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This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event-studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence—both quantitative and narrative—that indicates that the shift in inflation expectations played a causal role in stimulating the recovery.

Several key episodes in the 100-year history of the Federal Reserve have everal key episodes in the 100-year history of the Federal Reserve have been referred to in various contexts with the adjective “Great” attached to been referred to in various contexts with the adjective “Great” attached to them: the Great Experiment of the Federal Reserve’s founding, the Great them: the Great Experiment of the Federal Reserve’s founding, the Great Depression, the Great Infl ation and subsequent disinfl ation, the Great Moderation, Depression, the Great Infl ation and subsequent disinfl ation, the Great Moderation, and the recent Great Recession. Here, I’ll use this sequence of “Great” episodes and the recent Great Recession. Here, I’ll use this sequence of “Great” episodes to discuss the evolution over the past 100 years of three key aspects of Federal to discuss the evolution over the past 100 years of three key aspects of Federal Reserve policymaking: the goals of policy, the policy framework, and accountability Reserve policymaking: the goals of policy, the policy framework, and accountability and communication. The changes over time in these three areas provide a useful and communication. The changes over time in these three areas provide a useful perspective, I believe, on how the role and functioning of the Federal Reserve have perspective, I believe, on how the role and functioning of the Federal Reserve have changed since its founding in 1913, as well as some lessons for the present and for changed since its founding in 1913, as well as some lessons for the present and for the future. the future.

This paper examines the effects of the Reconstruction Finance Corporation's (RFC) loan and preferred stock programs on bank failure rates in Michigan during the period 1932-1934, which includes the important Michigan banking crisis of early 1933 and its aftermath. Using a new database on Michigan banks, we employ probit and survival duration analysis to examine the effectiveness of the RFC's loan program (the policy tool employed before March 1933) and the RFC's preferred stock purchases (the policy tool employed after March 1933) on bank failure rates. Our estimates treat the receipt of RFC assistance as an endogenous variable. We are able to identify apparently valid and powerful instruments (predictors of RFC assistance that are not directly related to failure risk) for analyzing the effects of RFC assistance on bank survival. We find that the loan program had no statistically significant effect on the failure rates of banks during the crisis; point estimates are sometimes positive, sometimes negative, and never estimated precisely. This finding is consistent with the view that the effectiveness of debt assistance was undermined by some combination of increasing the indebtedness of financial institutions and subordinating bank depositors. We find that RFC's purchases of preferred stock - which did not increase indebtedness or subordinate depositors - increased the chances that a bank would survive the financial crisis. We also perform a parallel analysis of the effects of RFC preferred stock assistance on the loan supply of surviving banks. We find that RFC assistance not only contributed to loan supply by reducing failure risk; conditional on bank survival, RFC assistance is associated with significantly higher lending by recipient banks from 1931 to 1935.

I examine the causal effect of bank failures during the Great Depression using the quasi-experimental setup of Richardson and Troost (2009). The experiment is based on Mississippi being divided into two Federal Reserve districts, which followed different policies for liquidity provision. This translated into variation in bank failures across the state. Employing a plant-level sample from the Census of Manufactures, I find that banking failures had a negative effect on revenue stemming from a fall in physical output. I find no effect on employment at the plant-level and a large decline at the county-level. (JEL E32, E44, G21, G33, N12, N22, N92)

The hundredth anniversary of the founding of the Federal Reserve is a natural time to reflect on the record of US monetary policy. It is widely agreed that this record is far from perfect, and that there have been some major failures of monetary policy over the past century. Our thesis is that overly pessimistic views about the power of monetary policy have been a critical source of these failures. There is little doubt that the opposite problem—an overinflated belief in the power of monetary policy—has also contributed to important policy errors. Most famously, policymakers in the mid-1960s believed that they faced a longrun inflation-unemployment trade-off, and thus that monetary policy could move the economy to a sustained path of very low unemployment and low inflation. This belief led them to pursue highly expansionary policy, starting the economy down the road to the inflation of the 1970s (for example, Romer and Romer 2002 and Primiceri 2006). The record of such errors has led some to argue that perhaps the most impor tant attribute of a successful central banker is humility (for example, Booth 2012). In this paper, we present evidence that an unduly pessimistic view of what monetary policy can accomplish has been a more impor tant source of policy errors and poor outcomes over the history of the Federal Reserve. At various times in the 1930s, faced with the Great Depression, Federal Reserve officials believed that the power of monetary policy to combat the downturn or stimulate recovery was minimal. In

We examine the labour-market experience of the UK and the US in the recessions of the early 1920s and the early 1930s and the subsequent recoveries. These were deep recessions, comparable to that of 2008--9, but the recoveries were very different. In the UK the recovery of the 1920s was incomplete, but that of the 1930s was rather less protracted than in the US. By contrast the US experienced very strong recovery in the 1920s but weaker recovery from the much deeper recession of the 1930s. A key ingredient to understanding these patterns is the interaction between economic shocks and labour-market institutions. Here we survey the large literature on interwar labour markets to identify the key elements that underpinned labour-market performance. We find that developments in wage-setting institutions and in unemployment insurance inhibited a return to full employment in interwar Britain, while, in the US, New Deal legislation impeded labour-market adjustment in the 1930s. We conclude with an assessment of the policy responses to labour-market crises in the past and in the present. Copyright 2010, Oxford University Press.

In the discussion of our contemporary economic disease, the Great Depression analogy refuses to go away. Almost every policy-maker referred to conditions that had ‘not been seen since the Great Depression’, even before the failure of Lehman. Some even went further – the Deputy Governor of the Bank of England notably called the crisis the worst ‘financial crisis in human history’. In its April 2009World Economic Outlook, the IMF looked explicitly at the analogy not only in the collapse of financial confidence, but also in the rapid decline of trade and industrial activity across the world. In general, history rather than economic theory seems to offer a guide in interpreting wildly surprising and inherently unpredictable events. Some observers, notably Paul Krugman, have concluded that a Dark Age of macroeconomics has set in.

This paper provides a survey of the Great Depression comprising both a narrative account and a detailed review of the empirical evidence, focusing especially on the experience of the United States. We examine the reasons for and flawed resolution of the American banking crisis, as well as the conduct of fiscal and monetary policy. We also consider the pivotal role of the gold standard in the international transmission of the slump and leaving gold as a route to recovery. Policy lessons for today from the Great Depression are discussed, as are some implications for macroeconomics. Copyright 2010, Oxford University Press.

What ended the Great Depression in the United States? This paper suggests that the recovery was driven by a shift in expectations. This shift was triggered by President Franklin Delano Roosevelt’s (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending which helped make his policy objective credible . The key to the recovery was the successful management of expecta tions about future policy . Roosevelt’s rise to power is modeled as a policy regime change , as in Thomas Sargent (1983) and Peter Temin and Barry Wigmore (1990). This paper formalizes Temin and Wigmore’s argu ment in a repeated game setting using a dynamic stochastic general equilibrium (DSGE) model and argues that the regime change can account for the recovery. In the model, a regime change means the elimination of certain “policy dogmas” that constrain the actions of the government. The regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy. This coordination ended the Great Depression by engineering a shift in expectations from “contractionary” (i.e., the private sector expected future economic contrac tion and deflation) to “expansionary” (i.e., the public expected future economic expansion and inflation). The expectation of higher future inflation lowered real interest rates, thus stimulating demand, while the expectation of higher future income stimulated demand by raising permanent income.

We document the existence of a "missing deflation" puzzle during the U.S. Great Depression (1929-1941) and show that the solution of this puzzle lies in Hoover policies. Herbert Hoover made multiple public announcements asking firms not to cut wages, most of which complied. The consequences of such a policy are ambiguous since it affects aggregate fluctuations via two channels: as a negative aggregate supply shock this policy decreases output while increasing inflation, but more inflation can postpone the occurrence of a liquidity trap when the economy is hit by a large negative aggregate demand shock. We develop and estimate a medium scale New Keynesian model to measure the effect of Hoover policies during the Great Depression and we find evidence that without such polices the U.S. economy would have ended up in a liquidity trap two years before it actually did, suffering an even deeper recession with a larger deflation. In addition, the welfare effects of Hoover policy are found to be clearly positive.

The paper discusses the interpretation of the Great Depression and the policy decision making by four Harvard economists: Lauchlin B. Currie, Jacob Viner, John H. Williams, and Harry D. White. All were eminent scholars in the field of monetary and international economics, and were deeply involved in policy decisions during the New Deal. We will discuss how their Harvard training provided them with a common methodological and analytical perspective, and how this common perspective translated into specific policies when they moved from the academia to public service in the US administration. Their interpretation of the causes of the Great Depression and their policy proposals show the eclectic approach that these four economists had to monetary, fiscal, and economic analysis, and the points of contact with both the US monetarist tradition and the work of John Maynard Keynes. At the same time, this very eclecticism, far from making them part of the monetarist or the Keynesian schools, characterized them as a group of their own: a network of scholars who, by virtue of their studies and the evolution of their professional careers, developed a style of analysis and policy prescriptions that deeply influenced the nature of the New Deal.

The paper investigates the notion that preference shocks play a central role in our understanding of the Great Depression. I identify a series of universally large negative shocks which destabilized the U.S. during the 1930s. When the artificial economy is paired with variable capital utilization and mildly increasing returns to scale in production, it is able to account for most of the decline in economic activity and it is able to predict realistic persistence.

This paper studies a dynamic stochastic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the public fs beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the U.S. Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the United States in 1937?38, one of the sharpest recessions in U.S. economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937, the U.S. policymakers faced economic conditions that are similar in some respects to those confronted by Japanese policymakers in the first half of 2006.

Canada suffered a major depression from 1929 to 1939. In terms of output it was similar to the Great Depression in the United States. However, total factor productivity (TFP) in Canada did not recover relative to trend, while in the United States TFP had recovered by 1937. We find that the neoclassical growth model, with TFP treated as exogenous, can account for over half of the decline in output relative to trend in Canada. In contrast, we find that conventional explanations for the Great Depression—monetary shocks, terms of trade shocks, and labor market and competition policies—do not work for Canada. Journal of Economic Literature Classification Numbers: E30, N12, N42.

This paper examines the ability of a simple stylized general equilibrium model that incorporates nominal wage rigidity to explain the magnitude and persistence of the Great Depression in the United States. The impulses to our analysis are money supply shocks. The Taylor contracts model is surprisingly successful in accounting for the behavior of major macroaggregates and real wages during the downturn phase of the Depression, i.e., from 1929:3 through mid-1933. Our analysis provides support for the hypothesis that a monetary contraction operating through a sticky wage channel played a significant role in accounting for the downturn, and also provides an interesting refinement to this explanation. In particular, both the absolute severity of the Depression's downturn and its relative severity compared to the 1920-21 recession are likely attributable to the price decline having a much larger unanticipated component during the Depression, as well as less flexible wage-setting practices during this latter period. Another finding casts doubt on explanations for the 1933-36 recovery that rely heavily on the substantial remonetization that began in 1933.

Bertil Ohlin was a most active commentator on current economic events in the interwar period, combining his academic work with a journalistic output of an impressive scale. He published more than a thousand newspaper articles in the 1920s and 1930s, more than any other professor in economics in Sweden. Here we have collected ten articles by Ohlin, translated from Swedish and originally published in Stockholms-Tidningen, to trace the evolution of his thinking during the Great Depression of the 1930s. These articles, spanning roughly half a decade, bring out his response to the stock market crisis in New York in 1929, his views on monetary policy in 1931, on fiscal policy and public works in 1932, his reaction to Keynes' ideas in 1932 and 1933 and to Roosevelt's New Deal in 1933, and, finally, his stand against state socialism in 1935. At the beginning of the depression, Ohlin was quite optimistic in his outlook. But as the downturn in the world economy deepened, his optimism waned. He dealt with proposals for bringing the Swedish economy out of the depression, and reported positively on the policy views of Keynes. At an early stage, he recommended expansionary fiscal and monetary policies including public works. This approach permeated the contributions of the young generation of Swedish economists arising in the 1930s, eventually forming the Stockholm School of Economics. He was critical of passive Manchester liberalism, “folded-arms evangelism”, as well of socialism while promoting his own brand of “active social liberalism”.

This paper puts John Maynard Keynes’ "The General Theory of Employment, Interest and Money" into its historical context, both in terms of economic history and in terms of the history of economics. It discusses the post-World War I period as background to the General Theory, looks at the influence of other economists of the period on the evolution of Keynes’ thought and considers the parallels between the post-World War period and the post-Napoleonic War period, when Ricardo and Malthus were debating issues very similar to the ones with which Keynes was wrestling.

For many, Friedman and Schwartz’s Monetary History of the United States (1963) is synonymous with the notion that monetary contraction and errors by the Federal Reserve caused the Great Depression. But this quick summary both sells the book short and oversells its findings about the 1930s. It sells the book short because the contributions of the Monetary History extend far beyond the Depression. Friedman and Schwartz use an extensive reading of the historical record over nearly a century to identify times when the money supply moved for reasons unrelated to current or prospective macroeconomic conditions. That output moved in the same direction as money following these “crucial experiments” remains some of the strongest evidence we have that monetary shocks have real effects. But saying the book proves that monetary shocks caused the Depression is a stretch. Of the monetary shocks Friedman and Schwartz identify, those early in the Depression are arguably the most tenuous. And crucially, the book provides scant discussion of how monetary shocks affect the economy. This weakness is most pressing in the analysis of the Depression. Because nominal interest rates fell precipitously early in the Depression and remained low throughout, it is hard to appeal to the standard transmission mechanism operating through the nominal cost of credit. This paper seeks to fill in the missing transmission mechanism in Friedman and Schwartz’s explanation of the Depression. In Section I, we describe previous work showing that falling

This working paper examines monetary aggregates as means of explaining economic activity. Comparative analysis of the Great Depression and the years 2007-11 is used to test the explanatory power of monetary aggregates in accordance with their use in monetarist explanations of the Great Depression. A conclusion from this analysis is that monetarist theory can structure monetary-aggregate data to produce useful insights about economic activity for the years 2007-11.

In the summer of 1931, a financial crisis began in Austria, spread to Germany, forced Britain to abandon the gold standard, crossed the Atlantic, and afflicted financial institutions in the United States. This article describes how banks in New York City, the central money market of the United States, reacted to this trans-Atlantic trauma. New York's money-center banks anticipated the onset of a financial crisis, prepared for it by accumulating substantial reserves, and during the European crisis, continued business as usual. New York's leading bankers deliberately and collectively decided on the business-as-usual policy in order to minimize the impact of the panic in the United States. New York banks’ behavior changed only after the Federal Reserve raised discount rates to stem gold outflows in the fall of 1931.

Conventional wisdom contends that fiscal policy was of secondary importance to the economic recovery in the 1930s. The recovery is then connected to monetary policy that allowed non-sterilized gold inflows to increase the money supply. Often, this is shown by measuring the fiscal multipliers, and demonstrating that they were relatively small. This paper shows that problems with the conventional measures of fiscal multipliers in the 1930s may have created an incorrect consensus on the irrelevance of fiscal policy. The rehabilitation of fiscal policy is seen as a necessary step in the reinterpretation of the positive role of New Deal policies for the recovery.

This paper examines Jacob Viner's contribution to the debate and the policy decision-making concerning international monetary policy from the Great Depression to the Bretton Woods agreements. An outstanding member of the so-called 'early Chicago School of Political Economy', Viner was actively engaged in the debate over the causes and cures of the Depression, emphasizing the important role international economic problems played in producing its onset and in reinforcing its duration. During the 1930s Viner was an outspoken supporter of international monetary cooperation, set up to secure exchange rates stability, which he regarded as a paramount factor in restoring business confidence and fostering recovery. As a close assistant to Secretary of the Treasury Henry Morgenthau, Jr, Viner was able to exert a positive influence on the administration's foreign economic policy, from the Gold Stabilization Act of 1934 to the Tripartite Agreement of 1936. Although not directly involved in the Bretton Woods Conference, he played a role in preparing the ground for the establishment of multilateral agencies such as the International Monetary Fund and the International Bank for Reconstruction and Development. By means of his unpublished papers and other archival sources, as well as his writings, I shall examine Viner's analysis of the Great Depression, his contribution to the debate over American foreign economic policy and his work as economic adviser from 1930 to 1945. © 2011 Taylor & Francis.

T he economic cataclysm of the 1930s was an international phenomenon experienced by countries in all parts of the globe. Countries as diverse as the United States, Germany, Chile, and Japan all experienced significant depressions in the 1930s. Thus, the title of Charles Kindleberger's classic book The World in Depression (1973) captures an important feature of the Great Depression. These international aspects, especially the importance of the gold standard in causing the downturn and transmitting depression from one country to another, have been emphasized in recent years in excellent books by Peter Temin (1989) and Barry Eichengreen (1992). These books have rightly received widespread attention and have successfully changed the focus of much analysis of the Great Depression from the United States to the world economy. While such a change from American provincialism is surely healthy and warranted, adopting an international perspective on the Great Depression risks losing sight of the many ways in which the U.S. depression differed in timing and severity from depressions elsewhere. More important, it may obscure the many uniquely American causes of America's Great Depression. This paper examines the ways in which the U.S. experience during the 1930s resembled that of other countries in some regards, and fundamentally differed in other aspects. I also evaluate the evidence on the causes of the Great Depression in the United States and the sources of the eventual recovery. I suggest that the path of American output and unemployment before 1931 can be explained quite well with only domestic factors. Even after 1931

To a first approximation, the question of how the Great Depression spread from country to country is short and straightforward: fixed exchange rates under the gold standard transmitted negative demand shocks. The first half of this paper will describe current thinking about the relationship between the gold standard and the Great Depression. The second half of the paper will look at a phenomenon not included in this first approximation: financial crises. Many have noted that banking panics and currency crises are bad for national economies, but few have tried to model their international spread.

This paper is about the size of fiscal multipliers and the sources of recovery from the Great Depression. Its contributions begin with a new quarterly data set for the interwar period that allows development of a VAR model of the U. S. economy over the period 1920-41. The quarterly data facilitate an estimate of the growth rate and level of potential real GDP, and this in turn allows us to date the end of the Great Depression as the period between 1939:Q1, when the output gap was 21.9 percent, and 1941:Q4, when the output gap was -1.3 percent. By using VAR dynamic forecasting and examining the effect of innovations to each variable individually, this paper’s baseline result is that 89.1 percent of the 1939:Q1-1941:Q4 recovery can be attributed to fiscal policy innovations, 34.1 percent to monetary policy innovations and the remaining -23.2 percent to the combined effect of the basic VAR dynamic forecast and innovations in non-government components of GDP (N). The paper attributes the negative innovations of N in the second half of 1941 to capacity constraints. Traditional Keynesian multipliers assume that there are no capacity constraints to impede a fiscal-driven expansion in aggregate demand. On the contrary, we find ample evidence of capacity constraints in 1941, particularly in the second half of that year. As a result our preferred government spending multiplier (which starts in 1940:Q2 and subtracts out the forecasts of the no-shock basic VAR model) is 1.80 when the time period ends in 1941:Q2 but only 0.88 when the time period ends in supply-constrained 1941:Q4. Only the 1.80 multiplier is relevant to situations like 2009-10 when capacity constraints are absent across the economy. Two sets of new insights emerge from a review of contemporary print media. We document that the American economy went to war starting in June 1940, fully 18 months before Pearl Harbor, in contrast to the widespread assumption in the previous literature that Pearl Harbor marked the beginning of WWII for the United States. We also detail the bifurcated nature of the 1941 economy, with excess capacity in its labor market but capacity constraints in many of the key manufacturing industries. By July 1941, the American economy was in a state of perceived national emergency. We not only show in two alternative sets of quarterly data that private consumption and investment actually declined in late 1941, but we also explain why. Among these examples, shortages of steel prevented auto companies from satisfying demand, and shortages of aluminum needed for aircraft production suppressed production even of the most humble of household objects, like tea kettles and zippers.

The prominent role of monetary policy in the U.S. interwar depression has been conventional wisdom since Friedman and Schwartz [1963]. This paper presents evidence on both the surprise and the systematic components of monetary policy between 1929 and 1933. Doubts surrounding GDP estimates for the 1920s would call into question conventional VAR techniques. We therefore adopt the FAVAR methodology of Bernanke, Boivin, and Eliasz [2005], aggregating a large number of time series into a few factors and inserting these into a monetary policy VAR. We work in a Bayesian framework and apply MCMC methods to obtain the posteriors. Employing the generalized sign restriction approach toward identification of Amir Ahmadi and Uhlig [2008], we find the effects of monetary policy shocks to have been moderate. To analyze the systematic policy component, we back out the monetary policy reaction function and its response to aggregate supply and demand shocks. Results broadly confirm the Friedman/Schwartz view about restrictive monetary policy, but indicate only moderate effects. We further analyze systematic policy through conditional forecasts of key time series at critical junctures, taken with and without the policy instrument. Effects are again quite moderate. Our results caution against a predominantly monetary interpretation of the Great Depression.

This paper examines the role of currency and banking in the German financial crisis of 1931 for both Germany and the U.S. We specify a structural dynamic factor model to identify financial and monetary factors separately for each of the two economies. We find that monetary transmission through the Gold Standard played only a minor role in causing and propagating the crisis, while financial distress was important. We also find evidence of crisis propagation from Germany to the U.S. via the banking channel. Banking distress in both economies was apparently not endogenous to output or monetary policy. Results confirm Bernanke's (1983) conjecture that an independent, non-monetary financial channel of crisis propagation was operative in the Great Depression.

Since the current recession began in December 2007, New Deal legislation and its effectiveness have been at the center of a lively debate in Washington. This paper emphasizes some key facts about two kinds of policy that were important during the Great Depression and have since become the focus of criticism by new New Deal critics: (1) regulatory and labor relations legislation, and (2) government spending and taxation. We argue that initiatives in these policy areas probably did not slow economic growth or worsen the unemployment problem from 1933 to 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere. To substantiate our case, we cite some important economic benefits of New Deal–era laws in the two controversial policy areas noted above. In fact, we suggest that the New Deal provided effective medicine for the Depression, though fiscal policy was not sufficiently countercyclical to conquer mass unemployment and prevent the recession of 1937–38; 1933’s National Industrial Recovery Act was badly flawed and poorly administered, and the help provided by the National Labor Relations Act of 1935 came too late to have a big effect on the recovery.

New data reveals that bank distress peaked in New York City, at the center of the United States money market, in July and August 1931, when the banking crisis peaked in Germany and before Britain abandoned the gold standard. This paper tests competing theories about the causes of New York's banking crisis. The cause appears to have been intensified regulatory scrutiny, which was a delayed reaction to the failure of the Bank of United States, rather than the exposure of money-center banks to events overseas.

Most treatments of the Great Depression have focused on its onset and its aftermath. In contrast, we take a unified view of the interwar period. We look at the slide into and the emergence from the 1920-21 recession and the roaring 1920s boom, as well as the slide into the Great Depression after 1929, and attempt to explain these phenomena in a unified framework. The model framework combines monopolistic product market competition with search frictions and bargaining in the labour market, allowing for both individual and collective (unionized) wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. The pro-union provisions of the Clayton Act of 1914 contributed to the slide in asset prices and the depression of 1920-21, while a series of tough anti-union Supreme Court decisions in late 1921 and 1922 coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark court decisions in favour of trade unions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, made the economy increasingly susceptible to collapsing profit expectations. We model the onset of the great depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices.

We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the Great Depression after 1929 in a unified framework. The model combines monopolistic product market competition with search frictions in the labor market, allowing for both individual and collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. A shift from individual to collective bargaining presents as a recession, involving declines in output and asset values, and increases in unemployment and real wages. The pro-union provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I, leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices and moderate increases in real wages.

This paper develops a new analysis of the U. S. economy in the 1920s that is illuminated by contrasts with the 1990s, and it also re examines the causes of the Great Depression. In both the 1920s and the 1990s the acceleration of productivity growth linked to the delayed effects of previously invented 'general purpose technologies' stimulated an increase in fixed investment that became excessive and proved to be unsustainable, while the productivity acceleration helps to account for low inflation in both decades. The uncanny parallel of the stock market boom, bubble, and collapse in 1995-2001 as in 1924-1930, reminds us that business cycles emerge from the complex interplay of multiple factors, not just one. Common elements between the two decades are overshadowed by differences, including the much larger share of agricultural output in the 1920s, the weakness of farm prices throughout the decade, and the role of collapsing farm prices in the pervasive post-1929 downward shift in aggregate demand. Another partly related difference was a high volatility of inventory accumulation that reflected the larger share of agriculture and manufacturing in the economy of the 1920s. Failures of public policy in the 1920s included the absence of deposit insurance, the unit-banking regulations that prevented the diversification of financial risk across regions, and the low margin requirements that exacerbated swings in stock market prices. Further, the 1920s witnessed the advent of protectionism and the sharp curtailment of immigration. The stability of the American economy after the 2000-01 collapse of investment and the stock market proves that good public policy matters, going beyond the narrowly defined operations of monetary and fiscal policy. Such highly diverse policies as banking regulation, deposit insurance, margin rules, reduction of tariffs, and loose restrictions on immigration all combine to make today's American economy more stable and less fragile than in the 1920s.

Recent years have witnessed a revival of interest in the Great Depression of the 1930s. Among the differing new interpretations, the real business cycle (RBC) approach is particularly significant. It represents an outstanding methodological innovation in trying to cast the Great Depression within an ‘equilibrium’ framework. This paper critically reviews the RBC interpretation of the Great Depression, clarifying its theoretical and methodological foundations, and paving the way for future assessments of its validity.

This paper argues that the banking crises in the United States in the early 1930s were similar to the “twin crises” -- banking and balance of payments crises -- which have occurred in developing countries in recent years. The downturn that began in 1929 undermined banks that had made risky loans in the twenties. The deflation that followed further weakened the banks, especially in rural areas where deflation in prices and incomes was the greatest. Depositors in those areas began transferring their deposits to banks they regarded as safer, or purchasing bonds. These “silent runs,” essentially a capital flight, have been neglected in many accounts of the banking crises. But evidence from the Gold Settlement Fund (which recorded interregional gold movements) and from regional deposit movements suggests that silent runs were important, especially in the crucial year 1930. When the crisis worsened, state and local authorities began declaring “bank holidays,” which limited the right of depositors to make withdrawals, a movement that culminated in the declaration of a national bank holiday by President Roosevelt. In retrospect the policy advocated periodically by the Federal Reserve Bank of New York, the purchase of government bonds on the open market, was right for the country as a whole. But a majority of the Governors of the other Federal Reserve Banks were opposed. Some opponents of open market purchases thought they would benefit the stock market without contributing significantly to the revival of business in the interior. The result was a minimalist policy that led to an unprecedented financial and economic collapse.

Contemporary observers viewed the recession that began in the summer of 1929 as nothing extraordinary. Recent analyses have shown that the subsequent large deflation was econometrically forecastable, implying that a driving force in the depression was the high expected real interest rates faced by business. Using a neglected data set of forecasts by railroad shippers, we find that business was surprised by the magnitude of the great depression. We show that an ARIMA or Holt- Winters model of railroad shipments would have produced much smaller forecast errors than those indicated by the surveys. The depth and duration of the depression was beyond the experience of business, which appears to have believed that recovery would happen quickly as in previous recessions. This failure to anticipate the collapse of the economy suggests roles for both high real rates of interest and a debt deflation in the propagation of the depression.

The extreme levels of stock price volatility found during the Great Depression have often been attributed to political uncertainty. This Paper performs an explicit test of the Merton/Schwert hypothesis that doubts about the survival of the capitalist system were partly responsible. It does so by using a panel data set on political unrest, demonstrations and other indicators of instability in a set of 10 developed countries during the interwar period. Fear of worker militancy and a possible revolution can explain a substantial part of the increase in stock market volatility during the Great Depression.

We apply a dynamic general equilibrium model to the period of the U.S. Great Depression. In particular, we examine a modification of the real business cycle model in which the possibility of indeterminacy of equilibria arises. In other words, agents’ self-fulfilling expectations can serve as a primary impulse behind fluctuations. We find that the model, driven only by these measured sunspot shocks, can explain well the entire Depression era. That is, the decline from 1929 to 1932, the subsequent slow recovery, and the recession that occurred in 1937–1938.

This study assesses five common explanations for the large decline in U.S. total factor productivity (TFP) during the Great Depression: changes in capacity utilization, factor input quality, and production composition; labor hoarding; and increasing returns to scale. The study finds that these factors explain less than one-third of the 18 percent TFP decline between 1929 and 1933. The rest of the decline remains unexplained. The study offers a potential explanation: declines in organization capital, the knowledge firms use to organize production, caused by breakdowns in relationships between firms and their suppliers, for example. As some firms failed during the Depression, efficiency in surviving firms decreased; managers had to shift time away from production in order to establish new relationships, and firms had to shift to unfamiliar technologies that initially were operated inefficiently. This article originally appeared in the American Economic Review. (c) 2001 by the American Economic Association.

This paper entertains the notion that disturbances on the demand side play a central role in our understanding of the Great Depression. In fact, from Euler equation residuals we are able to identify a series of unusually large negative demand shocks that appeared to have hit the U. S. economy during the 1930s. This echoes the view originally promoted by Temin (1976). We apply these measured demand shocks to a dynamic general equilibrium model and find that size and sequence of shocks can generate a pattern of the model economy that is not unlike data. The model is able to account for the lion's share of the decline in economic activity and is able to exaggerate realistic persistence.

The impact of the Great Depression was milder in the South Atlantic states, more severe in the Mountain states, and surprisingly uniform across other regions of the country -despite large differences in industrial structure. Employing data on 20 manufacturing industries disaggregated by state, we analyze the relative contributions of industiy mix and location to regional variations in economic performance. Industrial composition had a significant impact on employment growth, with regions that concentrated on durable goods or inputs to construction faring worse than others. Long-run trends also mattered, and explain much of the South Atlantic's more favorable perfonnance. T he Great Depression was a global crisis, but its severity varied both spatially and sectorally. Within the United States, the severity of the 1929 to 1933 contraction differed substantially across regions and cities. Although all regions suffered considerable employment losses, the contraction was relatively milder and shorter in the South Atlantic states and more severe and prolonged in the Rocky Mountain states. The severity of the contraction also varied dramatically across sectors of the economy, with employment falling most in such industries as construction and durables manufacturing, more modestly in the service sector and nondurables manufacturing. The economic fates of regions and industries were clearly linked. Regional economies that were more dependent on cyclically volatile industries were bound to suffer a relatively more severe contraction of economic activity during the Depression. But there may also have been a local component to economic shocks or their propagation that affected all or most industries within a region. A wave of bank failures in a specific region, for example, was a disruption to the region's capital markets that could affect any industry that depended on local sources of capital.

eginning with Irving Fisher (1933) and John Maynard Keynes (1931 B [1963]), macroeconomists have argued that financial markets were important sources and propagators of decline during the Great Depression. Turning points during the Depression often coincided with or were preceded by dramatic events in financial markets: stock market collapse, waves of bankruptcy and bank failure, and contractions in the money stock. But the mechanism through which financial factors contributed to the Depression has been a source of controversy, as has been the relative importance of financial factors in explaining the origins and persistence of the Depression. This essay reviews the literature on the role of financial factors in the Depression, and draws some lessons that have more general relevance for the study of the Depression and for macroeconomics. I argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial-real links in the Depression followed a paradigm shift in economics. A central, neglected theoretical piece of the story for financial factors was the allocative effects of imperfections in capital markets, which can imply links between disruptions in financial markets and subsequent economic activity. Also, the increasing emphasis on learning and "path-dependence" in economics has helped to explain why financial shocks during the 1930s were so severe and why policy-makers failed to prevent the Depression.

The Great Depression is to economics what the Big Bang is to physics. As an event, the Depression is largely synonymous with the birth of modern macroeconomics, and it continues to haunt successive generations of economists. With respect to labor and labor markets, these facts evidently include wage rigidity, persistently high unemployment rates, and long-term joblessness. Traditionally, aggregate time series have provided the econometric grist for distinguishing explanations of the Great Depression. Recent research on labor markets in the 1930s, however, has shifted attention from aggregate to disaggregate time series and towards microeconomic evidence. This shift in focus is motivated by two factors. First, disaggregated data provide many more degrees of freedom than the decade or so of annual observations associated with the depression, and thus may prove helpful in distinguishin g macroeconomic explanations. Second, disaggregation has revealed aspects of economic behavior hidden in the time series that may be essential to their proper interpretation and, in any case, are worthy of study in their own right. Although the substantive findings of recent research are too new to judge their permanent significance, I believe that the shift towards disaggregated analysis is an important contribution. The paper begins by reviewing the conventional statistics of the United States labor market during the Great Depression and the paradigms to explain them. It then turns to recent studies of employment and unemployment using disaggregated data of various types. The paper concludes with discussions of