930s monetary


experience cannot be seen as one of floating
exchange-rates; exchange rates as rigid as before
but without gold convertibility
• Keynes’ “General theory” was written in 1936 and
Hicks’ path-breaking interpretation is only from
1941  unlikely that policy-makers thought in
these terms already in early 1930s
• The implication might be that the patient simply
healed over time.

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