Fig 1: The Great Depression in the U.S.
Source: Economic Reports of the President, Historical Statistics $900 $800 $700
$824.8
Real (96) GDP
$600 $500 $400 $300 $200 $100 $1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
17.2%
$585.3 -29%
Fig 2: The Great Depression in the U.S.
24.1% 25.2%
28% 24%
Source: Historical Statistics of the United States, Colonial Times to 1976
Darby, Journal of Political Economy,
22.0%
20.3%
Unemployment Rate
16.3%
17.0%
20% 16% 12% 8%
19.1%
8.9%
Emergency workers counted as unemployed 3.2%
4% 0%
Emergency workers counted as employed
1929
1930
1931
1932
1933
1934
1935
1936
1937
14.3%
1938
1939
1
1940
14.6%
1940
Fig 3: Holy Panicky Private Sector Batman!
Source: Economic Reports of the President
$160
Real (96) Investment
$120
$80
$40 -83.6% $0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
1940 1939
Fig 4: The Crash, ∆AD or ∆SRAS?
Source: Economic Reports of the President 14
13
1929 1930
GDP PI (96 = 100)
12
11
1934
1931
1935
1937 1938
1936
10
1933
9
1932
8
Real (96) GDP
$900
$550
$600
$650
$700
$750
$800
$850
2
$950
1940
GDP PI (96 = 100)
Nominal Wage Index (1926 = 100)
Composite of manufacturing, railways, clerical, teachers, building, farms, road construction,retail trade, bituminous coal mining, telephone an telegraph, power & light, hotels, launderies
10
11
12
13
14
8
9
100
105
110
115
120
$550
70 1929.01 1930.01
75
80
85
90
95
1933
$600
1932
1934
1931.01 1932.01 1933.01 -20.6% 1934.01 1935.01 1936.01 1937.01 1938.01 1939.01
$650
1931
1935
$700
NBER Macrohistory Database, series 08061c
Fig 6: The Recovery, ∆AD or ∆SRAS?
Source: Economic Reports of the President
Fig. 5: What Happened to Nominal Wages?
3
1930
$750
1938
1936
$800
1937
1929
1939
$850
Real (96) GDP
1940
$900
1940.01
$950
Fiscal Policy and the Great Depression
What Keynes Would Recommend
No need to fear! KeynesMan is here!
What Actually Happened
1) Let’s fight these fight these rising actual deficits! 2) Let’s pursue contractionary discretionary fiscal policy; i.e. decrease the structural deficit.
1) First, do no harm.
Allow automatic fiscal policy, i.e. don’t fight the rising actual deficits.
2) Take active fiscal policy steps to save the patient.
Pursue expansionary discretionary fiscal policy; i.e. increase the structural deficit.
Thou shouldst truste me to cure thyne ailements for I be steeped in medical artes of
Fig. 7: The Role of Fiscal Policy
Source: Federal Reserve Economic Database
$10 $9 $8
Billions of Current Dollars
$7 $6 $5 $4 $3 $2
Federal Receipts S & L Receipts S & L Expenditures
$1 $1929 1930 1931 1932 1933 1934 1935 1936
Fed Expenditures 1937 1938 1939 1940
4
Figure 8: The Role of (Federal) Fiscal Policy
Source: Pepper, 1973, Explorations in Economic History
11%
Fed. Full Emp. Spending
9%
Fed. Full Emp. Taxes Fed. Full Emp. Budget Bal.
Tax rate hike
% of Full Employment GDP
7% Tax rate hike 5% Attempt to "control" spending
3%
1% Only structural deficit 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1939 1940 1940
-1%
Fig 9: Did Monetary Forces Cause the Great Depression?
Source: Economic Reports of the President, Historical Statistics
$40 $35 $30
M1 Money Supply
$25 -25.0%
1927 1928 1929 1930 1931 1932 1933 1934
$20 $15 $10 $5 $0
1935
1936
1937
5
1938
Fig. 10: The Role of Monetary Policy
16% 14% 12%
Source: Federal Reserve Economic Database
Fed Discount Rate Real Discount Rate
Federal Reserve Discount Rate
10% 8% 6% 4% 2% 0% -2% -4% -6%
Tight Money Policy
Jul-29
Jul-30
Jul-31
Jul-32
Jul-33
Jul-34
Jul-35
Jul-36
Jul-37
Jul-38
Jul-39
Jan-29
Jan-30
Jan-31
Jan-32
Jan-33
Jan-34
Jan-35
Jan-36
Jan-37
Jan-38
Jan-39
Fig 11: IS or LM? (Good & Services or Monetary Policy?)
Federal Reserve Economic Database, Economic Reports of the President
6% 1929
5%
Bank Prime Rate
4% 1932
1930 1931
3%
2% 1933 1% 1934 1935
0% $500 $550 $600 $650 $700 $750 $800
Real (96) GDP
$850
Jan-40
Jul-40
6
$900
Fig 12: IS or LM? (Good & Services or Monetary Policy?)
Federal Reserve Economic Database, Economic Reports of the President 6%
5%
1932 1933
Moody's AAA Bond Rate
1931
1930
1929
4%
1934 1935
3%
2%
1%
0% $500 $550 $600 $650 $700 $750 $800
Real (96) GDP
$850
c
Fig 13: IS or LM? (Goods & Services or Monetary Policy?)
Federal Reserve Economic Database, Economic Reports of the President
20% 16%
1932 1931
Real Bank Prime Rate
12% 8% 4% 0%
1933
1930 1929
1935
-4% -8% $500 $550
1934
Real (96) GDP
$850
$600
$650
$700
$750
$800
7
$900
$900
c
Fig 14: IS or LM? (Goods & Services or Monetary Policy?)
Federal Reserve Economic Database, Economic Reports of the President 20% 16%
1932 1931
Real AAA Bond Rate
12% 8% 4% 0% -4% -8%
1935 1930 1933 1929
1934
Real (96) GDP
$850
$500
$550
$600
$650
$700
$750
$800
Fig 15: The Role of Debt
Source: Historical Statistics of the United States, Colonial Times to 1970
$80
Net Private Debt (Current $s)
$60
$40
$20
$0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
8
$900
Fig 16: Holy Debt-Deflation Hypothesis Batman!
Source: Historical Statistics of the United States, Colonial Times to 1970
$900
Real (96) Net Private Debt
$700 $600 $500 $400 $300 $200 $100 $0
1929 1930 1931
1932
+16.0%
1933
$800
1934
1935
1936
1937
1938
1939 1939
Fig 17: This is More Exciting than Fighting Criminals Batman!
Source: Historical Statistics of the United States, Colonial Times to 1970
140% 120%
137.9% 138.3%
Net Private Debt/GDP
100% 80% 60% 40% 20% 0%
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1940
86.2%
9
1940