Frank G. Steindl, Oklahoma State University


The an excellent Depression has two meanings. One is the horrendous debacle of 1929-33 throughout which unemployment rose from 3 come 25 percent together the nation’s output fell over 25 percent and prices end 30 percent, in what also has been called the great Contraction. A second definition has the an excellent Depression together the whole decade that the thirties, the anxieties and also apprrebab.netensions because that which john Steinbeck’s The Grapes of Wrath is a metaphor. Much has been written about the unmatched drop in economic task in the good Contraction, v questions around its causes and the reasons for the protracted decrease especially prominent. The lot of scholarship devoted to these issues dwarfs that dealing with the recovery. But there indeed was a recovery, though long, tortuous, and uneven. In fact, it was well over double as long as the contraction.

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The economic situation hit that is trough in march 1933. Whether or not by coincidence, chairman Franklin D. Roosevelt took office the month, initiating the new Deal and also its fabled very first hundred days, among which to be the production in June 1933 the its principal recovery vrebab.neticle, the NIRA — National industrial Recovery Act.

Facts of the Recovery

Figure 1 supplies monthly data. This enables us to view more finely the activities of the economy, as contrasted v the use of quarterly or annual data. For existing purposes, the decade of the Depression operation from august 1929, as soon as the economic climate was at its organization cycle peak, with March 1933, the contraction trough, come June 1942, when the economy plainly was back to that long-run high-employment trend.

Figure 1 depicts the brebab.netavior of industrial output and prices end the an excellent Depression decade, the former as measured by the index of industrial Employment and the latter by the everyone Price Index.<1> among the notable functions are the big declines in output and prices in the an excellent Contraction, with the previous falling 52 percent and the last 37 percent. Another noteworthy feature is the sharp, major 1937-38 depression, once in twelve month output fell 33 percent and prices 11 percent. A 3rd feature is the over-two-year deflation in the face of a robust boost in output complying with the 1937-38 depression.


The brebab.netavior the the unemployment rate is shown in figure 2.<2> The dashed line mirrors the reported main data, which do not count together employed those hold “temporary” relief jobs. The solid heat adjusts the official collection by consisting of those holding such temporary jobs as employed, the impact of which is to minimize the unemployment price (Darby 1976). Each collection rises from about 3 to around 23 percent between 1929 and also 1932. The official series then climbs to near 25 percent the complying with year whereas the adjusted collection is over 4 percentage point out lower. Each continues declining the remainder of the recovery, though both climb sharply in 1938. By 1940, each is quiet in twin digits.


Three various other charts the are advantageous for knowledge the restore are numbers 3, 4, and 5. The first of these reflects that the monetary base that the economic situation — which is the reserves of commercial banks plus currency held by the general public — prospered principally through rises in the stock of yellow In contrast to the typical situation, the base did not increase since of credit noted by the federal Reserve System. Such credit transaction was essentially constant. The is, the Fed, the nation’s main bank, was basically passive for many of the recovery. The increase in the stock of gold developed initially due to the fact that of revaluation of yellow from $20.67 to $35 an oz in 1933-34 (which though not changing the physics holdings the gold increased the worth of such holdings by 69 percent). The physical stock of gold now valued at the greater price climate increased since of an inflow of yellow principally from Europe due to the deteriorating political and economic instance there.

Figure 4 mirrors the brebab.netavior the the share of money, both the narrow M1and more comprehensive M2 steps of it. The shaded area shows the to reduce in those money share in the 1937-38 depression. Those declines were one of the factors for the depression, simply as the big declines in the money stock in 1929-33 were major factors responsible for the good Contraction. During the convulsion of 1929-33, the small measure of the money share — money held by the public and demand deposits, M1 — dropped 28 percent and also the more comprehensive measure of the (M1 to add time deposits at commercial banks) dropped 35 percent. These decreases were major factors in resulting in the sharp decline that was the debacle that 1929-33.

Lastly, the budget position that the federal federal government is shown in figure 5. One of the notable features is the sharp boost in expenditures in mid-1936 and also the equally sharp decrease thereafter. The budget therefore went drastically into deficit, and then started to relocate toward a surplus by the finish of 1936, largely as result of the tax revenues developing from the Social protection Act of 1935.


Reasons for Recovery

In Golden Fetters (1992), Barry Eichengreen progressed the basis because that the most widely embraced understanding that the slide and recovery of economic situations in the 1930s. The depression was a an international phenomenon, as shown in figure 6, which mirrors the brebab.netavior of commercial production for several significant countries. His simple thesis pertained to the yellow standard and the path in i m sorry countries transformed their brebab.netavior under it during the 1930s. Under the classical “rules that the game,” nations experiencing balance of payment deficits sponsor those deficits through exporting gold. The loss of gold forced them come contract their money stock, which then led to deflationary pressures. Nations running balance of payment surpluses got gold, which increased their money stocks, in order to inducing expansionary pressures. According to Eichengreen’s framework, countries did not “play through the rules” the the worldwide gold standard during the depression era. Rather, nations losing gold were compelled to contract. Those receiving gold, however, did no expand. This produced a network deflationary bias, as a an outcome of which the depression to be world vast for those nations on the gold standard. As countries cut their ties to gold, which the U.S. Walk in early 1933, lock were totally free to pursue expansionary monetary and fiscal policies, and this is the major reason basic the recovery. The inflow of gold into the U.S., for instance, increased the make reservation of the bank system, which became the basis because that the increases in the stock of money.

The quantity theory the money is a useful framework that can be offered to know movements that prices and output. The concept holds that boosts in the it is provided of money relative to the need results in increased spending top top goods, services, gaue won assets, and real capital. The theory deserve to be expressed in the adhering to equation, where M is the stock of money, V is velocity, the price at which the is spent, which is the mirror side that the demand for money — the desire to host it. P is the price level and y is real output.


Increases in M family member to V result in boosts in P and also y.

Research right into the forces of recovery generally concludes the the growth of the money it is provided (M) was the principal cause of the climb in calculation (y) after March 1933, the trough the the great Contraction. Furthermore, those boosts in the money stock also pushed increase the price level (P).

Four researches expressly taking care of the recovery space of note. Milton Friedman and Anna Schwartz present that “the large movements in the stock of money correspond with those in income” (1963, 497) and argue that “the rapid rate of increase in the money stock certainly promoted and helped with the concurrent financial expansion” (1963, 544). Christina Romer concludes that the development of the money stock to be “crucial come the recovery. If had actually been organized to its common level, the U.S. Economy in 1942 would have been 50 percent listed below its pre-Depression trend path” (1992, 768-69). She additionally finds that fiscal plan “contributed practically nothing to the recovery” (1992, 767), a finding the mirrors lot of the postwar research study on the affect of budget policy, and also stands in contrast to the see of much of the public as it come to believe that the fiscal budget deficits of chairman Roosevelt were basic in promoting recovery.<3>

Ben Bernanke (1995) likewise stresses the importance of the growth of the money stock as an easy to the recovery. He concentrates on the gold traditional as a restraint top top independent financial actions, finding that “the proof is that countries leaving the gold conventional recovered substantially much more rapidly and also vigorously than those that did not” (1995, 12) due to the fact that they “had greater freedom to start expansionary monetary policies” (1995, 15).

More newly Allan Meltzer (2003) find the recovery pushed by increases in the stock of money, based upon an broadening monetary base as result of gold. “The key policy stimulus to output come from the rise in money, an unplanned an effect of the 1934 devaluation of the dollar against gold. Later in the te the increasing threat of war, and also war chin supplemented the $35 gold price together a reason of the increase in gold and also money” (2003, 573).

That the recovery was due principally come the development of the stock of money shows up to it is in a durable conclusion that postwar research study into causes of the 1930s recovery.

The way in i beg your pardon the stock of money increased is important. The farming stock the gold boosted the reserves of banks, for this reason the financial base. With their better reserves, banks did two things. First, they organized some as preventive reserves, called excess reserves. This is measured on the left hand next of number 7. Secondly, castle bought U.S.government securities, an ext than tripling your holdings, as viewed on the appropriate hand axis of figure 7. Also, as watched there, commercial financial institution loans raised only contempt in the recovery, rising only 25 percent in end nine years.<4> The principal incentive to the development of the money stock, therefore, to be banks’ raised purchases of U.S. Federal government securities, both ones currently outstanding and also ones issued to finance the deficits that those years.


The 1937-38 Depression and Revival

After four years of recovery, the economic situation plunged into a deep depression in may 1937, as output fell 33 percent and prices 11 percent in twelve months (shown in number 1). Two breakthroughs were identified with being principally responsible for the depression.<5> The one many prominently established by modern scholars is the activity of the federal Reserve.

As the Fed observed the volume of excess reserves rise month after month, it became concerned around the potential inflationary consequences if financial institutions were to start making much more loans, thereby expanding the money supply and also driving up prices. The bank Act that 1935 offered the Fed authority to readjust reserve requirements. V its newly granted authority, it determined upon a “preemptive strike” against what it related to as incipient inflation. Since it thought that those overabundance reserves were because of a “shortage the borrowers,” it thus raised to make reservation requirements, the effect of which was to impound in forced reserves the previous excess reserves. The increased requirements to be in reality doubled, in three steps: respectable 1936, march 1937, and May 1937. As figure 7 exhibits, overfill reserves as such fell. The principal result of the doubling of reserve demands was to alleviate the share of money, as shown in the shaded area of number 4.<6>

A 2nd factor leading to the depression was the fallout’s federal spending plan deficit, because of two considerations. First, there to be a spicy one-time increase in expenditure in mid-1936, because of the payment the a civilization War ns Veterans’ Bonus. Thereafter, expenditures dropped — the “spike” in the figure. Secondly, the Social security Act of 1935 mandated arsenal of payroll taxes beginning in 1937, with the first payments to it is in made number of years later. The joint impact of these two was to move the spending plan to close to surplus by late 1937.

During the depression, both output and also prices fell, together was their usual brebab.netavior in depressions. The bottom that the depression was might 1938, one year after the began. Thereafter, output began growing quite robustly, climbing 58 percent by august 1940. Prices, however, ongoing to fall, because that over two years. Figure 8 mirrors the depression and revival endure from might 1937 with August 1940, the month in i beg your pardon prices critical fell. The two shaded locations are the year-long depression and the price “spike” in September 1939. Of attention is that the shock that the war that spurred the price run did not induce expectation of additional price rises. Prices ongoing to loss for one more year, through August 1940.


Difficulties with existing Understanding

According to the currently accepted interpretation, the recovery fan its visibility to rises in the share of money. One an obstacle with this see is the marked contrast come the price experience of recovery v mid-1937. How could rising price in the 1933 turnaround be fundamental to the recovery however not in the vigorous, later recovery, as soon as prices in reality fell? Another an obstacle is the the ongoing rise in the share of money is because of the political chaos in Europe. There is tiny intrinsic come the U.S economic climate that contributed. Presumably, had there been no proceeding inflow the gold raising the monetary base and also money stock, the economy would have languished till the needs of people War II would have made your impact. In other words, would certainly there have been basically no recovery had there to be no Adolf Hitler?

Of more an effect is the conundrum gift by the suffer of an ext than two years that deflation in the challenge of dramatically rising accumulation demand, of i m sorry the sharply increasing money stock shows up as a significant force. If the climbing stock of money were basic to the recovery, climate prices and output would have actually been rising, together the aggregate demand for output, spurred also by enhancing fiscal spending plan deficits, would have actually been raising relative to accumulation supply. But in the present instance, prices were declining, no rising. Miscellaneous else to be driving the economy throughout the entire recovery, yet the watch dominant accumulation demand pressures obscured it in the early on part.

One prospective incentive to aggregate supply would be declining real incomes that would spur the hiring of additional workers. Yet with prices declining, it is i can not qualify that genuine wages would have actually fallen in the revival from the late 1930s depression. The evidence as shown in figure 9 shows that castle in reality increased. With few exceptions, actual wages increased throughout the whole deflationary period, increasing 18 percent overall and also 6 percent in the revival. The real wage rate, by rising, was for this reason a hinderance to boosted supply. Real wages cannot because of this be a factor inducing greater accumulation supply.


The economic phenomenon that was control the recovery to be probably raising productivity. Very early indication the this comes from the pioneering work of Robert Solow (1957) that in the food of assessing factors contributing to financial growth emerged data top top the brebab.netavior that productivity. In support of this, Alexander field presents both macroeconomic and also microeconomic proof showing the “the years 1929-41 were, in the aggregate, the most technologically progressive of any type of comparable period in U.S. Economic history” (2003, 1399).

The rapid productivity rises were crucial factor explaining the seemingly anomalous problem of fast recovery and the stubbornness of the unemployment rate. In today’s parlance, this has pertained to be recognized as a “jobless recovery,” one in i beg your pardon rising performance generates raised output rather than greater labor input developing more.

To acknowledge that productivity rises were vital to the financial recovery is not however the finish of the story since we are still left make the efforts to understand the mechanisms underlying their sharp increases. What induced such increases? Serendipity — the idea the productivity increased at simply the appropriate time and in the appropriate quantities — is not an appealing explanation.

More likely, over there is other intrinsic to the economic situation that encapsulates instrument — the is, incentives spurring inventive capital and also labor technologies generating productivity increases, and also other components — that relocate the economy back to its potential.


Bernanke, Ben S. “The Macroeconomics of the an excellent Depression: A compare Approach.” Journal of Money, Credit, and Banking 27 (1995): 1-28.

Darby, Michael R. “Three-and-a-Half Million U.S. Employees have Been Mislaid: Or one Explanation the Unemployment, 1934-41.” Journal of politics Economy 84 (1976):1-16.

Eichengreen, Barry. Golden Fetters: The gold Standard and also the an excellent Depression 1919-1939. Brand-new York: Oxford university Press, 1992.

Field, Alexander J. “The most Technologically progressive Decade the the Century.” American financial Review 93 2003): 1399-1413.

Friedman, Milton and Anna J. Schwartz. A Monetary background of the united States: 1867-1960. Princeton, NJ: Princeton university Press, 1963.

Meltzer, Allan H. A history of the commonwealth Reserve, volume 1, 1913-1951. Chicago: university of Chicago Press, 2003.

Romer, Christina D. “What ended the good Depression?” Journal of financial History 52 (1992): 757-84.

Solow, Robert M. “Technical adjust and the aggregate Production Function.” Review that Economics and also Statistics 39 (1957): 312-20.

Smithies, Arthur. “The American economic situation in the Thirties.” American financial Review Papers and also Proceedings 36 (1946):11-27.

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Steindl, candid G. Understanding economic Recovery in the 1930s: Endogenous Propagation in the great Depression. Ann Arbor: college of Michigan Press, 2004.