A Monetarist Look
at the Great Depression
Stock Market Crash
Unemployment
Bread Lines in New York
Prices were either too high or zero.
Food Lines in Paris
Oklahoma Dust Bowl
Make-shift Housing
Migrants Going West
Migrant Family
in California
Dorothea Lange's "Migrant
Mother," destitute in a pea
picker's camp, because of
the failure of the early pea
crop. These people had just
sold their tent in order to buy
food. Most of the 2,500
people in this camp were
destitute. By the end of the
decade there were still 4
million migrants on the road.
Despondency
10 years
Publication of John Maynard Keynes’s General Theory
Query: Was Keynes’s book really a “general theory”
or was it a tract for the times?
Per-capita GDP
Relative to the 1889-1929 Trend
10 years
Waning of “animal spirits”?
Sticky-Price Spiraling Downward
of Income and Expenditures?
Per-capita GDP
Relative to the 1889-1929 Trend
THE NATURAL RATE OF UNEMPLOYMENT
This focus suggests two questions in need of an answer:
1. What caused the bust? What was the triggering
mechanism? What change in market conditions
required adjustments of some kind on an
economywide scale?
2. Why did it take so long for markets to adjust to the
changed market conditions? If prices, wages, and
interest rates needed to adjust, why didn’t they
adjust?
Monetarism
Historically considered
Monetarism
MV = PQ
Monetarism
MV = PQ
18-30 months
This is the Quantity Theory of Money.
Monetarism
MV = PQ
18-30 months
In the long run, increases in M
affect nothing but P (and W).
Monetarism
18-30 months
MV = PQ
In the long run, decreases in M
affect nothing but P (and W).
Monetarism
Abstractly considered
MV = PQ
35%
35%
Suppose M falls from $45 billion to $30 billion.
P must fall proportionally to avoid a recession.
Monetarism
Historically considered: 1929-1933
MV = PQ
35% 15%
24%25%
The phenomenon of bust and depression was observed and
argued about long before the Great Depression and long before
Keynes wrote his General Theory.
A fully satisfying explanation requires that we consider the
phenomenon of boom, bust, depression, and recovery.
But sorting out the differences between Milton Friedman and
Maynard Keynes can be achieved with the narrower focus, i.e.,
bust and depression.
This focus suggests two questions in need of an answer:
1. What caused the bust? What was the triggering
mechanism? What change in market conditions required
adjustments of some kind on an economywide scale?
Keynes claimed it was a waning of animal spirts.
Friedman pointed to the collapse in the money supply.
2. Why did it take so long for markets to adjust to the
changed market conditions? If prices, wages, and interest
rates needed to adjust, why didn’t they adjust?
Keynes claimed it was a sticky prices and wage rates.
Friedman pointed to perverse government policy.
Consider policies pursued by Hoover and Roosevelt:
.
High-wage policies (Hoover)
.
Crop-Destruction Program (Roosevelt)
.
Potatoes, pork, cotton, dairy.
“Roosevelt did not forget agriculture. On May 12, 1933,
Congress passed the Agricultural Adjustment Act (AAA). The
Act had two goals—to raise farm prices quickly and to control
production so that prices would stay up over the long term.”
“In the AAA’s first year, though, the supply of food
outstripped demand. The AAA could raise prices only by
paying farmers to destroy crops, milk, and livestock. To many,
it seemed shocking to throw away food while millions of
people were going hungry.”
“The New Dealers claimed
the action was necessary
to bring prices up.”
From an elementary-school
history book, The American
Journey, 2003, p. 724.
Consider policies pursued by Hoover and Roosevelt:
.
High-wage policies (Hoover)
.
Crop-Destruction Program (Roosevelt)
.
Potatoes, pork, cotton, dairy.
.
.
Cartelization of Industry (Roosevelt)
Railroads, Steel, Banking
.
Blue Eagle Program (Roosevelt)
.
Make-Work Projects (Roosevelt)
.
WPA, CCC, “Give a Man a Job”
Social Security Program (Roosevelt)
Undistributed Profits Tax (Roosevelt)
CCC
Civil Conservation Corp
Make-Work Projects
New Deal-era promo for the NRA
(National Recovery Administration).
Producer: Metro-Goldwyn-Mayer
Featuring: Jimmy Durante
Click the “Blue Eagle” for the 2 min. 49 sec. video.
Monetarism
Historically considered: 1929-1933
A Summary view:
In 1929, the Federal Reserve
blundered monumentally in
allowing the money supply to fall.
Monetarism
Historically considered: 1929-1933
A Summary view:
Had the blundering not been
compounded by further blundering,
P (and W) would have fallen and
there would have been a short-lived
recession (18-30 months?).
Monetarism
Historically considered: 1929-1933
A Summary view:
The Hoover administration
instituted a “high-wage policy.”
Prices, which reflected high labor
costs, were also propped up.
Monetarism
Historically considered: 1929-1933
A Summary view:
The Roosevelt administration
further propped up prices through
its NRA legislation, involving crop
destruction, cartel arrangements,
and the “Blue Eagle” program.
Monetarism
Historically considered: 1929-1933
A Summary view:
The Roosevelt administration
worked through unions to prop
wages up. It was more “successful”
in blocking wage declines than in
blocking price declines.
Monetarism
Historically considered: 1929-1933
A Summary view:
All told, there was a double blunder
with a catastrophic twist:
M collapsed; P and W were propped
up--W more successfully than P.
Monetarism
Historically considered: 1929-1933
A Summary view:
The “real wage rate” (W/P) rose,
and unemployment peaked at 25%.
The Great Depression lasted for a
decade (1929-1939).
Monetarism
MV = PQ
Policy recommendation: Increase M
at a slow, steady rate (2 or 3%) to
match the long-run rate of growth.
Monetarism
MV = PQ
With this “Monetarist Rule” in effect
(2 or 3%) and a constant V, the rate
of inflation would be zero.
A Monetarist Look
at the Great Depression