ROMER C THE NATION IN DEPRESSION
Point: Despite the great depression period involved many countries in all the world, USA depression had peculiar aspects:
Peculiar aspects of American depression in general
1) An early downturn in the construction sector in the USA that was not in common with Germany, France and UK. For these countries the first year war just a “bad year” but not a tragic year. The depression was “great in the USA than elsewhere.
2) US: the fall in industrial production was mainly concentrated in consumer goods more than investment goods than in other countries.
3) USA (and Poland) Suffered the heaviest peak to trough fall in industrial production (-62.3%)
4) US had an unusual strength in the fall and recovery process and it started from investment goods (+42%)
5) To sum up the US was among the first countries to slip into depression and the last to recover
Causes of American depression domestic peculiar factors are very important
- In the 20’s and 30’s wages and prices were not completely flexible, this implies that movements in aggregate demand had real effects. Short term effects were mainly due to the crash in the financial market and collapse in domestic consumption spending, long term to tight monetary policy.
- In 1929 interest rates were quite high because the FED was trying to stem stock market boom. This policy wasn’t very effective because there were expectations of higher returns in the stock market. After the crash in Oct 1929, the FED lowered the interest rates so the monetary authority was responsive to the collapse. On this point Romer writes “the most likely source of precipitous drop in American consumption following the stock market crash in 1929 is tge crash itself” p30
- The crash made investors pessimistic about the future and the environment much more uncertain. Consumers cut their spending on irreversible durable goods, grocery store sales and ten-cent store sales rose !
- The crash triggered banking panics and worsened the depression. Bank panics cause a fall in money supply (reduction of borrowings), increased interest rates. Moreover it enhances pessimism and reduces again consumption. When a bank fails, all the long term relationships and informations are lost. This loss of information causes agency costs to rise and the result is credit rationing that makes (especially for small investors) investments more difficult.
- Also American policy ineffectiveness in 1930 1931 played a crucial role. The FED inaction was mainly due to gold standard constraints (and not to fear or deadlock and indecision in the Board of Governors as Friedman and Shwartz assume).
Sources of American recovery
- In 1932 the FED started an expansionary monetary policy,
- Was the recovery fast or slow ?