If the general price level falls, while nominal wage rates do not fall nearly as much, then Sumner ultimately blames the monetary authorities for letting the purchasing power of money increase so rapidly. In particular, we can compare the behavior of nominal wages and prices of the early s with the experience from the — depression. Here we rely on the statistics and analysis from Gallaway and Vedder First we reproduce one of their tables:.
As the final column from the table shows, real wages for hourly workers—especially if we further factor in productivity—grew substantially over the years of the Great Contraction, reaching almost 20 percent higher by when the unemployment rate was almost 25 percent.
For another amazing fact, note that nominal money wage rates for hourly workers in were only 5. During this year, unemployment was already at a devastating Even the table above does not shed light on the policies that might have contributed to the problem. Yet here is where the comparison with the — episode is decisive. After producing the above table, Gallaway and Vedder explain:. The issue is whether the Hoover recipe delayed the onset of money wage adjustments sufficiently to exacerbate the disequlibrium and increase the severity of the Great Depression.
The evidence is persuasive that this is the case…. Contrast this pattern with that of the —21 downturn. In both cycles, industrial production peaked at midsummer before the onset of the decline. In both cycles, the decline was precipitous, However, as noted earlier, in the case, money wage rates fell by 13 percent, setting the stage for the sharp recovery that began in August For example, according to data compiled by the National Industrial Conference Board, hourly wage rates for unskilled male labor fell more between and than they declined throughout the Great Depression.
The clear implication seems to be that the money wage rate adjustment process was distinctly different during the Great Depression compared to the —21 decline in business activity.
Gallaway and Vedder, , p. Sumner and I agree that during an economic downturn, the last thing in the world we want is for labor to become artificially more expensive as prices fall faster than wage rates. Namely, a Rothbardian could agree that the immediate driver of unemployment was the real wage rate, but the Rothbardian would lay the blame on government measures that interfered with nominal wage adjustments, rather than with deflationary monetary policy.
Working Papers & Publications
Returning to the figure above, we now see how it apparently endorses the Sumnerian framework. It is discretionary monetary policy tightening, in the context of the classical gold standard. And since the dark black line goes hand-in-hand with industrial production the gray line , Sumner believes that this chart is consistent with his central thesis.
However, even at this stage, there are problems. Even so, industrial output rises through the summer. Moreover, the particular zigs and zags do not coincide with each other; there is a relative tightening i. To be sure, eventually both lines collapse, but it is hardly clear that the movements in the black line are causing reactions in the gray line. Indeed, consider that as of January , the height of the black line has returned to the same position it held back in April That means that the modest month decline in the inverted gold ratio by January was no larger than that same change had been in April And yet, this monetary tightening coincided with growing industrial output back in April, while by January industrial production was in free-fall.
Now, when it comes to explaining the stock market crash of October , what really matters is not the mechanical policy of that moment but rather the expectations of investors. Perhaps the Federal Reserve signaled in some way the sharp tightening of monetary policy that would eventually come, and investors realized how much things had changed as fall unfolded.
Nicholas Crafts and Peter Fearon
Space constraints do not allow me to summarize his case, but I think it is fair to say that he presents no smoking guns. In fact, Sumner himself implicitly admits that he has failed in the task he set for himself, when he no doubt subconsciously moves the goalposts. Specifically, on page 40 Sumner tells us his strategy consistent with the EMH :.
Sumner, p. I submit that Sumner gives us nothing that fits the bill. He himself seems to acknowledge this when, twenty-one unconvincing pages later, Sumner writes:. At the beginning of this chapter, I suggested that in order to understand the October  crash, one needed to explain why it would have been sensible for investors to be highly optimistic in September , and somewhat pessimistic in November Is there an explanation for such a dramatic change in sentiment?
- The Gold Standard Did Not Cause the Great Depression | Mises Institute.
- The Novel 100: A Ranking of the Greatest Novels of All Time.
- The Official Patients Sourcebook on Gastroparesis: A Revised and Updated Directory for the Internet Age.
- Long Continental Records from Lake Baikal;
- Fler böcker av författarna.
- Land Treatment Systems for Municipal and Industrial Wastes;
Now in fairness, Sumner might respond that his book does not need to explain how monetary tightening—due to the constraints of the gold standard—led to the stock market crash. Even so, it sure seems as if the stock market crash had an awful lot to do with the onset of the Great Depression. Just look again at the final chart above, taken from Sumner: the big drop in industrial production clearly began with the market crash.
In truth, no economic historian can explain the precise timing of every movement in the financial markets and broader economy, for the simple reason that humans have free will. Even so, using the very criteria Sumner himself embraces, we can conclude that his book—though superb in several dimensions—does not achieve its stated purpose. To blame the Great Depression on the gold standard is akin to blaming a particular plane crash on gravity.
In contrast, the Rothbardian analysis at least has a shot at being satisfactory. This is the worst financial crisis since the s. However, the financial crisis of the s was very different from the financial crisis that we have now. The crisis of the '30s was obviously punctuated by the stock market crash, but the real damage was done by the wipeout of the banking system. Lots of small banks got wiped out.
If your local banker was gone, there was no source of funds in the local community. That was a severe impediment to the financial system. Also, there was no deposit insurance in those days, so people lost serious money when a bank failed. The financial crisis was really focused on the collapse of the banking system and the shrinkage of the money supply.
The current financial crisis is centered in the whole subprime mortgage lending arena and has come about through the collapse of house prices and so many mortgage securities not paying their contracted amounts. The problem has been centered more outside the commercial banking system and more in this kind of shadow banking area—the investment banks, the securities firms, the mortgage brokers and so forth. Many people criticized the Fed for its response to the Great Depression. How is the Fed's response to the current crisis different?
The Great Depression of the 1930s: lessons for today
The key difference between the s and today is how the Fed has reacted to the crisis. You had tremendous deflation, and that contributed to the contraction of the whole economy. In the current episode, very early—starting in August —the Fed started taking a series of steps to try to contain the crisis to the financial system and prevent it from affecting the whole economy. Are there any parallels that in the housing market now and the housing market in the s?
There was a big decline in house prices during the Great Depression and a large increase in mortgage foreclosure rates. However, the cause of the housing distress during the Great Depression—the rise of foreclosures, the number of homes with delinquent mortgages and so forth, was the depression itself—the falling incomes, the collapsing price levels. That caused the distress in housing markets. Today, distress in the housing market is largely caused by the housing market itself—the boom and the bust, which has been centered, of course, on the subprime market.
So, there is a real difference between the s and today. More recent research on the New Deal points out that a lot of the New Deal programs actually hindered the recovery of the economy. So, the effect of the New Deal continues to be debated. We stopped having bank failures, and the money supply started ramping up. So I think the growth of the money supply had a role, but some of the things that FDR did—particularly those things that helped stabilize the banking system, like deposit insurance and changes to the gold standard, contributed to the recovery.
Certainly, it was an event that caused a big increase in the government's role in the economy. For example, everything from the birth of Social Security, to federal deposit insurance, to the minimum wage and so forth, all got started during the Great Depression. There was a tremendous legacy in that respect.
The Shadow of History: Lessons from Japan’s Great Depression in the s | SpringerLink
Many consider the Great Depression the watershed event in U. Certainly the balance of power between the federal government and state governments changed. The Banking Acts of and changed the balance of power within the Federal Reserve System in favor of the Board of Governors, especially with regard to monetary policy. The Acts made clear the Board's power to set the discount rate and gave the Board a majority of votes on the Federal Open Market Committee, including the chairmanship of the Committee.
The legislation also gave the Board new authority to set reserve requirements for banks and margin requirements on loans to purchase securities. More fundamentally, the Depression demonstrated how the collapse of a banking system and severe deflation can wreck an economy. Subsequently, the high inflation era from the mids to the early s showed how inflation can also damage the economy. The lessons of these episodes are 1 that central banks must respond to financial crises that threaten the macroeconomy, and 2 that price stability should be the paramount objective for monetary policy because of the harm that deflation and inflation can do to the real economy.
Well, you do have shocks that are uncontrollable—when you have wars and severe weather events, for instance. You have technology shocks. Then, you do have these episodes of financial mania that seem to just arise. Some people will describe it as myopia on the part of investors.