Causes of the Great Depression

src: cf.nearpod.com

The the cause of the Great Depression at the beginning of the 20th century has been much discussed by economists and remains a matter of active debate. They are part of a larger debate about the economic crisis. The specific economic events that occurred during the Great Depression were well established. An early stock market crash sparked a "panic-buying" of assets. This was followed by deflation in asset and commodity prices, dramatic reductions in demand and credit, and trade disruptions, resulting in widespread unemployment (over 13 million people unemployed in 1932) and impoverishment. However, economists and historians have not reached a consensus about the causal relationship between the various events and government economic policies in causing or improving the Depression.

Current mainstream theory can be broadly classified into two main viewpoints. The first is demand-driven theory, of the Keynesian and institutional economists who argue that depression is caused by the loss of widespread belief that leads to consumption-less. Demand-driven theories argue that the financial crisis after the collapse of 1929 led to a sudden and continuous decline in consumption and investment expenditure. After panic and deflation occur, many people believe that they can avoid further losses by staying away from markets. Therefore, holding money becomes profitable because prices fall lower and the amount of money given buys more goods, exacerbating the decline in demand.

Secondly, there are monetarists, who believe that the Great Depression began as a normal recession, but a significant policy blunder by the monetary authorities (especially the Federal Reserve) led to a shrinking money supply that greatly aggravated the economic situation, causing a recession to descend into the Great Depression. Associated with this explanation are those who point to the debt deflation that causes those who borrow to owe more in terms of real.

There are also several heterodox theories that reject the explanations of the Keynesians and monetarists. Some new classical macroeconomists argue that the various labor market policies imposed initially led to the length and severity of the Great Depression. The Austrian economic school focuses on the macroeconomic effects of the money supply and how the central bank's decision can lead to malinvestment. Marxist economists view the Great Depression, with all other economic crises, as a symptom of the nature of the cycle of capitalism and the instability inherent in the capitalist model.

Video Causes of the Great Depression

Common theoretical reasoning

The two classic competing theories of the Great Depression are the Keynesian (demand-driven) and monetarist explanations. There are also various heterodox theories that discourage or deny the explanations of the Keynesians and monetarists.

Economists and economic historians are almost evenly divided over whether the traditional monetary explanation that monetary power is the main cause of the Great Depression is true, or the traditional Keynesian explanation that the fall of autonomous spending, especially investment, is the main explanation for the onset of the Great Depression. Today's controversy is less important as there is major support for the theory of debt deflation and a hypothesis of constructive expectations on monetary explanations Milton Friedman and Anna Schwartz add non-monetary explanations.

There is a consensus that the Federal Reserve System should cut the process of monetary deflation and banking collapse. If the Fed has done that, the economic downturn will be much worse and much shorter.

Mainstream Theory

Keynesian

In his book The General Theory of Employment, Interest and Money (1936), the English economist John Maynard Keynes introduced concepts intended to help explain the Great Depression. He argues that there is a reason why the self-correction mechanism that many economists claim to work on as long as the decline may not work.

One argument for a non-interventionist policy during a recession is that if consumption falls due to savings, austerity will cause the interest rate to fall. According to classical economists, lower interest rates will lead to an increase in investment spending and demand will remain constant. However, Keynes argues that there is a good reason why investment does not always increase in response to a rate cut. Businesses make investments based on earnings expectations. Therefore, if the decline in consumption seems to be long-term, businesses analyzing trends will lower sales expectations in the future. Therefore, the last thing they are interested in is investing in increased production in the future, even if lower interest rates make capital inexpensive. In this case, the economy can be thrown into a general decline because of a decrease in consumption. According to Keynes, this self-reinforcing dynamic is what happens at the extreme levels during the Depression, where bankruptcy is common and investment, which requires a degree of optimism, is highly unlikely. This view is often characterized by economists as opposed to Say's Law.

The idea that reducing capital investment is the cause of depression is a central theme in the theory of secular stagnation.

Keynes argues that if the national government spends more money to help the economy recover the money that consumers and businesses typically spend, then the unemployment rate will fall. The solution is for the Federal Reserve System to "create new money for the national government to borrow and spend" and to cut taxes rather than raise them, so consumers can spend more, and other useful factors. Hoover chose to do the opposite of what Keynes considers to be a solution and allows the federal government to raise excessive taxes to reduce the budget shortfall due to depression. Keynes stated that more workers could be hired by lowering interest rates, encouraging companies to borrow more money and make more products. Employment will prevent governments from spending more money by increasing the number of consumers to spend. The Keynesian theory is then confirmed by the length of the Great Depression in the United States and the constant rate of unemployment. The level of work began to increase in preparation for World War II by increasing government spending. "Given this development, the Keynesian explanation of the Great Depression is increasingly accepted by economists, historians, and politicians".

Monetaris

In their 1963 book The History of American Monetary, 1867-1960, Milton Friedman and Anna Schwartz explain their case for a different explanation of the Great Depression. In essence, the Great Depression, in their view, is caused by the fall in the money supply. Friedman and Schwartz wrote: "From the peak of the cycle in August 1929 to the cyclical trough in March 1933, the money supply fell by more than a third." The result is what Friedman calls "the Great Contraction" - a period of decline in income, prices, and jobs caused by the choking effect of a restricted cash supply. Friedman and Schwartz argue that people want to have more money than the Federal Reserve provides. As a result, people hoard money by consuming less. This causes a contraction in work and production because the price is not flexible enough to quickly fall. The Fed's failure is unaware of what is happening and does not take corrective action.

After the Depression, the main explanation tends to ignore the importance of money supply. However, in the view of monetarists, the Depression is "in fact a tragic testimony of the importance of monetary power." In their view, the failure of the Federal Reserve to handle the Depression is not a sign that impotent monetary policy, but that the Federal Reserve implements the wrong policies. They do not claim the Fed is causing depression, it's just that they fail to use policies that may have stopped the recession from turning into depression.

The US economy during this period experienced a number of boom and bust cycles. Depression often seems to be paralyzed by the panic of the bank, the most significant occurring in 1873, 1893, 1901, 1907, and 1920. Prior to the establishment of the Federal Reserve in 1913, the banking system has dealt with these crises in the US (as in Panic of 1907) by suspending the convertibility of deposits into currencies. Beginning in 1893, there was a growing effort by financial institutions and entrepreneurs to intervene during this crisis, providing liquidity to the banks that suffered. During the banking panic of 1907, an ad-hoc coalition assembled by J. P. Morgan managed to intervene in this way, thereby cutting into panic, which is probably the reason why the depression that usually follows the panic of banking does not happen today. Multiple calls for the government version of this solution resulted in the formation of the Federal Reserve.

But in 1928-32, the Federal Reserve did not act to provide liquidity for the afflicted bank. In fact, his policy contributed to the banking crisis by allowing a sudden contraction of the money supply. During the Roaring Twenties, the central bank has set itself as the main goal of "price stability", in part because New York's Federal Reserve governor Benjamin Strong is a student of Irving Fisher, a very popular economist who popularized stable prices as a monetary goal. It has made the dollar amount in such quantities that the price of goods in the community seems stable. In 1928, Strong died, and with his death, this policy ended, to be replaced by a real bill of doctrine that required all currencies or securities to have material goods to support it. This policy enabled the US money supply to fall by more than a third from 1929 to 1933.

When this money shortage leads to running in the bank, the Fed maintains its true billing policy, refusing to lend money to banks in a way that has cut the panic of 1907, instead of letting each run into a disaster and failing completely. This policy resulted in a series of bank failures in which one-third of all banks disappeared. According to Ben Bernanke, the next credit crunches caused a wave of bankruptcy. Friedman said that if policies similar to those of 1907 had been followed during the banking panic by the end of 1930, this might have stopped the vicious cycle of forcible liquidation of assets at depressed prices. As a result, the banking panic of 1931, 1932, and 1933 may not have happened, as the convertibility suspension in 1893 and 1907 quickly put an end to the liquidity crisis at the time. "

The explanation of monetarists has been rejected in Samuelson's Economics, writing "Today some economists consider the Federal Reserve's monetary policy as a panacea to control the business cycle.Pure monetary factors are regarded as a symptom as much as the cause, although symptoms with aggravating effects which should not be entirely ignored. "According to Keynesian economist Paul Krugman, Friedman and Schwartz's works became dominant among mainstream economists in the 1980s but should be reconsidered in view of Japan's 1990 Decade Loss. The role of monetary policy in the financial crisis is an active debate on the 2007-12 global financial crisis; see Cause of global financial crisis 2007-12.

Additional nonmonetary modern annotations

The monetary explanation has two weaknesses. First, it can not explain why money demand falls faster than supply during the initial decline in 1930-31. Second, it can not explain why in March 1933 there was a recovery even though short-term interest rates remained close to zero and Money supply was still down. These questions are addressed by a modern explanation built on the monetary explanations of Milton Friedman and Anna Schwartz but add non-monetary explanations.

Debt Deflation

Total debt to GDP levels in the US reached a high of just under 300% at the time of the Depression. This debt level does not extend beyond the end of the 20th century.

Jerome (1934) provides an excerpt without any attribution of the financial conditions that allowed the expansion of large industries from the post-World War I period:

Probably never before in this country has such a volume of funds available at very low prices for long periods of time.

Furthermore, Jerome said that the volume of new capital problems increased at a compound annual rate of 7.7% from 1922-29 at the time of the Standard Statistics Co. index. of 60 high-grade bonds generated from 4.98% in 1923 to 4.47% in 1927.

There are also real estate and housing bubbles in the 1920s, especially in Florida, which exploded in 1925. Alvin Hansen stated that housing construction during the 1920s exceeded 25% population growth. See also: Florida land boom from the 1920s Statistics kept by Cook County, Illinois show more than 1 million empty plots for homes in the Chicago area, although only 950,000 plots are occupied, the result of Chicago's explosive population growth in combination with real estate bubbles.

Irving Fisher argues that the major factors that led to the Great Depression were excess debt and deflation. Fisher attributes loose credit to excessive borrowing, which sparked speculation and asset bubbles. He then outlines the nine factors that interact with each other under conditions of debt and deflation to create a boom to bust mechanism. The chain of events took place as follows:

1. Liquidation of debt and sale of distress
2. Contraction of money supply due to bank loan settled
3. Decrease in asset price level
4. A larger drop in net business wealth, triggering bankruptcy
5. Profit drop
6. Decrease in output, in trade and employment.
7. Pessimism and loss of confidence
8. Hoard money
9. Decrease in the nominal interest rate and increase in adjusted interest rate of deflation.

During the Crash of 1929 before the Great Depression, the margin requirement was only 10%. The brokerage firm, in other words, will lend $ 90 for every $ 10 deposited by the investor. When the market falls, the broker asks for this loan, which can not be repaid. Banks start failing because the debtor fails on debt and the depositor seeks to withdraw their deposits en masse, sparking some banks running. Federal Reserve government guarantees and banking regulations to prevent panic are ineffective or unused. Bank failures lead to the loss of billions of dollars in assets.

Extraordinary debt becomes heavier, as prices and revenues fall by 20-50% but debt remains at the same dollar amount. After the 1929 panic, and during the first 10 months of 1930, 744 US banks failed. (Overall, 9,000 banks failed during the 1930s). In April 1933, about $ 7 billion of deposits had been frozen in unsuccessful or unlicensed banks after the March Bank Holiday.

Bank failures grew larger as desperate bankers called for loans, which borrowers had no time or money to pay. With future earnings that look bad, capital investment and construction slow down or actually stop. In the face of bad debts and worsening future prospects, surviving banks are becoming more conservative in their lending. The banks build up their capital reserves and make fewer loans, which increases deflationary pressures. Satanic cycle develops and spiral decreases accelerated.

Debt liquidation can not keep up with the falling prices. The mass effect of a stampede to liquidate increases the value of each dollar owed, relative to the asset's asset loss. Individual efforts to reduce their debt burden effectively improve it. Paradoxically, the more debtors are paid, the more debt they have. This self-inflicting process turned the 1930 recession into a great depression in 1933.

Fisher's debt deflation theory initially has no mainstream effect because the arguments that debt-deflation is nothing more than a redistribution from one group (debtor) to another (creditor). Pure redistributions should not have significant macroeconomic effects.

Based on monetary hypotheses from Milton Friedman and Anna Schwartz as well as the debt deflation hypothesis from Irving Fisher, Ben Bernanke developed an alternative way in which the financial crisis affected output. He built Fisher's argument that the dramatic decline in the price level and nominal income led to an increase in real debt burden which in turn led to the debtor's inability and consequently led to a decline in aggregate demand, a further decline in the price level then generating a spiral of debt deflation. According to Bernanke, a small drop in the price level simply reallocates wealth from debtors to creditors without damaging the economy. But when deflation is a severe falling asset price along with the debtor's bankruptcy causes a decrease in the face value of the asset on the bank's balance sheet. Banks will react by tightening their credit conditions, which in turn lead to a credit crunch that is detrimental to the economy. The credit crunch lowers investment and consumption and results in a decrease in aggregate demand that also contributes to the deflationary spiral.

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 suggested Congress to engage in debt forgiveness or direct payments to citizens in order to avoid future financial events. Some people support the theory of debt resets.

Expectations of hypothesis

Expectations have become central elements of the macroeconomic model since the mainstream of the economy receives a new neoclassical synthesis. While not rejecting that it is an inadequate demand that maintains depression, according to Peter Temin, Barry Wigmore, Gauti B. Eggertsson and Christina Romer are key to recovery and the end of the Great Depression is a successful management of public expectations. This thesis is based on the observation that after years of severe deflation and recession, important economic indicators turned positive in March 1933, just as Franklin D. Roosevelt did. Consumer prices went from deflation to mild inflation, industrial production reached its lowest point in March 1933, investing more than doubled in 1933 with a turnaround in March 1933. There was no monetary power to explain the rotation. Money supply is still down and short-term interest rates remain close to zero. Prior to March 1933, people expected deflation and further recession so that even zero interest rates did not stimulate investment. But when Roosevelt declared a major regime change, people began to expect inflation and economic expansion. With those expectations, zero interest rates begin to stimulate investment as planned. Roosevelt's fiscal and monetary policy reforms helped make the policy objective credible. Higher future earnings expectations and higher future inflation boost demand and investment. Analysis shows that the abolition of standard gold policy dogmas, balanced budgets in times of crisis and small governments led to a major shift in expectations that accounted for about 70-80 percent of output and price recovery from 1933 to 1937. If regime change does not occur and Hoover policy continues , the economy will continue to fall freely in 1933, and output will be 30 percent lower in 1937 than in 1933.

The 1937-1938 recession, which slowed the economic recovery from the great depression, was explained by the concern of the population that a moderate tightening of monetary and fiscal policy in 1937 would be the first step to restoration of the policy regime before March 1933.

Heterodox theory

Austrian School

Austrian economists argue that the Great Depression was the inevitable outcome of the Federal Reserve's monetary policy during the 1920s. According to them, the policy of the central bank is "easy credit policy" which leads to unsustainable credit booms. In view of Austria, money supply inflation during this period led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. By the time the Federal Reserve was late in tightening monetary policy in 1928, it was too late to avoid a significant economic contraction. Austria argues that government intervention after the 1929 crash delayed market adjustments and made the road to completing recovery more difficult.

Acceptance of Austria's explanation of what primarily caused the Great Depression matched the acceptance or rejection of the Monetarist explanation. The Austrian economist Murray Rothbard, who wrote the Great Depression of America (1963), rejected the Monetarist explanation. He criticized Milton Friedman's statement that the central bank failed to adequately increase the money supply, claiming the Federal Reserve was indeed pursuing an inflation policy when, in 1932, it bought $ 1.1 billion in government securities, increasing its total holdings to $ 1.8 billion. Rothbard said that despite central bank policy, "total bank reserves rose only $ 212 million, while the money supply fell by $ 3 billion". The reason for this, he argues, is that the American people lose confidence in the banking system and start hoarding more money, a factor that is so far beyond the control of the Central Bank. The potential to run in the bank caused local bankers to become more conservative in lending their reserves, which, according to Rothbard's argument, was the cause of the Federal Reserve's inability to expand.

Friedrich Hayek criticized the FED and the Bank of England in the 1930s for not taking a reactionary stance. However, in 1975 Hayek admitted that he made a mistake in the 1930s for not challenging the Central Bank's deflationary policy and stating the reason why he was ambivalent: "At that time I believed that the deflationary process of some short duration would probably break. which I do not think is compatible with a functioning economy.In 1978, he asserted that he agreed with the Monetaris point of view, saying, "I agree with Milton Friedman that after Crash occurs, Federal Reserve Systems implements a silly deflationary policy," and that he opposed deflation as it was against inflation.At the same time, economist Lawrence White argues that Hayek's business cycle theory is inconsistent with monetary policy that allows severe contraction of money.

Hans Sennholz argues that most of the boom and bust that hit the American economy in 1819-20, 1839-43, 1857-60, 1873-78, 1893-97, and 1920-21, were generated by the government creating an explosion through easy money and credit, which is immediately followed by the inevitable breasts. Spectacular crash of 1929 followed five years of reckless credit expansion by the Federal Reserve System under the Coolidge Government. The adoption of the Sixteenth Amendment, the passing of the Federal Reserve Act, the rising government deficit, the passing of the Hawley-Smoot Tariff Act and the Revenue Act of 1932, exacerbated the crisis, extending it.

Marxian

Marxists generally argue that the Great Depression is the result of the instability inherent in the capitalist model.

Maps Causes of the Great Depression

The specific causation theory

Non-debt deflation

In addition to debt deflation, there is a component of productivity deflation that has occurred since The Great Deflation in the last quarter of the 19th century. There may also be a continuation of the correction of the sharp inflation caused by World War I.

Oil prices hit an all-time low in the early 1930s as production started from East Texas Oil Field, the largest field ever found in the lower 48 states. With oversupply oil markets local prices falling down ten cents a barrel.

Productivity or technological shock

In the first three decades of 20th century productivity and economic output jumped in part due to electrification, mass production and increased motorization of transport and agricultural machinery. Electrification techniques and mass production such as Fordism permanently decrease labor demand relative to economic output. By the end of 1920, rapid growth in productivity and investment in manufacturing meant there was excess production capacity.

Sometime after the peak of the business cycle in 1923, more workers displaced by increased productivity than growth in the labor market could meet, causing unemployment to slowly increase after 1925. Also, the workweek fell slightly in the decade before the depression. Wages do not follow productivity growth, which causes less-consumption problems.

Henry Ford and Edward A. Filene are among the leading entrepreneurs concerned with overproduction and underconsumption. Ford doubled the wages of its workers in 1914. The issue of overproduction was also discussed in Congress, with Senator Reed Smoot proposing an import tariff, which became the Smoot-Hawley Tariff Act. The Smoot-Hawley Tariff was enforced in June 1930. The tariff was misguided because the US had run a trade account surplus during the 1920s.

Another effect of rapid technological change is that after 1910 the rate of capital investment slowed, primarily due to reduced investment in the business structure.

Depression caused a large number of plant closures.

It can not be overemphasized that the trends [productivity, output and work] we describe are long-term trends and really proven before 1929. These trends are now the result of this depression, nor the result of the World War. Conversely, the current depression is the collapse resulting from this long-term trend. - M. King Hubbert

In the book Mechanization in Industry , publication sponsored by the National Economic Research Bureau, Jerome (1934) notes that whether mechanization tends to increase output or replace labor depends on the elasticity of product demand. In addition, the reduction of production costs is not always left to the consumer. It is further noted that agriculture is negatively affected by the decrease in the need for animal food when horses and mules are shifted by dead resources after WW I. As a point of concern, Jerome also notes that the term "technological unemployment" is used to describe the work situation during depression.

Some parts of the unemployment increase marked by the post-War years in the United States can be attributed to industrial mechanization that produces inelastic demand commodities. - Fredrick C. Wells, 1934

The dramatic increase in productivity of major US industries and productivity effects on outputs, wages and working weeks is discussed by a Brookings Institution-sponsored book.

Corporations decide to fire workers and reduce the amount of raw materials they buy to produce their products. This decision was made to cut production of goods because the number of products not sold.

Joseph Stiglitz and Bruce Greenwald stated that it was a surprise productivity in agriculture, through fertilizer, mechanization, and seed enhancement, leading to a collapse in prices of agricultural products. Farmers are forced out of the land, increasing the excess supply of labor.

The price of agricultural products began to decline after World War I and eventually many farmers had to go out of business, causing the failure of hundreds of small rural banks. Agricultural productivity resulting from tractors, fertilizers and hybrid corn is only part of the problem; Another problem is the change of horses and mules into internal combustion transport. The population of horses and donkeys began to decline after WW 1, liberating large quantities of land previously used for animal feed.

The emergence of internal combustion engines and the increasing number of cars and buses also stopped the growth of the electric railway.

The years 1929 to 1941 had the highest total factor productivity growth in US history, largely due to increased productivity in public utilities, transport and trade.

Disparity in wealth and income

Economists such as Waddill Catchings, William Trufant Foster, Rexford Tugwell, Adolph Berle (and later John Kenneth Galbraith) popularized the theory that influenced Franklin D. Roosevelt. This theory states that the economy produces more goods than consumers can buy, because consumers do not have enough income. According to this view, by 1920 wages had risen to a lower level than high productivity growth. Most of the benefits of increased productivity generate profit, which goes into the stock market bubble rather than being a consumer purchase. Thus the workers do not have enough income to absorb the large amount of capacity that has been added.

According to this view, the root cause of the Great Depression is global overinvestment while the wage and income levels of independent businesses fail to create sufficient purchasing power. It is said that the government should intervene by increasing the tax of the rich to help make income more just. With increased revenue, the government can create public works to improve jobs and 'start the economy'. In the United States, economic policy had been the reverse until 1932. The Revenue Act of 1932 and the public works program introduced at Hoover last year as president and taken by Roosevelt, created some redistribution of purchasing power.

The stock market crash proves that the banking system depended on by Americans is unreliable. Americans are looking toward non-substantial banking units for their own liquidity supply. When the economy begins to fail, these banks are no longer able to support those who depend on their assets - they do not have as much power as the big banks. During times of depression, "three waves of bank failures shook the economy." The first wave came just as the economy was heading towards recovery in late 1930 and early 1931. A second wave of bank failures occurred "after the Federal Reserve System raised the rediscount tribe to halt gold outflows" around the end of 1931. The latest wave, which began in mid-1932 , was the worst and most devastating, continuing "almost to the point of total collapse of the banking system in the winter of 1932-1933." Reserve banks led the United States into a deeper depression between 1931 and 1933, because of their failure to appreciate and use the forces they held - were able to create money - as well as "the inappropriate monetary policy pursued by them all along." year ".

Gold Standard System

According to the standard gold theory of Depression, the Depression was largely due to the decision of most western countries after World War I to return to the gold standard on the prewar gold price. Monetary policy, according to this view, is thus incorporated into the deflationary arrangements that will over the next decade slowly crush the health of many European economies.

This postwar policy was preceded by an inflationary policy during World War I, when many European countries abandoned the gold standard, forced by enormous war costs. This results in inflation as newly created money supplies are spent on the war, not on investments in productivity to increase demand that will neutralize inflation. The view is that the amount of new money being introduced greatly determines the rate of inflation, and therefore, the cure for inflation is to reduce the amount of new currency created for destructive or wasteful purposes, and not lead to economic growth.

After the war, when America and European countries returned to the gold standard, most countries decided to return to the gold standard at prewar prices. When the UK, for example, passed the 1925 Gold Standard Act, thereby restoring England to the gold standard, a crucial decision was made to fix the new Pound Sterling price at parity at prewar prices even though the pound then traded on the foreign exchange market for much more low. At the time, this action was criticized by John Maynard Keynes and others, who argued that in doing so, they forced the reassessment of wages without any tendency to balance. Keynes's critique of Winston Churchill's form of the return of the gold standard implicitly compares it to the consequences of the Versailles Treaty.

One reason for setting the currency at parity to pre-war prices is the prevailing opinion that deflation is not a danger, while inflation, particularly inflation in the Weimar Republic, is an unbearable danger. Another reason is that those who lend in nominal amounts expect to regain the same gold value they lend. Because of the reparations that Germany had to pay to France, Germany began a period of credit growth to export and sell enough goods abroad for gold to pay for repairs. The US, as the world's gold absorber, lent money to Germany to industrialize, which later became the basis for Germany's repayment of France, and France repayed loans to the US and the US. This setting is codified in the Dawes Plan.

In some cases, deflation may become harsh on economic sectors such as agriculture, if they are highly indebted with high interest rates and can not refinance, or that rely on loans to finance capital goods when low interest rates are not available. Deflation erodes commodity prices while increasing real debt. Deflation is beneficial to those who have cash assets, and for those who want to invest or buy assets or borrowed money.

More recent research, by economists such as Temin, Ben Bernanke, and Barry Eichengreen, has focused on the constraints policy makers are under at the time of the Depression. In this view, the limits of the inter-war gold standard enlarge the initial economic shock and are a significant obstacle to any action that will improve the growing Depression. According to them, the initial destabilization shock may have come from Wall Street Crash in 1929 in the US, but it is the gold standard system that transmits the problem to the rest of the world.

According to their conclusions, during times of crisis, policymakers may want to loosen monetary and fiscal policy, but such actions would threaten the ability of states to maintain their obligation to exchange gold at its contractual level. The gold standard requires countries to maintain high interest rates to attract international investors who buy foreign assets with gold. Therefore, the government ties their hands because the economy collapses, unless they leave their currency to gold. Improving the exchange rate of all countries on the gold standard ensures that the foreign exchange market can only balance through interest rates. As the Depression worsens, many countries begin to abandon the gold standard, and those who abandon it previously suffer less than deflation and tend to recover more quickly.

Richard Timberlake, a free banking school economist and protà © à © gà © Å © Milton Friedman, specifically discusses this stance in his paper Gold Standard and the Real Bill Docution in US Monetary Policy , where he argues that Federal Reserve is actually has a lot of lee-way below the gold standard, as has been shown by New York Fed Governor price stability policy Benjamin Strong, between 1923 and 1928. But when Strong died in late 1928, the faction that took over the dominance of the Fed advocated the doctrine of real bills, in which all money must be represented by physical goods. This policy, which forced a 30% dollar deflation that inevitably damaged the US economy, was declared by Timberlake as arbitrary and inevitable, the existing gold standard has been able to continue without it:

This control shift is critical. In accordance with Strong's precedent has been established in promoting a stable price-level policy without regard to the shackles of gold, the supporters of the real bill can proceed equally unrestricted in implementing their ideal policy. The system policy of 1928-29 consequently shifted from stabilizing the price level to a real passive bill. "The" gold standard remains in place - nothing but the formal window covering is waiting for the right time to reappear.

Structure of financial institutions

Economic historians (especially Friedman and Schwartz) stress the importance of many bank failures. Failure mostly occurs in rural America. Structural weaknesses in the rural economy make local banks vulnerable. The farmers, who were deeply indebted, saw agricultural prices decline in the late 1920s and their implicit real interest rates on loans skyrocketed.

Their land was too mortgaged (as a result of the 1919 land price bubble), and plant prices were too low to allow them to repay their debt. Small banks, especially those related to the agricultural economy, were in a constant crisis in the 1920s with their customers failing in loans due to a sudden rise in real interest rates; there was a steady stream of failures between these smaller banks over the decade.

Municipal banks also suffer from structural weaknesses that make them vulnerable to shock. Some of the largest banks in the country fail to maintain adequate reserves and invest heavily in the stock market or make risky loans. Loans to Germany and Latin America by New York City banks are very risky. In other words, the banking system is not ready to absorb major recession shocks.

Economists argue that a liquidity trap may have contributed to bank failures.

Economists and historians debate how much responsibility to define Wall Street Crash in 1929. The timing is right; the magnitude of shocks to future prosperity expectations is very high. Most analysts believe the market in 1928-29 is a "bubble" at a price much higher than justified by the fundamentals. Economists agree that somehow it caused some mistakes, but how much has not been estimated. Milton Friedman concludes, "I have no doubt for a moment that the fall of the stock market in 1929 played a role in the initial recession".

The idea of ​​having government bonds initially became ideal for investors when Liberty loans encouraged this ownership in America during World War I. It sought to reign in the 1920s. After World War I, the United States became a world creditor and trusted by many foreign countries. "Governments from around the world look to Wall Street for loans". Investors then start relying on these loans for further investment. The head of the Senate Bank Committee advisor Ferdinand Pecora revealed that National City executives also rely on loans from special bank funds as a safety net for losses while US banker Albert Wiggin "makes millions selling his own bank stock".

Economist David Hume states that the economy becomes unbalanced as the recession spreads on an international scale. The cost of the goods remains too high for too long during the time when there is less international trade. The policies set in certain countries to "maintain the value of their currencies" resulted from the failure of the bank. The government that continues to follow the gold standard has failed banks, which means that the government and central bankers who contribute as the bench stepped into depression.

The debate has three sides: one group says the accident caused depression by drastically lowering expectations about the future and by removing large amounts of investment capital; the second group said the economy had slipped since the summer of 1929 and the accident ratified it; the third group said that in any scenario the accident would not cause more than one recession. There was a brief recovery in the market until April 1930, but prices then began to fall again from there, not reaching the bottom end until July 1932. This was the largest long-term US market downturn of any size. To move from recession in 1930 to deep depression in 1931-1932, completely different factors had to be played out.

Protectionism

Protectionism, like the American Smoot-Hawley Tariff Act, is often indicated as the cause of the Great Depression, with countries enforcing protectionist policies that result in your neighbor's beggar. The Smoot-Hawley Tariff Act is very dangerous for farming because it causes farmers to default on their loans. These events may have deteriorated or even caused the subsequent bank to run in the Midwest and West which led to the collapse of the banking system. A petition signed by more than 1,000 economists was presented to the US government warning that the Smoot-Hawley Tariff Act would have a catastrophic economic impact; However, this does not stop the action from being signed into law.

Governments around the world are taking steps to spend less on foreign goods such as: "impose tariffs, import quotas, and exchange controls". These restrictions form a lot of tension between the trading nations, leading to major reductions during depression. Not all countries apply the same measure of protectionism. Some countries raise tariffs drastically and impose strict restrictions on foreign exchange transactions, while other countries condense "trade and exchange restrictions only slightly":

• "Countries that remain at the gold standard, keeping the currency fixed, are more likely to limit foreign trade." These countries "use protectionist policies to strengthen the balance of payments and limit the loss of gold." They hope that this limitation and depletion will withstand the economic downturn.
• Countries that abandoned the gold standard, let their currency depreciate which causes their balance of payments to strengthen. It also liberates monetary policy so that central banks can lower interest rates and act as lenders of last resort. They have the best policy instruments to fight the Depression and do not need protectionism.
• "The length and depth of a country's economic downturn and the timing and strength of its recovery are related to how long it lasts on the gold standard.The countries that leave the relatively early gold standard have a relatively mild recession and early recovery. remaining at the gold standard is experiencing a prolonged deterioration. "

In a 1995 survey of American economic historians, two-thirds agreed that Smoot-Hawley's tariff measures would at least worsen the Great Depression. However, many economists believe that the Smoot-Hawley tariff act is not a major contributor to the great depression. Economist Paul Krugman argues that, "Where protectionism really matters is in preventing recovery in trade when production recovers." He cites reports by Barry Eichengreen and Douglas Irwin: Figure 1 in the report shows trade and production fell together from 1929 to 1932, but production increased faster than in trade from 1932 to 1937. The authors argue that adherence to the gold standard forces many countries to use tariffs, when they should devalue their currencies. Peter Temin argues that contrary to popular arguments, the effect of tariff contraction is small. He noted that exports were 7 percent of GNP in 1929, they fell 1.5 percent from 1,929 GNP in the next two years and the decline was offset by an increase in domestic demand from tariffs.

International debt structure

When the war ended in 1918, all the European countries that had allied themselves with the United States owed a lot of money to American banks, an amount too large to be repaid from the shattered cash. This is one reason why the Allies insist (against Woodrow Wilson's concerns) about the reparations payments from Germany and Austria-Hungary. Reparations, they say, will give them a way to pay off their own debts. However, Germany and Austria-Hungary themselves were in deep economic hardship after the war; they could not afford to pay for compensation instead of the Allies to pay their debts.

The debtor countries put strong pressure on the US in 1920 to forgive the debt, or at least reduce them. The American government refused. In contrast, US banks began to lend big to European countries. Thus, debt (and reparations) are paid only by adding old debt and accumulating new debt. In the late 1920s, and especially after the American economy began to weaken after 1929, European countries found it much more difficult to borrow money from the United States. At the same time, high US tariffs make it much more difficult for them to sell goods in the US market. Without a source of income from foreign exchange to repay their loans, they begin to fail.

Beginning in the late 1920s, European demand for US goods began to decline. That's partly because European industry and agriculture are becoming more productive, and partly because some European countries (especially Weimar Germany) suffer from serious financial crises and are unable to afford goods abroad. However, the main problem causing the destabilization of the European economy in the late 1920s was the international debt structure that emerged after World War I.

High tariff walls such as the Smoot-Hawley Tariff Act critically block the payment of war debts. As a result of high US tariffs, it is just a kind of cycle that maintains reparations and repayment of war debts. During the 1920s, former allies paid debt repayments to the US primarily with funds obtained from German reparations payments, and Germany was able to make those payments only because of large personal loans from the US and Britain. Similarly, US investment abroad provides the dollar, which allows foreign countries to buy US exports.

The Smoot-Hawley Rate Act was instituted by Senator Reed Smoot and Representative Willis C. Hawley, and signed into law by President Hoover, to raise taxes on American imports by about 20 percent during June 1930. This tax, which adds to the already shrinking revenues and overproduction in the US, only benefits Americans for having to spend less on foreign goods. In contrast, European trading nations disliked this tax increase, largely because "the United States is the creditor and international export to the US market has declined". In response to the Smoot-Hawley Tariff Act, some of America's major producers and largest trading partners, Canada, chose to seek levies by increasing the financial value of imported goods favored by Americans.

In the scramble for liquidity that followed the 1929 capital market crash, funds flowed back from Europe to America, and fragile European economies collapsed.

In 1931, the world was shaken from the worst depression of recent memories, and the entire structure of reparations and debts of war collapsed.

Population dynamics

In 1939, prominent economist Alvin Hansen addressed the decline in population growth with respect to the Depression. The same idea is discussed in a 1978 journal article by Clarence Barber, an economist at the University of Manitoba. Using the "Harrod model form" to analyze the Depression, Barber states:

In such models, one would look for the origins of serious depression under conditions that result in a decrease in the natural rate of Harrod's growth, more specifically, in the decline in the population rate and the growth of the labor force and in the rate of growth of productivity or technical progress, to a level below the growth rate which is guaranteed.

Barber said, while there was "no clear evidence" of a decline in "productivity growth rates" during the 1920s, there was "clear evidence" that population growth rates began to decline over the same period. He argues that the decline in population growth rates may have led to a significant "natural growth rate" decline to cause serious depression.

Barber said the decline in population growth rates is likely to affect demand for housing, and this claim is apparently what happened during the 1920s. He concluded:

the rapid and very large decline in the growth rate of non-farm households is clearly the main reason for the decline that occurred in the construction of housing in the United States from 1926 on. And this decline, as claimed by Bolch and Pilgrim, may be the single most important factor in turning the 1929 downturn into a major depression.

The decline in housing construction that can be attributed to demographics has been estimated to range from 28% in 1933 to 38% in 1940.

Among the causes of declining population growth rates during the 1920s were declining birth rates after 1910 and reduced immigration. The decline in immigration largely resulted from the law in 1920 puts a greater restriction on immigration. In 1921, Congress passed the Emergency Quota Act, followed by the Immigration Act of 1924.

Factors that have massively contributed to the economic downturn since 1925, are the decline in both residential and non-residential buildings under construction. It was the debt due to war, the fewer families formed, and the imbalance of mortgage and lending payments in 1928-29 which mainly contributed to the decline in the number of houses built. It (What?) Which causes the rate of population growth to slow down (How?). Although non-residential units continue to be built "at a high level throughout the decade", the demand for such units is actually very low

src: i.ytimg.com

The role of economic policy

Calvin_Coolidge_.281923.E2.80.9329.29 "> Calvin Coolidge (1923-29)

There is an ongoing debate between historians as to how far left-handed President Calvin Coolidge's laissez-faire attitude has contributed to the Great Depression. Despite the growth rate of bank failures he did not notice the voices that predicted the lack of banking regulation as potentially dangerous. He did not listen to congressmen warning that stock speculation was too far away and he ignored criticism that workers were not participating enough in the prosperity of Roaring Twenties.

Self-abandoned jokes (1929 -33)

Overview

From the viewpoint of the mainstream of current economic thinking, the government must strive to maintain a large number of broad aggregates on a stable growth path (for new classical macroeconomic advocates and monetarism, its size is the sum of nominal money; for Keynesian economists the nominal aggregate demand own). During the depression, the central bank should pour liquidity into the banking system and the government must cut taxes and accelerate spending to keep nominal money stocks and total nominal demand for collapse.

The United States Government and the Federal Reserve did not do so during the 1929-32 slide into the Great Depression. The existence of "liquidation" plays a key role in motivating public policy decisions not to resist the Great Depression. An increasingly common view among economic historians is that the compliance of some Federal Reserve policy makers to liquidationist theses led to catastrophic consequences. Regarding President Hoover's policies, economists Barry Eichengreen and J. Bradford DeLong point out that Hoover's fiscal policy is guided by economists of liquidation and policymakers, as Hoover sought to keep the federal budget balanced until 1932, when Hoover lost confidence in his book. Finance Minister Andrew Mellon and succeed him. Hoover writes in his memoir he is not on the side of the liquidationists, but takes the side of the people in his cabinet with "economic responsibility", his Trade Secretary Robert P. Lamont and Secretary of Agriculture Arthur M. Hyde, who advised the President to "Use the power of government to protect the situation ". But at the same time he retained Andrew Mellon as Treasury Secretary until February 1932. In 1932, Hoover began supporting more aggressive measures to combat the Depression. In his memoirs, President Hoover wrote bitterly about his Cabinet members who had advised not to act during the downslide into the Great Depression:

The self-abandoned liquidator led by the Minister of Finance Mellon... felt that the government should keep his hand and let the degenerate liquidate itself. Mr. Mellon has only one formula: "Liquidity of labor, liquidating stocks, liquidating peasants, liquidating real estate... It will clean up the rottenness of the system." The high cost of living and living high will go down.People will work harder, a more moral life.Value will be adjusted, and the enterprising person will take the wreck of the less competent person. "

Before the Keynesian Revolution , such a theory of liquidation was a common position for economists to take and hold and be addressed by economists such as Friedrich Hayek, Lionel Robbins Joseph Schumpeter, Seymour Harris and others. According to liquidationists, depression is a good medicine. The function of depression is to liquidate failed investments and businesses that have been made obsolete by technological developments to release production factors (capital and labor) from unproductive use. It can then be reused in other sectors of a dynamically technological economy. They point to the short duration of the Depression 1920-21 is because the policy of letting liquidation take place and arguing that the crisis has laid the foundation for prosperity in the late 1920s. They encouraged deflationary policies (which had been implemented in 1921) which - in their opinion - would help the release of capital and labor from unproductive activities to lay the foundations for a new economic boom. Liquidation experts argue that even if the adjustment of the economy takes a mass bankruptcy, then be it. Delaying the liquidation process will only increase social costs. Schumpeter wrote it

... leads us to believe that recovery is only audible if it comes by itself. For any revival that is only because the artificial stimulus leaves part of the depressed work being released and adds, to the rest of the undigested irregularities, the undigested new inability, which must be liquidated in turn, thus threatening the business with another (worse) crisis. in front of.

Despite the expectations of liquidation, most of the capital stocks were not transferred and disappeared during the first years of the Great Depression. According to a study by Olivier Blanchard and Lawrence Summers, the recession caused a decrease in net capital accumulation to pre-1924 levels in 1933.

Criticism

Economists such as John Maynard Keynes and Milton Friedman suggest that a non-existent policy prescription resulting from the liquidation theory contributes to deepening the Great Depression. With Keynes's ridiculous rhetoric trying to discredit the liquidation view in presenting Hayek, Robbins and Schumpeter as

... hard and puritan souls who regard [the Great Depression]... as the inevitable and desirable enemies of so many "excessive expansions" as they call it... They will, they feel, triumph for mammon untruth if so much prosperity is not balanced with universal bankruptcy. We need, they say, what they politely call 'prolonged liquidation' to get us right. Liquidation, they say, is not yet complete. But in time. And when enough time has passed 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 teacher's macroeconomics, and became Keynesians. He writes:

I think the Austrian business cycle theory has done a lot to the world. If you go back to the 1930s, which is a key point, here you have Austrians sitting in London, Hayek and Lionel Robbins, and say you just have to let the bottom fall out of the world. You just have to let him heal himself. You can not do anything. You will only make it worse.... I think by encouraging the policy of not doing good in England or in the United States, they are disadvantageous.

Economist Lawrence White, while acknowledging that Hayek and Robbins were not actively opposed to deflationary policies in the early 1930s, but challenged Milton Friedman's argument, J. Bradford DeLong et al. that Hayek is a supporter of liquidation. White argues that Hayec's and Robbins's business cycle theory (which later developed into Austrian business cycles theory in its present form) is in fact inconsistent with monetary policy that allows for severe contraction of money supply. Nevertheless, White said that at the time of the Great Depression Hayek "expressed ambivalence about the shrinking nominal income and sharp deflation in 1929-32". In a lecture in 1975, Hayek acknowledged the mistake he made more than forty years earlier in not opposing the Central Bank deflation policy and stating the reason why he was "ambivalent": "At the time I believe that a short-term deflationary process may have solved the rigidity wages that I do not think fit the functioning economy. "1979 Hayek criticized the monetary policy of the Fed's contraction at the start of the Depression and its failure to offer banking liquidity:

I agree with Milton Friedman that once Crash happens, the Federal Reserve System pursues a silly deflationary policy. I not only fight inflation but I also defy deflation. So, once again, poorly programmed monetary policy prolongs depression.

Herbert Hoover (1929-33)

Economic policy

Historians lend to Hoover for working tirelessly to combat depression and noted that he left the government prematurely. But his policy was considered not far enough to overcome the Great Depression. He is ready to do something, but not close enough. Hoover is not a laissez-faire exponent. But his main philosophy is volunteerism, self-help, and rough individualism. He rejected direct federal intervention. He believes that the government should do more than its immediate predecessor (Warren G. Harding, Calvin Coolidge) believes. But he did not want to go as far as Franklin D. Roosevelt did. Therefore, he is described as the "first president" and "the last of the old".

Hoover's first action was based on volunteering by companies not to reduce labor or cut wages. But businesses have few options and wages are reduced, workers are laid off, and investments are postponed. The Hoover Government extended more than $ 100 million in emergency farming loans and about $ 915 million in public works projects between 1930 and 1932. Hoover urged bankers to establish National Credit Corporation so that major banks could help bank failures survive. But bankers are reluctant to invest in failing banks, and National Credit Corporation has done nothing to address the problem. In 1932 Hoover reluctantly established the Reconstruction Finance Corporation, a Federal agency with the authority to lend up to $ 2 billion to rescue the bank and m

Source of the article : Wikipedia