How Hoover’s Wage & Cartelisation Policies Caused the Great Depression

UCLA economist Lee Ohania points out that in late 1929 and early 1930 a Depression-level industrial employment crash occurred before any serious deflation or banking panic hit the U.S. economy:

Economists cite monetary contraction (Friedman and Schwartz, 1963) and banking panics (Bernanke, 1983) as important determinants of the Depression, but industry was significantly depressed before either of these factors was quantitatively important. The attached figure shows per-capita industrial hours worked between January 1929 and September 1930, and two measures of the money stock from Friedman and Schwartz that roughly correspond to M1 and M2. Hours decline substantially, but these two measures of the money supply fall only about 4%, and 1%, respectively. Moreover, there are no significant banking panics during this early stage of the Depression. Friedman and Schwartz date the first banking panic occurring from November 1930 until January 1931, but this first episode is after industrial hours have fallen 30%. Moreover, Wicker (1996) argues that this first banking episode did not have important macroeconomic effects, which he states is also consistent with the views of Friedman and Schwartz.

Here’s Ohanian’s key graphic:


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One Response to How Hoover’s Wage & Cartelisation Policies Caused the Great Depression

  1. s says:

    I’m not entirely sure why you conclusively and exclusively attribute these to wage and cartelisation policies. Wouldn’t a more Hayekian interpretation hold that this is also because of the liquidation of the malinvestments taking place in the economy? Of course, the wage and price controls made things worse and are a cause of this drop, but I think a more correct interpretation would hold that the liquidation of malinvestments and the wage and price controls caused the depression. The deflationist drop in banking credit was a symptom, not a cause. This, I believe, pin-points the exact problem with the Friedmanite view of the depression.

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