1
The Great Depression (lesson 11)
Based on Cameron and Neal (2016), ch. 14
Great Depression: onset and propagation
World price, exports and production decreased
The Great Depression caused a series of effects interacting with each other to form a vicious spiral
Fall in production -> rise in unemployment -> fall in demand -> price decline -> further output fall
The banking sector crisis piled up trouble:
• as debtors became increasingly unable to repay their debt, banks
• called in loans ⟶ trouble for borrowers
• faced a surge in fund withdrawals by depositors ⟶ liquidity/solvency threat
• ultimately often failed ⟶ net loss for the economy
In Europe the crisis became serious in 1931 when financial panic spread following the default of the
Austrian Credit Anstalt and the subsequent German currency crisis .
, 2
By September 1931, Britain was driven off gold.
At that point many countries abandoned gold and by 1933 (London Monetary Conference) the international
monetary system broke up forming 3 main currency areas:
• the sterling area
• the dollar area
• the gold bloc
Policy responses to the depression
In the deep of the depression, stopping price from falling further – i.e. ending deflation – became a major
concern for governments.
A number of policy responses were aimed at bringing prices and business back to normal, but there was
little governments could do under gold standard rules, requiring:
• Balanced budgets (little room for fiscal measures)
• Balanced international accounts (little room for monetary easing)
The gold standard acted as a powerful mechanism of transmission.
In the early years of the depression, responses in line with gold standard mentality did a lot to make the
situation worse and the crisis last longer.
Examples of ‘policy mistakes’:
• Federal Reserve raised the discount rate in 1931
• US president Hoover’s attempt to balance the budget in 1932
• France adherence to gold through 1936
• German chancellor Bruning balanced‐budget policies in 1931‐32
As a rule, countries that remained on gold performed worse in the 1930s than countries that went off gold
at an early stage of the depression.
Countries that stayed on gold typically resorted to measures leading to the disintegration of world trade and
de‐globalization:
• protectionism increased dramatically
• controls on international capital movements
• clearing agreements to limit use of gold or international currencies in international transactions
• competitive devaluations to increase exports, etc.
Would an international solution have been possible ?
It would have if FR, UK and US had agreed on a coordinated policy of monetary stimulus but at the London
World Economic and Monetary Conference (1933) each country pursued its own interest and no agreement
could be reached on
• monetary stabilisation
• ‘reflation’ to revive prices.
, 3
The great depression #2 (lesson 12)
Based on Cameron and Neal (2016), ch. 14
The rise of the state
The Great Depression ultimately proved that markets were not capable of self‐regulation.
Throughout the depression years the market mechanism alone could not redress the situation, revive prices,
reduce unemployment, bring demand back: markets were prone to failure.
The state then stepped in using monetary policy and fiscal expansion.For this to happen the old liberal
creed – based on no intervention of the state in economic matters – had to be abandoned.
Countries experimented with new policies that were diverse, yet all involved a degree of state intervention.
The US economy under FD Roosevelt
Franklin Delano Roosevelt (FDR) changed course in many ways venturing into a new policy territory.
Between 1929-1933 US GDP had
fallen by 8,1%.
Between 1933-1937 US GDP raised
by 8,4%
In spite of the number of public programmes financed by the federal government, FDR did not deliberately
embrace deficit spending:
• indeed, in 1937 he attempted to bring the budget back to balance and this caused a new recession
The recovery owed mainly to expansionary monetary policy permitted by dollar devaluation.
The Nazi economy
The main architect of the Nazi economy was Hjalmar Schacht. A banker, president of the Reichsbank in
1923‐30, he was widely appreciated at home and abroad for ending the hyperinflation in 1923.
In 1933, Schacht supported Hitler’s election and was appointed president of the Reichsbank and finance
minister.
When Hitler came to power in January 1933
• industrial production was some 60% the 1929 level
• the unemployed >6 million
By 1938,
• industrial production was up 25% on the 1929 level
• the labour market was at full employment, with acute shortage of skilled workers
How did Germany achieved this result ?
Schacht’s domestic economic policies, 1933‐36
• The consequence of Nazi economic policies was a substantial increase in the share of government
spending in GNP
The Great Depression (lesson 11)
Based on Cameron and Neal (2016), ch. 14
Great Depression: onset and propagation
World price, exports and production decreased
The Great Depression caused a series of effects interacting with each other to form a vicious spiral
Fall in production -> rise in unemployment -> fall in demand -> price decline -> further output fall
The banking sector crisis piled up trouble:
• as debtors became increasingly unable to repay their debt, banks
• called in loans ⟶ trouble for borrowers
• faced a surge in fund withdrawals by depositors ⟶ liquidity/solvency threat
• ultimately often failed ⟶ net loss for the economy
In Europe the crisis became serious in 1931 when financial panic spread following the default of the
Austrian Credit Anstalt and the subsequent German currency crisis .
, 2
By September 1931, Britain was driven off gold.
At that point many countries abandoned gold and by 1933 (London Monetary Conference) the international
monetary system broke up forming 3 main currency areas:
• the sterling area
• the dollar area
• the gold bloc
Policy responses to the depression
In the deep of the depression, stopping price from falling further – i.e. ending deflation – became a major
concern for governments.
A number of policy responses were aimed at bringing prices and business back to normal, but there was
little governments could do under gold standard rules, requiring:
• Balanced budgets (little room for fiscal measures)
• Balanced international accounts (little room for monetary easing)
The gold standard acted as a powerful mechanism of transmission.
In the early years of the depression, responses in line with gold standard mentality did a lot to make the
situation worse and the crisis last longer.
Examples of ‘policy mistakes’:
• Federal Reserve raised the discount rate in 1931
• US president Hoover’s attempt to balance the budget in 1932
• France adherence to gold through 1936
• German chancellor Bruning balanced‐budget policies in 1931‐32
As a rule, countries that remained on gold performed worse in the 1930s than countries that went off gold
at an early stage of the depression.
Countries that stayed on gold typically resorted to measures leading to the disintegration of world trade and
de‐globalization:
• protectionism increased dramatically
• controls on international capital movements
• clearing agreements to limit use of gold or international currencies in international transactions
• competitive devaluations to increase exports, etc.
Would an international solution have been possible ?
It would have if FR, UK and US had agreed on a coordinated policy of monetary stimulus but at the London
World Economic and Monetary Conference (1933) each country pursued its own interest and no agreement
could be reached on
• monetary stabilisation
• ‘reflation’ to revive prices.
, 3
The great depression #2 (lesson 12)
Based on Cameron and Neal (2016), ch. 14
The rise of the state
The Great Depression ultimately proved that markets were not capable of self‐regulation.
Throughout the depression years the market mechanism alone could not redress the situation, revive prices,
reduce unemployment, bring demand back: markets were prone to failure.
The state then stepped in using monetary policy and fiscal expansion.For this to happen the old liberal
creed – based on no intervention of the state in economic matters – had to be abandoned.
Countries experimented with new policies that were diverse, yet all involved a degree of state intervention.
The US economy under FD Roosevelt
Franklin Delano Roosevelt (FDR) changed course in many ways venturing into a new policy territory.
Between 1929-1933 US GDP had
fallen by 8,1%.
Between 1933-1937 US GDP raised
by 8,4%
In spite of the number of public programmes financed by the federal government, FDR did not deliberately
embrace deficit spending:
• indeed, in 1937 he attempted to bring the budget back to balance and this caused a new recession
The recovery owed mainly to expansionary monetary policy permitted by dollar devaluation.
The Nazi economy
The main architect of the Nazi economy was Hjalmar Schacht. A banker, president of the Reichsbank in
1923‐30, he was widely appreciated at home and abroad for ending the hyperinflation in 1923.
In 1933, Schacht supported Hitler’s election and was appointed president of the Reichsbank and finance
minister.
When Hitler came to power in January 1933
• industrial production was some 60% the 1929 level
• the unemployed >6 million
By 1938,
• industrial production was up 25% on the 1929 level
• the labour market was at full employment, with acute shortage of skilled workers
How did Germany achieved this result ?
Schacht’s domestic economic policies, 1933‐36
• The consequence of Nazi economic policies was a substantial increase in the share of government
spending in GNP
