EC120 week 20, topic 15, slide 0 Origins and propagation of the Great Depression Topics: The Wall Street Crash, 1929 Onset of the Great Depression Banking Crises in the United States Collapse of the Gold Standard Searching for explanations Recovery National policies in the recovery

EC120 week 20, topic 15, slide 1 The Wall Street Crash, 1929 New York stock market prices collapsed in October 1929 What caused the crash? No consensus about causes. Restrictive monetary policy from late 1928 often blamed Did the crash cause the Great Depression? Probably not

EC120 week 20, topic 15, slide 2 Onset of the Great Depression Slump followed the stock market crash: Smoot-Hawley tariff, 1930, intensified US trade barriers US interest rates cut but nominal money stock declined Slump spread beyond the US –Monetary restraint in Europe -> banks’ distress -> decreased lending –Loan repayments to US burdened debtors –Decline of international trade & prices

EC120 week 20, topic 15, slide 3 Banking Crises in the United States Monetary policy in US in early 1930s: –Restraint to stem potential stock market speculation –Expansion to stem decline of economic activity –Gold flows: policy tended to `sterilise’ inflows Banking crises: bank runs -> waves of bank failures –A major force for economic contraction Milton Friedman 1912 – 2006 Anna Schwartz 1915 – 2012 Ben Bernanke 1953 –

EC120 week 20, topic 15, slide 4 Collapse of the Gold Standard, 1 European themes, mainly on Austria, Germany & Britain: Onset of slump -> borrowers’ default -> banks’ distress Central banks were constrained in providing support Gold Standard needed international co-operation and credible commitment –Both were lacking

EC120 week 20, topic 15, slide 5 Collapse of the Gold Standard, 2 Fragility of Gold Standard in the currency crises of 1931: Began in Austria (bank failure), then Hungary & Germany Imposition of exchange controls effectively suspended GS Britain: Balance of Payments weakness -> run on sterling United States maintained convertibility until April 1933

EC120 week 20, topic 15, slide 6 Searching for explanations, 1 Temin: “The Great Depression was caused … by the strains of the First World War on the gold standard.” –Temin’s assertions raise questions: 1. What triggered onset of the depression? 2. Why was the depression so deep? 3. Why did it last so long, with varied global impacts? 1. What triggered onset of the depression? –Fall in output begins in 1928 –Wall Street crash: symptom rather than a cause?

EC120 week 20, topic 15, slide 7 Searching for explanations, 2 2. Why was the depression so deep? –Adherence to Gold Standard –Monetary policy –Falling commodity prices –Deflation had several adverse effects –Tariff barriers (protectionism) 3. Why did the depression last so long? –Collapse of financial intermediation –Government policies

EC120 week 20, topic 15, slide 8

EC120 week 20, topic 15, slide 9 Recovery Recovery began after abandoning the Gold Standard: Expansionary monetary & fiscal policies Currencies floated, `managed’ by central banks But recovery was slow and uneven: Many trade barriers remained Depleted capital stock reduced productive capacity Deflation generated deflationary expectations

EC120 week 20, topic 15, slide 10 National policies in the recovery, 1 Common theme: a change in `policy regime’ from financial orthodoxy towards government activism Differing national experiences: United States, election of FDR in 1932: –Sought to raise prices –Regulation, eg National Recovery Act, 1933 –`New Deal’: intervention to stimulate economic activity

EC120 week 20, topic 15, slide 11 National policies in the recovery, 2 Japan: pursued its own recovery, separated from others Germany: Nazi’s seized power -> National Socialism Britain: hesitant, modestly expansionary policies France: adhered to the Gold Standard until 1936 Rearmament − clouds of war from mid-1930s