1. By: Peter Temin 1994

2.  The Shock that destabilized the world economy was World War I.  Changed pattern of international debts and lending  US from debtor to world’s creditor  Led to expansion and collapse of agriculture  End of mass immigration Reestablished Gold Standard @ Old Rates  Structural im balances of payments  Mandated deflation rather than devaluation for foreign exchange deficits

3.  Agriculture Collapse?  Over extension, geographically and financially  Reduced Immigration?  Reduced population growth  slowed growth  Under consumption?  Housing and Automobile purchases drop  Contractionary Monetary Policy  Attempt to arrest speculative boom in stock prices  Deflation and Keynes effect: M s /P up when P down  Deflation and Mundell effect: wait to spend if π e negative  Real rate of interest is high

4.  Stock Market Crash?  Reduced wealth  Depressed consumer expenditures  But other crashes were withstood nicely  Smoot-Hawley Tariff?  Reduced imports /reduced demand for American exports  But tariff should have been expansionary  Bank Failures and Debt Deflation Death Spiral  Temin: “Deflation causes Depression.”

5.  1931: Germany and Britain break golden fetters  Germany: Run on RM /Can’t borrow  Exchange controls  Britain: Contagion  Run on £  Floating  Depreciation  Neither abandon gold standard policies  deflation  Sep ’31: Expectation $ will follow  rush to sell $  Fed holds firm  Economy tanks  Great Depression  Discount Rate Up  Accelerated decline in money supply.  Lowest rate of monetary growth during depression in Oct ‘31  1932: grudging Fed bond purchases: Start/Stop  RFC : Rescue Wall Street, not Main Street  Gold standard mindset prevails

6. Policy Regime Change  Reverse deflation expectations  April ‘33: Roosevelt leaves gold and starts to devalue  Dollar depreciates 30-45% against the Pound  Recovery Begins: Stock & farm Prices Up... Y up slowly  First New Deal  Reform Banking System  Glass-Steagall—reduce power of “money trust”/FDIC  Control production  “socialism”?  NIRA/AAA – hours down/wages up/cartelized prices up  Real wage up  Reduced hiring  Persistent unemployment  Explanation: Efficiency Wage???Insider – Outsider?  Second New Deal: Redistribution  Social Security, etc.  Mistake of ’37  Deflationary expectations redux

7.  Depends on expectations and their strength  Did NIRA raise π e more than it constrained output?  Did monetary expansion matter in liquidity trap?  Was 1938 policy reversal intended or passive response to gold inflows from Europe primed for war?  Was fiscal policy expansionary or restrained?  Temin’s Biographical Note: the major sources  Friedman & Schwartz/Kindleberger  Temin’s Own: Did Monetary Forces?/Lessons /___ + Wigmore  Eichengreen and Sachs / Eichengreen ( Fetters )  Miscellaneous sources on bank reform/NIRA/AAA  Add: Cole & Ohanian/Eggertsson  Add: Bernanke/Romer