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journal article What Ended the Great Depression?The Journal of Economic History Vol. 52, No. 4 (Dec., 1992) , pp. 757-784 (28 pages) Published By: Cambridge University Press https://www.jstor.org/stable/2123226 Read and download Log in through your school or library Alternate access options For independent researchers Read Online Read 100 articles/month free Subscribe to JPASS Unlimited reading + 10 downloads Purchase article $34.00 - Download now and later Abstract This paper examines the role of aggregate-demand stimulus in ending the Great Depression. Plausible estimates of the effects of fiscal and monetary changes indicate that nearly all the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. A huge gold inflow in the mid- and late 1930s swelled the money stock and stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. That monetary developments were crucial to the recovery implies that self-correction played little role in the growth of real output between 1933 and 1942. Journal Information The Journal of Economic History is devoted to the multidisciplinary study of history and economics, and is of interest not only to economic historians but to social and demographic historians, as well as economists in general. The journal has broad coverage, in terms of both methodology and geographic scope. Topics covered include money and banking, trade, manufacturing, technology, transportation, industrial organisation, labour, agriculture, servitude, demography, education, economic growth, and the role of government and regulation. In addition, an extensive book review section keeps readers informed about the latest work in economic history and related fields. Instructions for Contributors at Cambridge Journals Online Publisher Information Cambridge University Press (www.cambridge.org) is the publishing division of the University of Cambridge, one of the world’s leading research institutions and winner of 81 Nobel Prizes. Cambridge University Press is committed by its charter to disseminate knowledge as widely as possible across the globe. It publishes over 2,500 books a year for distribution in more than 200 countries. Cambridge Journals publishes over 250 peer-reviewed academic journals across a wide range of subject areas, in print and online. Many of these journals are the leading academic publications in their fields and together they form one of the most valuable and comprehensive bodies of research available today. For more information, visit http://journals.cambridge.org. Rights & Usage This item is part of a JSTOR Collection. If you're seeing this message, it means we're having trouble loading external resources on our website. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. What Is Stagflation?Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another. Once thought by economists to be impossible, stagflation has occurred repeatedly in the developed world since the 1970s oil crisis. In mid-2022, many were saying that the United States had not entered a period of stagflation, but might soon experience one, at least for a short period. In June 2022, Forbes magazine argued that a period of stagflation was likely because economic policymakers would tackle unemployment first, leaving inflation to be dealt with later. Key Takeaways
StagflationUnderstanding StagflationThe term stagflation was first used by British politician Iain Macleod in a speech before the House of Commons in 1965, a time of economic stress in the United Kingdom. He called the combined effects of inflation and stagnation a "'stagflation situation." The term was revived in the U.S. during the 1970s oil crisis, which caused a recession that included five consecutive quarters of negative GDP growth. Inflation doubled in 1973 and hit double digits in 1974. Unemployment reached 9% by May 1975. The effects of stagflation were illustrated by means of a misery index. This index, a simple sum of the inflation rate and the unemployment rate, tracked the real-world effects of stagflation on a nation's people. History of StagflationStagflation was once believed to be impossible. The economic theories that dominated academic and policy circles for much of the 20th century ruled it out of their models. In particular, the economic theory of the Phillips Curve, which developed in the context of Keynesian economics, portrayed macroeconomic policy as a trade-off between unemployment and inflation. As a result of the Great Depression and the ascendance of Keynesian economics, economists became preoccupied with the dangers of deflation and argued that most policies designed to lower inflation tend to increase unemployment, while policies designed to lower unemployment raise inflation. The advent of stagflation across the developed world later in the 20th century showed that this was not the case. Stagflation is a great example of how real-world experience can run roughshod over widely accepted economic theories and policy prescriptions. Since that time, inflation has proved to be persistent even during periods of slow or negative economic growth. In the past 50 years, every declared recession in the U.S. has seen a continuous, year-over-year rise in consumer price levels. The sole, partial exception to this is the lowest point of the 2008 financial crisis—and even then the price decline was confined to energy and transportation prices while overall consumer prices other than energy continued to rise. What Causes Stagflation?There is no real consensus among economists about the causes of stagflation. They have put forth several arguments to explain how it occurs, even though it was once considered impossible. Blame Oil Price ShocksOne theory states that stagflation is caused when a sudden increase in the cost of oil reduces an economy's productive capacity. The oil crisis of the 1970s is the prime example. In October 1973, the Organization of Petroleum Exporting Countries (OPEC) issued an embargo against Western countries. This caused the global price of oil to rise dramatically, therefore increasing the costs of goods and contributing to a rise in unemployment. Because transportation costs rose, producing products and getting them to shelves became more expensive and prices rose even as people were laid off from their jobs. Critics of this theory point out that sudden oil price shocks like those of the 1970s did not occur in connection with any of the simultaneous periods of inflation and recession that have occurred since the embargo. Blame Poor Economic PoliciesAnother theory is that the confluence of stagnation and inflation is the result of poorly made economic policy. Harsh regulation of markets, goods, and labor in an otherwise inflationary environment are cited as the possible cause of stagflation. Some point to former President Richard Nixon's policies, which may have led to the recession of 1970—a possible precursor to other periods of stagflation. Nixon put tariffs on imports and froze wages and prices for 90 days in an attempt to prevent prices from rising. Once the controls were relaxed, the rapid acceleration of prices led to economic chaos. While appealing, this is an ad-hoc explanation of the stagflation of the 1970s which does not explain later periods that showed a simultaneous rise in prices and unemployment. Blame the Loss of the Gold StandardOther theories point to monetary factors that may also play a role in stagflation. Nixon removed the last indirect vestiges of the gold standard, bringing down the Bretton Woods system that had controlled currency exchange rates. This decision removed commodity backing for the currency and put the U.S. dollar and most other world currencies on a fiat basis, ending most practical constraints on monetary expansion and currency devaluation. Stagflation vs. InflationWhatever the explanation, we have seen inflation persist during periods of economic stagnation since the 1970s. Even before the 1970s, some economists criticized the notion of a stable relationship between inflation and unemployment. They argue that consumers and producers adjust their economic behavior to rising price levels either in reaction to—or in expectation of—monetary policy changes. As a result, prices rise in response to expansionary monetary policy without any corresponding decrease in unemployment, while unemployment rates rise or fall based on real economic shocks to the economy. This implies that attempts to stimulate the economy during recessions could simply inflate prices without promoting real economic growth. Urbanist and author Jane Jacobs saw the disagreements between economists on the causes of the stagflation of the ‘70s as a misplacement of scholarly focus on the nation rather than the city as the primary economic engine. She believed that to avoid the phenomenon of stagflation, a country needed to provide an incentive to develop "import-replacing cities"—that is, cities that balance import with production. This idea, essentially the diversification of the economies of cities, was critiqued for its lack of scholarship by some, but held weight with others. Special ConsiderationsThe de facto consensus on stagflation among most economists and policymakers has been to essentially redefine what they mean by the term inflation in the era of modern currency and financial systems. Persistently rising price levels and falling purchasing power—i.e., inflation—are just normal conditions of good and bad economic times. Economists and policymakers generally assume that prices will rise, and largely focus on accelerating and decelerating inflation rather than on inflation itself. The dramatic episodes of stagflation in the 1970s may be historical footnotes today. But, since then, simultaneous economic stagnation and rising prices appear to be part of the new normal of economic downturns. What Causes Stagflation?Economists argue about the root causes of stagflation. In general, the stage is set for stagflation when a supply shock occurs. This is an unexpected event, such as a disruption in the oil supply or a shortage of essential parts. Such a shock occurred during the COVID-19 pandemic with a disruption of the flow of semiconductors that slowed the production of everything from laptops to cars and appliances. Such a shock can affect all of the factors that make up stagflation: inflation, employment, and economic growth. Why Is Stagflation Bad?Stagflation is a combination of three negatives: slower economic growth, higher unemployment, and higher prices. This is a combination that isn't supposed to occur, in the logic of economics. Prices shouldn't go up when people have less money to spend. What Is the Cure for Stagflation?There is no definitive cure for stagflation. The consensus among economists is that productivity has to be increased to the point where it will lead to higher growth without additional inflation. This would then allow for the tightening of monetary policy to rein in the inflation component of stagflation. That is easier said than done, so the key to preventing stagflation is for economic policymakers to be extremely proactive in avoiding it. Which of the following is an example of a negative real shock to an economy?an increase in the inflation rate but a decrease in the real GDP growth rate. Which of the following is an example of a negative shock to an economy? not adjusted for inflation.
Which condition is mentioned in the textbook as a real shock that contributed to the Great Depression?The Great Depression was caused by a combination of real shocks and aggregate demand shocks. The Great Depression was not caused by shocks to the economy but rather by a stock market crash.
Which of the following is true about inflation?The true statement is option d) It refers to an increase in the average level of prices. The inflation over a given period signifies the general increase in the average price level of goods and services.
What impact will lower taxes have on the AD curve?The tax cut, by increasing consumption, shifts the AD curve to the right.
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Which of the following is a negative real shock that occurred during the great depression?
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