Bernanke’s ＂Holy Grail＂： The Background and Incentives of the Great Depression in the 1930s.

Sun Shuqiang/Wen

Ben Bernanke, former chairman of the Federal Reserve, wrote in the preface to the Great Depression: "Explaining the Great Depression is the holy grail of macroeconomics. Although a lot of time and energy have been spent, people have not touched the edge of the holy grail at all." "In the long river of history, the Great Depression is an incredible episode-stock market crash, hungry people everywhere, begging for alms, bank runs, crazy currency speculation, and over all this, there is a rolling cloud of war … I am addicted to studying the Great Depression because it is an fascinating event that happened in a critical period in modern history … The Great Depression has fundamentally improved our understanding of the economy." Then, in the first chapter, Bernanke wrote: "The Great Depression not only made macroeconomics an independent research field, but also continuously influenced the credo, policy suggestions and research process of macroeconomists. Aside from practicality, it has always been a fascinating intellectual challenge to explain the global economic collapse in the 1930 s. "

Arnold Tong, a British historian, wrote in the book Overview of International Affairs published in 1932: "Members of this great, ancient and always successful society are asking themselves: Is the long-term course of western life and its growth likely to come to an end in their time?" The Great Depression was a disaster in the economic history of mankind. Its influence was not only confined to the economic field, but also had a great impact on politics, and even led to the outbreak of the Second World War. The Great Depression also promoted the germination and development of macroeconomics. Starting with Keynes’s General Theory of Employment, Interest and Money, many creeds that we regard as the standard today are the direct consequences of the Great Depression.

If nearly a hundred years have passed since the Great Depression began in 1929, people’s interest and exploration in the Great Depression seems to be in the ascendant. Numerous scholars have made endless research and exploration on the causes, great damage and long duration of the Great Depression from various angles, but the debate is still fierce. Undoubtedly, the Great Depression will occupy an important place in the research list of economists for many years to come. However, it seems reasonable for scholars to explore the Great Depression from a certain aspect, but only one angle can not explain the economic disaster that has such a wide impact. It is necessary to observe the Great Depression from point to point and spy out the broader economic and social background of the Great Depression.

An important source of information for studying the Great Depression is a large number of historical books, some of which are not specifically aimed at the Great Depression, but in the book, we can pick up many fragments about the Great Depression and put together a bigger picture about the Great Depression, and examine the causes and consequences of the Great Depression from various angles. Based on the records of many historical books, this paper attempts to sort out and summarize the economic and social background related to the Great Depression, the factors that contributed to the deterioration of the Great Depression, the changes in management economic concepts, Roosevelt’s New Deal and other related contents, thus forming a more comprehensive analytical framework for the Great Depression. Of course, studying the Great Depression itself is a fascinating question, but the Great Depression is a mirror from which we can examine the current economic and financial situation and reflect on whether we have gone astray.

General situation of American economy and society before the Great Depression

It would be biased to study economic events like the Great Depression only from the outbreak of the Great Depression. There must be a harbinger of what is about to happen. The economic, financial and social development of the previous period provided a good background for us to observe the Great Depression. At the same time, in view of the wide influence, long duration and deep recession of the Great Depression, it is inevitable to fall into one-sided analysis only from one aspect.

Before the Great Depression, johncalvin coolidge was in power from 1923 to the beginning of 1929, and his ruling philosophy was small government and free market. After Coolidge came to power, he implemented substantial tax cuts and reduced government expenditure. During Coolidge’s administration, the American economy seemed to be thriving and the situation was excellent. Hoover inherited Coolidge’s ruling idea, even worse. Hoover said in a speech that "our American attempt to pursue human happiness is unparalleled in the world because it follows the principle of decentralized power and self-governance, and believes in an orderly free system, equal opportunity and individual freedom."

Before the Great Depression, the inequality in America was very serious. According to the data provided by Catherine Marsh’s Great Depression: 1929-1933, the total income of 0.1% of the richest families in the United States is equal to the total income of 42% of the poorest families. Nearly three-quarters of Americans earn less than $2,500 a year, but 24,000 families earn more than $100,000 a year, and 513 people earn more than $1 million a year. The prosperity enjoyed by the rich and the upper class does not extend to the working class, and more than 40% of Americans live below the poverty line; On the eve of the Great Depression, although 80% households had no savings, the richest 0.5% households owned nearly one-third of the net wealth of the United States, which was the biggest gap between the rich and the poor in American history. In his book Biography of the Chairman of the Federal Reserve: From Issuing Dollars to Manipulating the World, Skyne mentioned that in the roaring 1920s, the GDP of the 16 largest chaebol in the United States accounted for 53% of the gross national product. On the one hand, one-third of the national income is occupied by the richest people who account for 5% of the population; On the other hand, about 60% of American families are still struggling below the subsistence level.

There was a serious debt backlog in the 1920s. In his book The Great Depression, Bernanke quoted data from other studies, showing that the outstanding corporate bonds and bills increased from $26.1 billion in 1920 to $47.1 billion in 1928. In the same period, the public bonds of non-federal government increased from $11.8 billion to $33.6 billion (the national income of the United States was only $86.8 billion in 1929, which shows how serious the debt backlog was at that time); What is more noteworthy is that in the 1920s, the debts of small borrowers such as households and unincorporated enterprises increased sharply. For example, the outstanding value of urban real estate mortgage loans increased from $11 billion in 1920 to $27.9 billion in 1929, and the growth of consumer mortgage loans reflected that major durable consumer goods began to enter the mass market. Judging from the loans provided by banks to stock brokers, it was common in the 1920s that brokers used loans from banks to hoard stocks, or lent them to customers with deposits to buy stocks. In general margin trading, investors generally paid only 20% to 25% of the total investment, and the rest were borrowed. While the debt structure is still relatively rigid, other indicators have shrunk dramatically. In 1932, the total interest payment was only 3.5% less than that in 1929, but according to simon Kuznets’s estimation, the salary expenditure decreased by 40%, the dividend payment decreased by 56.6% and the salary expenditure decreased by 60%.

Before the outbreak of the Great Depression, the situation of enterprise merger and monopoly was more serious. After World War I, thanks to the improvement of production efficiency and the progress of management technology, large-scale production was gradually applied, and economies of scale provided the foundation for mergers. However, in view of the strict anti-monopoly and antitrust in the United States in the early 20th century, M&A in the 1920s occurred more in the vertical field of enterprises, that is, vertical M&A, that is, M&A between the upstream and downstream of the production chain. For example, research shows that during the peak period of M&A from 1926 to 1930, there were 4,600 M&A cases in the United States. Even after the stock market crash, the wave of mergers continued. Allen wrote in the book "The Age of the Great Tear": "The enthusiasm for mergers, alliances and holding company empires has resurfaced: the Van Swaringer consortium completed their acquisition of the Missouri Pacific Railway Company; The merger process of aviation industry and many other industries has started again; Chase Bank in new york merged its two competitors and became the largest bank in the world. " Monopoly will have some negative effects on the economy and make some rules of the free market economy invalid, which is also the reason why it may have serious consequences to continue to insist on the automatic adjustment of the market after the outbreak of the Great Depression.

American consumer culture flourished in the 1920s. After World War I, novelty such as cars, radios and movies gradually became popular among ordinary American consumers. Thanks to the economic prosperity, consumer culture also became popular. In order to promote sales, advertising and sales promotion are gradually implemented in sales, and installment payment is also used as a means to expand sales. John gordon wrote in The Great Game: The Rise of Wall Street Financial Empire: "In the 1920s, the rapid development of advertising industry and the wide application of credit stimulated the increase of demand to a greater extent. By the mid-1920s, many ordinary people began to use credit consumption to buy some bulky goods. Before the 1920s, credit was the patent of the rich … The popularity of credit greatly enhanced the purchasing power and purchase volume of the middle class ". Allen wrote in the book "The Great Prosperity Era": "The salesman and promoter system in the United States appeared in the 1920s. It is this system that makes manufacturers or companies put sales in the same important position as production, and even put sales in a more important position than production." Living within our means is a virtue, and it is almost certain that excessive consumption is not a good thing for the economy at any time.

Agriculture and rural areas in the United States are gradually going into depression. In the 1920s, American agriculture gradually declined, rural purchasing power was insufficient, and farmers’ income decreased year by year. In the first 30 years of the 20th century, the popularity of automobiles was good for industry, but it was a disaster for farmers. In 1900, one-third of the cultivated land in the United States was used to produce feed for millions of horses and mules in the United States, but as cars replaced these livestock, more and more cultivated land was used to produce food. During the First World War, the huge demand for food created an illusion, but by the 1920s, the supply of food surged, while the income of rural areas fell sharply due to the oversupply of agricultural products. According to the data provided by Skyne, the income of farmers accounted for 16% of the total national income in 1919, and fell to 8.8% in 1929. Bankrupt farmers can be seen everywhere, and the life of farmers is even more difficult. Their income is less than 1/3 of the national average. The impact of technological progress on agriculture is also enormous. Mechanical equipment reduces the demand for manual workers, and food prices fall with the decrease of profits, so small farmers can’t pay the cost of new equipment. More unfortunately, during the Great Depression, the climate in some parts of the United States was abnormal, and the drought lasted for many years. The weather without rain for a long time seemed to be nature’s revenge on mankind. In 1932, the National Weather Service recorded 14 sandstorms, which increased to 38 in 1933. For many people, the prospect of farming and earning a living is rapidly disappearing. A farmer sleeping on the street said:"I earned $7,000 growing cotton in 1927, lost everything in 1931, and began to wander in 1932."

Speculation in the stock market is serious and the bubble is constantly expanding. We all know that the stock market crash in October 1929 started the prelude to the Great Depression, which had a series of serious consequences, so many studies regarded the stock market crash as the fuse of the Great Depression. Of course, the US stock market does not bubble out of thin air, but also focuses on the real economy. According to the data provided by john gordon in The Great Game, the widespread use of electricity in the 1920s greatly increased labor productivity by 40%, and at the same time, the wave of M&A made American industry realize the scale effect better. In the 1920s, new economic forces marked by automobiles and railways gradually formed, and the consumption of automobiles, radio communication and household appliances increased exponentially. From 1922 to 1927, the average profit of American companies increased by 75%, which stimulated the stock market to soar. By 1929, there were 2-3 million families in the United States, that is, 1/10 of the national population invested their money in the stock market. Buying and selling stocks has become a common hobby of Americans, and the whole country is addicted to it. Claude coburn, a British journalist who has just arrived in the United States, said: "You can talk about the ban, or Hemingway, or air quality or even music and houses, but in the end you still have to talk about the stock market, so that this conversation will be meaningful." At the same time, President Coolidge and Treasury Secretary Andrew Mellon also gave their full support to the stock market, adding fuel to the flames on Wall Street, because as long as the stock market shows some signs of weakness, these two people will come out to make speeches and reassure the American people.

According to the data given by Liaquat Ahmed in The King of Finance: Banker Who Ruined the World, in the summer of 1928, the Dow Jones index was close to 200 points. At that time, the market seemed to develop independently from the real economy. In the following 15 months, the Dow Jones index rose from 200 points to 380 points. The existence of a bubble is an indisputable fact, and the rise of stock price far exceeded the growth of corporate profits. In March 1929, paul warburg, one of the founders of the Federal Reserve, warned: "The tragedy of history will always repeat itself, which makes us realize that no matter what excessive speculation, it will eventually end in pain and excessive contraction."

Factors that exacerbated the Great Depression

One thing we should pay attention to when studying the Great Depression is to clearly distinguish between the trigger factors and the factors that make the Great Depression worse. At present, there is no conclusion about the trigger of the Great Depression, and many studies have explained it from different angles, and it can be predicted that the trigger will still be in a state of endless debate for a long time to come. However, there is much consensus on which factors affected the severity of the Great Depression, but as we pointed out above, even though we can emphasize the role of a single factor in the evolution of the Great Depression, it seems to be more in line with the actual situation from multiple perspectives, that is to say, the Great Depression is a systematic problem in which the economic and financial systems are in disorder.

Keynes analyzed from the perspective of demand, and thought that the lack of effective demand was the cause of economic recession, including the demand of residents and the investment demand of enterprises. Among them, the investment demand of enterprises is influenced by the "animal spirit" and has great uncertainty, which requires the government to increase expenditure and make up for the demand when the economy is in recession and the demand is insufficient, so as to avoid the sustained economic decline.

In his book Prosperity and Depression published in 1932, irving fisher put forward the theory of "debt-deflation" to explain the Great Depression, which was thought to be caused by excessive debts of enterprises. When the economy is in a state of "excessive debt" at a certain point, debtors or creditors will speed up debt repayment out of caution, which will lead to a series of vicious cycles such as asset selling, currency circulation speed decline, price decline, enterprise assets shrinkage and investment reduction.

Milton friedman and Anna Schwartz pointed out in The History of American Currency (1867-1960): "If the monetary authorities take other feasible measures, they can stop the decline of the money stock-in fact, it can bring about almost any desirable increase in the money stock. The same action can also greatly alleviate the banking crisis. If measures are taken to prevent or curb the decline of the money stock, the harm of the Great Depression can be alleviated, and the duration of the depression can almost certainly be shortened, let alone monetary expansion measures. The Great Depression may still cause considerable damage. However, if the money stock does not decline, it is hard to believe that the money income will drop by more than one third and the price level will drop by more than one third in four years. "

AlanMeltzer pointed out in his book AHistoryoftheFederalReserve Server that extreme views such as monetary policy being the only cause of the Great Depression or monetary policy having nothing to do with the Great Depression are untenable. The Great Depression can be called a monetary event in two aspects: first, monetary policy could have alleviated or prevented the economic downturn, but it did not. In this sense, the Great Depression was a response to monetary policy; Second, the initial economic downturn was a response to negative currency shocks.

However, it is also biased to criticize the improper handling of the Fed at that time from the present perspective. After all, the intervention of monetary and fiscal policies in the economy at that time was not deeply rooted in the hearts of the people, and even caused strong opposition. At that time, the federal reserve act stipulated that the Fed must hold collateral, and when issuing currency, it must be supported by gold or commercial paper generated in commercial transactions, which is a rule formulated according to the real paper theory. Due to the contraction of economic activities, the commercial paper that can be created is not enough to support the Federal Reserve’s currency issuance.

Barry eichengreen and some other researchers believe that the gold standard aggravated the severity of the Great Depression. For example, eichengreen thinks that the gold standard is the key to understand the Great Depression in his book The Golden fetters: The Gold Standard and the Great Depression. The gold standard in the 1920s made the international financial system more fragile, thus laying a hidden danger for the Great Depression in the 1930s. The gold standard spread the unstable shock from the United States to the world, which amplified the initial unstable shock. The gold standard is the main obstacle to offset action, and it is also the constraint for policy makers in the process of avoiding bank failures and controlling the spread of financial panic. The relevant research cited by Bernanke in the book Great Depression and his own research also show that countries that adhere to the gold standard have suffered more serious output decline and price decline.

In recent years, Gu Chaoming, chief economist of Nomura Securities, put forward the theory of balance sheet recession in his series of books to explain the Great Depression. He believed that the reason why the Great Depression was so serious was that many assets with bubbles accumulated on the balance sheet of enterprises. After the asset price fell, the balance sheet of enterprises was damaged and apparently insolvent. In order to repair the balance sheet, enterprises would speed up debt repayment and reduce investment, which would lead to insufficient demand, useless monetary policy and fall into a liquidity trap.

Some studies believe that Smoot-Hawley Tariff Act passed by the United States at the beginning of the Great Depression aggravated the severity of the Great Depression. Reid smoot, Republican of Utah and Chairman of the Senate Finance Committee, and Wells C. Hawley, Republican of Oregon and Chairman of the House Ways and Means Committee jointly promoted the smoot-Hawley Tariff Act, which raised import tariffs and implemented the beggar-thy-neighbor policy, which led to retaliatory actions by European countries. In the book "Mirror Hall: Great Depression and Great Recession, What Did We Do Right and What Did We Do Wrong", the author cites relevant research and thinks that tariffs have little impact on the American economy and other economies, and its real evil result is to destroy the cooperative atmosphere of the international community. The US trade protection policy has triggered retaliation from other countries, and at that time, it should have required the full cooperation of all countries to deal with the Great Depression.