mated regressions suggested that the com bined monetary and nonmonetary effects

Mated regressions suggested that the com bined

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mated regressions suggested that the com- bined monetary and nonmonetary effects of the financial crisis can explain much of the severity of the decline in output. In this section, the question of the length of the Great Depression is addressed. As a matter of theory, the duration of the credit effects described in Section II above depends on the amount of time it takes to 1) establish new or revive old channels of credit flow after a major disruption, and 2) re- habilitate insolvent debtors. Since these processes may be difficult and slow, the per- sistence of nonmonetary effects of financial crisis has a plausible basis. (In contrast, per- sistence of purely monetary effects relies on the slow diffusion of information or unex- plained stickiness of wages and prices.) Of course, plausibility is not enough; some evi- dence on the speed of financial recovery should be adduced. After struggling through 1931 and 1932, the financial system hit its low point in March 1933, when the newly elected President Roosevelt's "bank holiday" closed down most financial intermediaries and markets. March 1933 was a watershed month in several ways: It marked not only the beginning of economic and financial recovery but also the introduction of truly extensive government involvement in all aspects of the financial system.3' It might be argued that the federally directed financial rehabilitation-which took strong measures against the problems of both creditors and debtors-was the only major New Deal program that successfully pro- moted economic recovery.32 In any case, the large government intervention is prima facie evidence that by this time the public had lost confidence in the self-correcting powers of the financial structure. Although the government's actions set the financial system on its way back to health, recovery was neither rapid nor complete. Many banks did not reopen after the holi- day, and many that did open did so on a restricted basis or with marginally solvent balance sheets. Deposits did not flow back into the banks in great quantities until 1934, and the government (through the Recon- struction Finance Corporation and other agencies) had to continue to pump large sums into banks and other intermediaries. Most important, however, was a noticeable change in attitude among lenders; they emerged from the 1930-33 episode chas- tened and conservative. Friedman and Schwartz (pp. 449-62) have documented the shift of banks during this time away from making loans toward holding safe and liquid investments. The growing level of bank liquidity created an illusion (as Friedman and Schwartz pointed out) of easy money; 31See Chandler (1970), ch. 15, and Friedman and Schwartz, ch. 8. 32E. Carey Brown (1956) has argued that New Deal fiscal policy was not very constructive. A paper by Michael Weinstein in Brunner (1981) points out coun- terproductive aspects of the N.R.A.
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