By: Peter Temin 1994

 “This history of the Great Depression…describes real and imagined causes of the depression, bank failures and deflation, the Fed and the gold standard, the start of the recovery, the first New Deal, and the second New Deal. I argue that adherence to the gold standard caused the depression, that abandoning gold started recovery, and that several of the New Deal measures adopted in the recovery lasted in good order for half a century.”

 The Shock that destabilized the world economy was the First World War.  Changed pattern of International debts and lending  The expansion and collapse of agriculture  End of mass immigration Reestablished Gold Standard Mandated Deflation rather than devaluation for foreign exchange deficits

 Agriculture Collapse  Over extension, geographically and financially  Lower Immigration  Reduction in population growth  Under consumption  Housing and Automobile purchases drop  Contractionary Monetary Policy  Attempt to arrest speculative boom in stock prices

 Stock Market Crash  Depressed consumer expenditures  Smoot-Hawley Tariff  Reduced demand for American exports  Bank Failures and Debt Deflation Death Spiral.  We all know this story  Temin “Deflation causes Depression.”

 Germany and Britain abandon Gold Standard and start to devalue.  People expect dollar next, rush to sell $  Fed does the opposite  Raises Interest Rates  Accelerates decline in money supply.  Signifies lowest rate of monetary growth during depression in Oct

 Policy Regime Change needed to adjust expectations.  Roosevelt leaves gold and starts to devalue $ on April  Dollar depreciates 30-45% against the Pound.  Rest of the world, with very limited exceptions abandon Gold

 Reform banking system  Glass-Steagall Act. –Stabilizes banks, FDIC, increased Moral Hazard.  Government Control of Production  NIRA and AAA: Set labor contracts, spread jobs around, set agricultural production limits

 Wages too high  Wages rising faster than prices  Social Security Act.  Monetary Base grows  Fed stopped sterilizing gold inflows.  Deflationary Expectations Curbed  Real i-rates fell, spending on durables rose