The Great Depression

Presented By:
Aaron Deutch
Sawyer Goldberg
Alex Ottenheimer
Camille Fougerol
Effects on Output
Output in the United
States fell by 28%.

European output fell by

7% overall.

Germany fell by 15%, the

worst in Europe.
Effects on Employment
Industrial unemployment in 1932
averaged 36% in the U.S., 22% in the
U.K., and 43% in Germany

Over 6 million people unemployed in

Germany in 1933, and over 12 million
people in the U.S.
Presentation Order
Gold Standard

International Economic
Order

Policy reaction to the

depression

Theories to the causes of

the depression
Gold Standard
Origins of the Crisis
Many see the Great Depression as a direct consequence
of the First World War.

Most countries feared inflation and currency instability and

believed that following their previous economic practices
would bring them back to normal.

Over time, most people have blamed the Wall Street

Crash as the most important aspect triggering the Great
Depression.

Recently, people have credited the way the restoration of

the gold standard and the policy regimes that emerged as
the way the depression was transmitted worldwide.
The Gold Standard Before the
War
The success of the gold standard before the war depended on
fortuitous circumstances.

The lack of big movements in imports, exports, and interest rates,

economic stability, and price flexibility within industrialized nations
prevented serious disequilibrium in international payments systems.

In 1922, it was agreed in a conference in Genoa that trade expansion

and stabilization of currencies would be best achieved with an
international system under the gold standard.

This was supposed to bring less fear of exchange rate instability or

reckless fiscal policies.
Going Back to the Gold Standard

Most countries were massively burdened with public debt, with the
U.S. debt increasing the most, by a factor of 19.

Britain and Italy decided to embark upon deflation and lower

expenditures to reduce prices towards US levels to enable a swift
return to gold.

France ignored typical preconditions for returning to gold, only to end

up with high inflation and a rapidly depreciating currency.

Germany resorted to money creation, which ended up fueling

inflation, ruined consumer confidence, increased uncertainty, and
ensured a decline in industrial production.

By 1924, stability was determined to depend upon returning to pre-

war ways.
Problems with the Gold Standard

There were fundamental weaknesses of the restored gold standard

that would have long-term implications.

Countries were limited in their capacity to embark upon

expansionary policy. With National and European economies more
interconnected, particular countries would violate the rules.

Gold reserves were in short supply.

Problems with Banks
Central banks, which were meant to control international monetary policy and
sustain confidence, feared inflation. This led to the flow of “hot money”,
risking further financial instability.

The French and American banks were not supportive of the fixed-exchange
system, hoarding half of the world’s total gold supply. They continued to
enjoy the benefits of gold inflows, but did not lower interest rates or
encourage a gold outflow.

Countries that overvalued gold or had a shortage of gold suffered as a result.

International Economic Order in
1929-1930
Three key elements contributed to the Great Depression

International
indebtedness

Decline in Gold standard

global trade ideology
 A worrying international indebtedness
European countries
heavily dependant upon American economy
worryingly indebted
Confidence of investors and consumers
booming stock market speculation

August 1929: Fed raised its discount rate

Wall Street Crash
Indebted nations followed
 deflationary pressures International
indebtedness

Defence of
Decline in the gold
global trade Standard
ideology
 The defence of the gold standard ideology
deflation
wage cuts dictated by Gold standard and
rising unemployment foreign policy (Germany)

expansion of money
supply
banned, despite some attempts
raising employment
raising consumption

International
indebtednes
s

Defence of
Decline in the gold
global trade Standard
ideology
 Decline in global trade
post-WWI
self-sufficient and protectionist world (Smoot-Hawley tariff)

vicious circle
Primary Producing countries vs Europe and the US

Internationa
l
indebtedne
ss

Defence of
Decline in the gold
global trade Standard
ideology
 June 1930: The Smoot-Hawley Tariff Act

1920s: crisis in the agricultural sector

 raised tariff barriers

But soon in all sectors of the economy:

nearly 900 American import duties!
More a consequence than a cause

The act “added poison to the emptying well of global trade” (The Economist, Dec 18th 2008)
Creditanstalt: May 1931

Largest bank in Austria

60% of Austrian industry was

dependent on Creditanstalt

Run on the currency

(schilling)

Rescue of Creditanstalt cost

9% of Austria’s GNP
 Germany
German banks had short
term indebtedness

Germans began run on bank,

foreigners followed

1931 loans from USA, France,

Britain->too little too late
 USA
Wall Street Crash in 1929, and series
of banking panics in 1930-1933

Public turned deposits into cash

Not all banks were part of the

Federal Reserve System

Federal reserve did not provide

liquidity
 USA
Hoover had expansionary fiscal policy,
then reversed course

Hoover tried to balance budget to

sustain bond prices

FDR in 1933 promised to reduce

federal expenditure and balance
budget
 Reduction in Production
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
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Policy Reactions to the Great
Depression
Reacting to the Depression
Policy Responses
Japan’s Recovery
Devaluing Currency
Germany and the Nazis
France
Britain
Government Attention
Policy Responses
Myopic Policy Responses
Hawley Smoot Tariff
Trade
Japan’s Recovery
Expansionary Public Expenditure

Relaxed Monetary Policy

Exports
Currency Devaluation
Faster Recovery

Acceptance of Unbalanced Budgets

Redistribution of Income
Germany and the Nazis
Nazi Deficit Spending

Use of Political Dictation

Increase in Public
Expenditure
 France
Contractionary Fiscal Policy

Cut Public Expenditures

Raise Taxes
 Britain
Sterling as a Reserve and Transaction
Currency

Promotion of Capital Exports

Orthodox Fiscal Policy

Government Attention
Focused on Existing Industrial Structure

Attention Shifted from Efficiency to

Cartelization
Theories to the Causes of the
Great Depression
Monetarist
Friedman and Schwartz
published in 1963

Federal Reserve could have

prevented depression
1929
 1933
33% reduction in money supply
International Trade: 1929

USA Britain
Deflation
Lower prices in the US increase
foreign demand for US goods

Poorer people in the US reduce

demand for foreign goods
International Trade: 1931

USA Britain
Monetary Base
Comparison

Ben
Bernanke
 Austrian
Rothbard, Hayek, Mises

Mises in 1929, "A great crash is coming,

and I don't want my name in any way
connected with it."

Federal Reserve set interest rates below

the market level, causing bad investments
to be made

These bad investments began to come

undone in 1929
Keynesian
General Theory-1936

Classical explanation is wrong

Low interest rate only drives

investment if there is some optimism
from demand
The Great Depression

Presented By:
Aaron Deutch
Sawyer Goldberg
Alex Ottenheimer
Camille Fougerol