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Monetarist Interpretations of the Great Depression: An Evaluation and Critique

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  • Robert J. Gordon
  • James A. Wilcox

Abstract

This paper rejects the proposition that there is only a single interesting question to ask about the decade of the 1930s. It is concerned not only with the role of money in the 1929-33 contraction but also with the relative role of monetary and nonmonetary factors in the recession of 1937-38 and subsequent recovery and, in addition, with the division of nominal income change between prices and real output. New empirical evidence bearing on each of these issues is provided The results suggest that both extreme monetarist and nonmonetarist interpretations of the decade of the l930s are unsatisfactory and leave interesting features of the data unexplained. Arguing against acceptance of an extreme monetarist interpretation are (1) the inability of changes in the money supply alone to explain the severity of the initial collapse in income between 1929 and the fall of 1931, (2) the steady weakening of the correlation between changes in nominal income and money as the 1930s progressed, (3) the failure of monetary factors to explain the nature and timing of the 1938-41 recovery, and (4) the apparent absence of any tendency for the mechanism of price flexibility to provide strong self-correcting forces as required by an approach that stresses monetary rules and opposes policy activism. Arguing against acceptance of an extreme nonmonetarist interpretation are (1) the close association between the collapse in income and the lagged effect of monetary changes after the fall of 1931, (2) the milder contraction and earlier recoveries associated with the more expansive monetary policies pursued in Europe, (3) the close association between money and income in the 1937-38 recession, and (4) the failure of the price change data to adhere to the expectational Phillips curve approach imbedded in many postwar econometric models constructed by nonmonetarists.

Suggested Citation

  • Robert J. Gordon & James A. Wilcox, 1978. "Monetarist Interpretations of the Great Depression: An Evaluation and Critique," NBER Working Papers 0300, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0300 Note: EFG
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    References listed on IDEAS

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    1. James H. Scott Jr., 1976. "A Theory of Optimal Capital Structure," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 33-54, Spring.
    2. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
    3. Shoven, John B, 1976. "The Incidence and Efficiency Effects of Taxes on Income from Capital," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1261-1283, December.
    4. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    5. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters,in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Bruno Chiarini, 2008. "Milton Friedman: la moneta, il metodo e la politica," Rivista di Politica Economica, SIPI Spa, vol. 98(1), pages 39-56, January-F.
    2. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    3. Sebastiano Nerozzi, 2011. "From the Great Depression to Bretton Woods: Jacob Viner and international monetary stabilization (1930-1945)," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 18(1), pages 55-84.
    4. Bernanke, Ben S, 1995. "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 1-28, February.
    5. Robert B. Litterman, 1984. "Forecasting with Bayesian vector autoregressions four years of experience," Staff Report 95, Federal Reserve Bank of Minneapolis.
    6. Gordon, Robert J, 1982. "Price Inertia and Policy Ineffectiveness in the United States, 1890-1980," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1087-1117, December.
    7. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
    8. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
    9. Cecchetti, Stephen G & Karras, Georgios, 1994. "Sources of Output Fluctuations during the Interwar Period: Further Evidence on the Causes of the Great Depression," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 80-102, February.
    10. Nathan S. Balke & Robert J. Gordon, 1986. "The Estimation of Prewar GNP Volatility, 1869-1938," NBER Working Papers 1999, National Bureau of Economic Research, Inc.
    11. Orsola Costantini, 2015. "The Cyclically Adjusted Budget: History and Exegesis of a Fateful Estimate," Working Papers Series 24, Institute for New Economic Thinking.
    12. Ritschl, Albrecht & Woitek, Ulrich, 2000. "Did Monetary Forces Cause the Great Depression?," CEPR Discussion Papers 2547, C.E.P.R. Discussion Papers.
    13. Albrecht Ritschl & Ulrich Woitek, "undated". "Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy," IEW - Working Papers 050, Institute for Empirical Research in Economics - University of Zurich.
    14. Christina D. Romer, 1996. "Inflation and the Growth Rate of Output," NBER Working Papers 5575, National Bureau of Economic Research, Inc.
    15. Stephen G. Cecchetti, 1997. "Understanding the Great Depression: Lessons for Current Policy," NBER Working Papers 6015, National Bureau of Economic Research, Inc.

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