From WWI to the Great Depression Econ 210a March 17, 2010
Readings • • • • • •
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Michael D. Bordo and Hugh Rockoff (1996), "The Gold Standard as a 'Good Housekeeping Seal of Approval'" Journal of Economic History 56 (1996): 389-‐428 <hXp://Znyurl.com/dl20090112ah> John Maynard Keynes (1920), The Economic Consequences of the Peace, chapters 1, 2, and 6 <hXp://www.gutenberg.org/files/15776/15776-‐h/15776-‐h.htm> ChrisZna Romer (1990), "The Great Crash and the Onset of the Great Depression," Quarterly Journal of Economics 104, pp.719-‐736, <hXp://Znyurl.com/dl20090112af> John Maynard Keynes (1932), "The World Economic Outlook," AtlanZc <hXp://Znyurl.com/ dl20090112ae> ChrisZna Romer (1992), "What Ended the Great Depression?" Journal of Economic History 52, pp. 757-‐784. <hXp://www.jstor.org/stable/2123226> Margaret Weir and Theda Skocpol, "State Structures and Social Keynesianism: Responses to the Great Depression in Sweden and the United States," InternaZonal Journal of ComparaZve Sociology pp. 4-‐29 <hXp://books.google.com/books?hl=en&lr=&id=GLQ3AAAAIAAJ&oi=fnd&pg=PA7-‐ IA3&dq=Margaret+Weir+and+Theda+Skocpol,+%22State+Structures+and+Social +Keynesianism&ots=P2iXGFkFfu&sig=APmY6D1P2QkJ0l28RRWX5YxjBmg#PPA29,M1> (OpZonal) William Keeton (1992), “ The ReconstrucZon Finance CorporaZon: Would it Work Today,” Economic Review of the Federal Reserve Bank of Kansas City 77:1, pp.33-‐54. <hXp:// www.kc.frb.org/PUBLICAT/ECONREV/EconRevArchive/1992/1q92keet>
Cuung-‐Edge Macroeconomic Theory •
Jean-‐BapZste Say (1829): –
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John Stuart Mill (1844a): –
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The Bank [of England, in 1824-‐5], legally obliged to redeem its banknotes in specie, regarded itself as obliged to buy gold back at any price, and to coin money at a loss and at considerable expense. To limit its losses, it forced the return of its banknotes, and ceased to put new notes into circulaZon. It was then obliged to cease to discount commercial bills. Provincial banks were in consequence obliged to follow the same course, and commerce found itself deprived at a stroke of the advances on which it had counted, be it to create new businesses, or to give a lease of life to the old. As the bills that businessmen had discounted came to maturity, they were obliged to meet them, and finding no more advances from the bankers, each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of producZon, a mulZtude of workers were without work. Many bankruptcies were declared among merchants and among bankers, who having placed more bills in circulaZon than their personal wealth could cover, could no longer find guarantees to cover their issues beyond the undertakings of individuals, many of whom had themselves become bankrupt... What they called a general [glut or] superabundance, was not a superabundance of commodiZes relaZvely to commodiZes, but a superabundance of all commodiZes relaZvely to money. What it amounted to was, that persons in general, at that parZcular Zme, from a general expectaZon of being called upon to meet sudden demands, liked beXer to possess money than any other commodity. Money, consequently, was in request, and all other commodiZes were in comparaZve disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parZng with their money, or coming under any new engagements to part with it. But the result is, that all commodiZes fall in price, or become unsaleable. When this happens to one single commodity, there is said to be a superabundance of that commodity; and if that be a proper expression, there would seem to be in the nature of the case no parZcular impropriety in saying that there is a superabundance of all or most commodiZes, when all or most of them are in this predicament...
John Stuart Mill (1844b): –
A commercial crisis is the recoil of prices, ayer they have been raised by speculaZon higher than is warranted by the state of the demand and of the supply. SpeculaZon is almost always set in moZon by something which affords apparent grounds for expecZng either an extra demand or a deficient supply. But the anZcipaZon may, in the first place, be erroneous; in the second, however raZonal it may be, the speculaZon (especially where the prospect of gain is considerable) is very likely to be overdone, each speculator conducZng his operaZons as if he alone knew the circumstances on which the hope of profit is grounded.... [P] aradoxical as it may appear, the largest purchases are oyen made at the highest price.... Then the recoil comes; and the price falls to a lower point than that from which it had risen... many of those who during the high price have contracted engagements, which they trusted to a further rise for giving them the means of fulfilling, are unable to hold on unZl the crisis is past, but must sell at any sacrifice.... When, however, as in 1825 and at several other periods in the present century, the opening of new markets, or some expected deficiency of supply extending to various important arZcles, has set speculaZon at work in several great departments at once, the spirit is apt to become general, and other commodiZes rise in price without any reasonable cause whatever. In such cases, the ulZmate revulsion is most extensive and calamitous. As long as the seasons vary, as markets fluctuate, and men miscalculate, or the passion of gain (as in gamblers) over-‐rides their calculaZons, so long will these alteraZons of ebb and flow, these ”[business] cycles," as Colonel Torrens calls them, "of excitement and depression,” conZnue...
Improvements in Macroeconomic Theory since 1844 • A recogniZon that what assets are “cash,” are “money” is endogenous—the “commercial crisis” is not just a rise in the demand for but a big fall in the supply of cash or of assets perceived as good as cash • A recogniZon that you do beXer when you do a three-‐ commodity model—safe money, risky bonds, and goods and services—than just a two-‐commodity model of money and goods and services • The “credit channel” • Work on aggregate supply:
– And on feedback from aggregate supply down to aggregate demand...
The Pre-‐WWI Order (According to Keynes) •
John Maynard Keynes, Economic Consequences of the Peace:
– What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the populaZon, it is true, worked hard and lived at a low standard of comfort.... But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and ameniZes beyond the compass of the richest and most powerful monarchs of other ages... – The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quanZty as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exerZon or even trouble, in their prospecZve fruits and advantages; or be could decide to couple the security of his fortunes with the good faith of the townspeople of any substanZal municipality in any conZnent that fancy or informaZon might recommend... – But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direcZon of further improvement, and any deviaZon from it as aberrant, scandalous, and avoidable. The projects and poliZcs of militarism and imperialism, of racial and cultural rivalries, of monopolies, restricZons, and exclusion, which were to play the serpent to this paradise, were liXle more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internaZonalizaZon of which was nearly complete in pracZce...
WWI and Ayer (According to Keynes) • John Maynard Keynes, Economic Consequences of the Peace:
– Very few of us realize with convicZon the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organizaZon by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundaZon we scheme for social improvement and dress our poliZcal pla~orms, pursue our animosiZes and parZcular ambiZons, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family. Moved by insane delusion and reckless self-‐regard, the German people overturned the foundaZons on which we all lived and built. But the spokesmen of the French and BriZsh peoples have run the risk of compleZng the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organizaZon, already shaken and broken by war, through which alone the European peoples can employ themselves and live.
Rebuilding the Gold Standard as Job #1, and Its Consequences • Second-‐rate countries before WWI were those that could not maintain the gold standard – Subject to instability – Subject to inflaZon
• WWI inflaZon had pushed everyone (save the U.S.) off the gold standard • Dilemmas of return:
– Run the system with many less reserves than it had proporZonal to spending • Surplus countries then want to hoard gold • Deficit countries then must deflate
– Or mammoth deflaZon – Or coordinated devaluaZon
• Credibility
– You have abandoned gold once, you can do it again – You have a different post-‐WWI electorate – Nothing worse than aXempZng to make a credible commitment to an incredible anchor
The Great Depression in the USA
Two Great Depressions • One in Europe, another in North America • United States close to being a closed economy – It does it to itself
• Europe interdependent – Different mechanisms of depression
• Our task: to understand them
The Coming of the Great Depression to America • A shock (Federal Reserve aXempts to “cool off” the stock market bubble by raising interest rates and discouraging loans) • Another shock (the stock market crash) • A vulnerability (consumer durables and their financing) • A recession • The collapse of the financial system • The Federal Reserve – High-‐powered money and interest rates – Lender-‐of-‐last-‐resort funcZon?
• Crowding out a private sector lender-‐of-‐last-‐resort?
– Response to European devaluaZons
• The Hoover administraZon
– Balance the budget – Jawboning the businessmen – “Prosperity is just around the corner”
• The Great Depression
New Deals
The Great Depression in Europe • The gold standard and the Great Depression in Europe • The experience of the gold bloc • The experience of Britain • The experience of Germany – Hilferding, Bruening, and company – Hitler
• PoliZcal consequences of the Great Depression
New Deals II
Consequences of the Great Depression • Keynesianism
– And monetarism too
• Mixed Economies
– Size of the public sector – Public/private partnership – Public ownership and guidance
• Social Democracy – Welfare – Social insurance – UnionizaZon