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PART ONE
THE WORLD'S MOST FAMOUS
CASE OF
DEFLATION
THE GREAT DEPRESSION
The Great Depression was the most
severe economic depression ever
experienced by the Western world.
It was during this troubled time that the
world’s most famous case of deflation
also happened.
The resulting aftermath was so bad that
economic policy since has been chiefly
designed to prevent deflation at all costs.
SETTING THE
STAGE
“ T H E ROA RI N G T W EN T I ES”
During the 1920s, economic growth
picked up as the new technologies like
the automobile, household appliances,
and other mass-produced products led
to a vibrant consumer culture and
growth in the economy.
192 0 - 1 9 2 1
Growth has hard to come by in the
first years after the war, and by
1920-21 the economy fell into a
brief deflationary depression.
PRIVATE DE BT I N THE U S
More than half of the automobiles in the
nation were sold on credit by the end of
the 1920s. Consumer debt more than
doubled during the decade
Production:
-6.9%
1000
100
1930
(US Dept. Commerce)
1900
Prices:
-18%
900
40
(US Dept. Commerce)
Unemployment:
11.7% (1921)
800
(Lebergott)
700
600
500
400
1921
1923
1925
1927
1929
IN CO M E IN EQ UAL I T Y
BL AC K T H U RSDAY
While GDP growth during this
period was extremely strong, the
Roaring Twenties also had a dark
side. Income inequality during this
era was the highest in American
history.
The Roaring Twenties ended with a bang.
On this day, the Dow Jones Industrial
Average plunged 11% at the open in very
heavy volume, precipitating the Wall
Street crash of 1929 and the subsequent
Great Depression of the 1930s.
400
By 1929, the income of the top 1%
had increased by 75%. Income for
the rest of people (99%) increased
by only 9%.
TOP
1%
(OCT. 24, 1929)
300
200
1,230,000 Americans
100
BOTTOM
99%
121,770,000 Americans
P E R S PEC TI VES O N
THE GREAT DEPRESSION
Economics continue to debate
to this day on the cause of the
Great Depression.
HERE’S PERSPECTIVES
FROM THREE DIFFERENT
ECONOMIC SCHOOLS:
Approach #1
KEYNESIAN
Reduce interest rates
(monetary policy)
1
John Maynard Keynes saw the causes of the Great
Depression hinge upon a lack of aggregate demand.
This later became the subject of his most influential
work, The General Theory of Employment, Interest,
and Money, which was published in 1936.
Approach #2
Government investment
in infrastructure
(fiscal policy)
Keynes argued that the solution was to stimulate
the economy through some combination of
two approaches:
The difficulty lies not so much in
developing new ideas as in escaping
from old ones.
John Maynard Keynes
Representative of The British Treasury
2
KEYNESIAN
Monetarists such as Milton Friedman viewed the
cause of the Great Depression as a fall in the
money supply.
Friedman and Schwartz argue that people wanted
to hold more money than the Federal Reserve
was supplying. As a result, people hoarded money
by consuming less. This caused a contraction in
employment and production since prices were not
flexible enough to immediately fall.
The Great Depression, like most other
periods of severe unemployment, was
produced by government mismanagement
rather than by any inherent instability of
the private economy.
Milton Friedman
American economist
AUSTRIAN
3
Austrian economists argue that the Great
Depression was the inevitable outcome of the
monetary policies of the Federal Reserve during
the 1920s.
In their opinion, the central bank's policy was an
"easy credit policy" which led to an unsustainable
credit-driven boom.
Any increase in the relative size of
government in the economy, therefore,
shifts the societal consumption-investment
ratio in favor of consumption, and prolongs
the depression.
Murray Rothbard
American heterodox economist
of the Austrian School
DEPRESSION
AND
DEFLATION
+607%
Between 1929 and 1932,
worldwide GDP fell by an
estimated 15%.
600
DEFLATION HIT.
500
Personal income, tax revenue,
profits and prices also plunged
while International trade fell
by more than 50%.
400
300
1929 - 1932 CH AN GE IN
ECO N O M IC IN D ICATORS
200
Unemployment in the U.S.
rose to 25% and in some
countries rose as high as 33%.
UNI T ED S TAT ES
G REAT B RI TA I N
100
FRA NC E
G ERM A NY
Industrial
Production
Wholesale
Prices
Foreign
Trade
0
Unemployment
-46%
-32%
-70%
THESE STATISTICS WERE ONLY THE TIP OF THE ICEBERG.
LEARN ABOUT THE FULL EFFECTS, THE STORIES, AND THE
RECOVERY FROM THE GREAT DEPRESSION IN
PART 2.
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