Economic History of the US

Transcription

1 Economic History of the US Depression and the World Wars, Lecture #4 Peter Allen Econ 120

2 Great Depression, Largest economic contraction in US history Front-loaded collapse lasted 3 ½ years Sep Mar 1933 Real GDP, -27% (nominal GDP, -46%) Unemployment, 3.2% to 24.9% CPI, -25% WPI, -33% Stock market crash, 23 Oct.- 15 Nov. 1929, -50% Americans came to expect recession as normal, nobody would spend

3 Collapse Spanned Hoover Administration March 1929 to March 1933 Most impressive presidential resumé Worst enemy everything he thought he knew about economics New elements, inflated demand and wealth effects on consumers

4 Hoover s Response 1. Reduced of marginal tax rate 2. White House meetings of business and labor leaders 3. Raise tariff 4. Balanced budget 5. Stay on gold standard 6. Public reassurance

5 Treasury Secretary Andrew Mellon In office, for Harding, Coolidge, Hoover Institution unto himself previously a banker supply-sider 1920s - cut tax rates, increased revenue, balanced budget and paid down WWI debt Criticized by Keynes, Friedman, Bernanke Didn t understand the economy as well as he thought

6 Mellon s Philosophy, 1929 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 Sounds like Adam Smith i.e. let prices adjust downward Neoclassical economics

7 What about the Fed? Fed s purpose was to protect banks But Fed didn t step in as lender of last resort to failing banks Insolvency vs. Illiquidity/classical view w/fractional reserve, banks are never completely liquid In a bank run difference becomes irrelevant Forces closure of bank, depositors to realize loss, and drop of monetary base for future lending Why? Debated ever since.

8 Why Didn t the Fed Act? 1. Prevalent understanding of economics let the markets correct themselves through prices What Adam Smith would have advised Bubble should be allowed to deflate Laissez-faire Mellon, et. al. Experience of prior recession ( ): bank failures, healthy 2. Didn t understand magnitude of crisis Federal Reserve Act limited Fed s power No one conceived large-scale intervention Needed to act early-on, but lacked conviction

9 Why Didn t the Fed Act? 3. Unsure how to measure monetary conditions Thought that the low nominal interest rate...sign of plenty of money Actually caused by deflation so the Real Interest Rate was very high No heed to stock of money Real Interest Rate (%)

10 Why Didn t the Fed Act? 4. Power struggle within the Fed NY Fed versus Federal Reserve Board in D.C. NY Fed wanted to inject money, Board resisted for internal reasons 5. Role of the Gold standard Committed to keep $ from falling against gold Reason that FDR took US off gold standard, April 1933 Underweighted by monetarists Prof. Barry Eichengreen

11 John Kenneth Galbraith The Federal Reserve Board in those times was a body of startling incompetence. The Great Crash 1929 (1954)

12 Bernanke and 2008 Appointed Fed Chairman by Pres. George Bush in Feb Reappointed by Pres. Obama Ph.D, MIT 1979 Dissertation on Depression Don t let Money Supply Fall

13 Congress Response, Smoot-Hawley Tariff June 1930 Signed into law, Hoover Petition by economists, business leaders not a good idea 20,000 products, tariff to 50-60% Exports = 6% of GDP Imports = 4.9% of GDP European partners retaliated by 1932 Adverse impact, esp. on investment, but often overstated Hurt debt-laden allies

14 Temin s Critique of the Monetarist Interpretation of the Great Depression

15 Other theories Ben Bernanke asymmetric info. problem Bank failures severed informal credit relationships Between local banks and small businesses Irving Fisher Effect of rising real value of debt, i.e. deflation on spending by businesses and consumers Joseph Schumpeter FDR made the Depression worse by changing regulations continuously and anti-business rhetoric