lec_9_110B-1 - Economics110B WorldEconomic HistoryII...

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    Economics 110B  World Economic  History II Spring 2009  University of California, Davis Lecture 9: The Depths of the Great  Depression and Recovery
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    Today’s Program Further Causes of the Great Depression Recovery from the Great Depression The role of the exchange rate regime Domestic policies and international constraints The Legacy of the Turmoil: What society  thought it learned.
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    Readings Cameron and Neal Ch.14, pp, 348-356
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    A Review: The Main Causes of the Great  Depression No coordination by governments No fiscal stabilization policy Bank failures Wage rigidity Consumption and Investment Fell “Autonomously” Stock Market Volatility and stock/asset price declines High tariffs and trade wars
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    In What Way Was the Stock Market  Crash to Blame? The crash occurs two months after the down turn begins Stock market  volatility  may have created uncertainty Uncertainty leads to lower purchases by consumers And lower investment Consumer goods and investment goods producers were hit  the hardest.
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    Banking Crises as a Cause of the  Depression A banking panic is when depositors rush to convert their  deposits into cash Limited cash leads to a scramble among depositors Banks try to sell interest-bearing assets immediately to  satisfy their customers: What is the impact Bond prices fall   interest rates rise   demand collapses  further    debt-deflation  causes the value of collateral to  fall Banks possess information and their failure  accelerates   even more the downturn.***
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    Who had banking crises? Why? USA had three episodes: 1930, 1931, 1933 By 1933 half of all banks that existed in 1929 had failed. 24 other countries: Germany, Austria, France, Estonia, Italy, Argentina, Belgium, Poland,  Hungary, Latvia, Czechoslovakia, Turkey, Egypt, Switzerland,  Romania, Mexico, Sweden, Norway and others What caused crises? no branching (US); too much competition (low  concentration); decline in industrial production; whether you were  on the gold standard  (a very important determinant)
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    Banking Crises and the International  Financial System Contagion: Austria’s crisis spread to Hungary; cross-border deposits from  Germany fled at the hint of danger, some were lost making Germany  vulnerable. British deposits in Germany were frozen weakening the UK. Gold Standard rules and lender of last resort function of central banks  clashed International capital flows were destabilizing As governments tried  reflating  they were forced to push back (balance  of payments problems) Economics/Finance Question: why didn’t deficits bring in capital?  Substitutability of international assets is imperfect
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This note was uploaded on 11/08/2010 for the course ECN 110B 110B taught by Professor Wilson during the Winter '10 term at UC Davis.

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lec_9_110B-1 - Economics110B WorldEconomic HistoryII...

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