The Great Depression - Part 2

The Great Depression - Part 2 - Emily Pitts ECON 2200 Page...

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Emily Pitts ECON 2200 Page 1 of 6 The Great Depression: Part 2 Chapter 23 continued I. How do economic historians explain the Great Depression? A. The Monetarist Interpretation: Friedman & Schwartz, A Monetary History of the US (1963) m This interpretation focuses on events between 1929 and 1933. m Primary cause: Decline in M (Table 23.2) Bank failures/panics → Surviving banks increase reserve holdings Loans _ _ In early 1930s, total bank deposits (as runs occurred) + reserve holdings of surviving banks M _ _ (column 1 of Table 23.2) M = P Y Y _ _ (column 2 of Table 23.2) As Y unemployment income loans of household + firms Note column 3 of Table 23.2: Rising M – to – NNP ratio Monetarists view this as evidence of hoarding m Federal Reserve’s role: Monetarists claim that the Fed’s failure to exercise basic central bank functions increased the depth and duration of the recession that became the Great Depression. Monetary policy tended to be procyclical rather than countercyclical, esp. 1929-1932. Failure of Fed to: 1) Act as lender of Last Resort 2) Exercise expansionary monetary policy (+ instead, exercised contractionary monetary policy) Changes in Discount Rate The Great Depression: Part 2 Page 1 of 6
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Emily Pitts ECON 2200 Page 2 of 6 Recall that DR (discount rate) M August 1929: Fed DR} Effort to bank loans for speculation in stock November 1931: Fed DR} Sept. 1931: England left the gold standard March 1933: Fed DR} Early 1933 was 3 rd + worst banking crisis All of these increases in DR only further encouraged M + led banks to increase their holdings of reserves Open Market Operations Fed buying + selling of Treasury bonds Expansionary Mon. Policy Contractionary Monetary Policy Fed made modest purchases of bonds in Oct. 1929, Dec. 1930, + Aug. 1931 insignificant impact on M August 1932: Fed purchased $1.1 billion in Treasury bonds
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The Great Depression - Part 2 - Emily Pitts ECON 2200 Page...

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