A Macro Interpretation of Recovery: Australia and Canada

Green, Alan G.; Sparks, Gordon R.

doi:10.1017/cbo9780511597206.005

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“…Countries with close economic ties to the U.S., such as Canada, had the greatest tendency to share in these conditions (Green and Sparks 1988). In contrast, countries with chronic exchange rate problems, notably Britain, did not share the same conditions because they did not share the same policies, their central banks being forced to put a damper on money and credit growth in order to defend weak currencies.…”

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“…46 We do not 45 Green and Sparks (1988) contrast the Australian and Canadian recoveries and attribute the timing of the turnaround to the identity of their principal trading partners: Australia's main export market, the UK, also began recovering at the end of 1931, whereas recovery in Canada's principal export market, the U.S., was delayed until 1933. 46 Note also that the R-squared of the regression (of the fall in output between 1929 and either 1931 or 1932 on the one hand and the deviation from trend of the boom indicator in 1928) is higher when we use the deviation of share prices from trend than when we use the composite.…”

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The Great Depression as a Credit Boom Gone Wrong

2003

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The experience of the 1990s renewed economists' interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organization and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realized. In addition, the structure and management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression. JEL classification codes: E3, N2.2

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The Great Depression as a Credit Boom Gone Wrong

2003

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“…43 Overall, this analysis points to the existence of a short but sharp credit boom in the second half of the 1920s, peaking in 1928 and most prominent in the United States. Countries with close economic ties to the U.S., such as Canada, had the greatest tendency to share in these conditions (Green and Sparks 1988). In contrast, countries with chronic exchange rate problems, notably Britain, did not share the same conditions because they did not share the same policies, their central banks being forced to put a damper on money and credit growth in order to defend weak currencies.…”

mentioning

confidence: 99%

“…Green and Sparks (1988) contrast the Australian and Canadian recoveries and attribute the timing of the turnaround to the identity of their principal trading partners: Australia=s main export market, the UK, also began recovering at the end of 1931, whereas recovery in Canada=s principal export market, the U.S., was delayed until 1933.46 Note also that the R-squared of the regression (of the fall in output between 1929 and either 1931 or 1932 on the one hand and the deviation from trend of the boom indicator in 1928)…”

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The Great Depression as a Credit Boom Gone Wrong

Eichengreen

Mitchener

Research in Economic History

121

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The experience of the 1990s renewed economists' interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organisation and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realised. In addition, the structure of management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression. JEL classification codes: E3, N2. 1 We thank Pipat Luengnaruemitchai and Justin Jones for research assistance and Michael Bordo, Alex Field, Charles Goodhart, and Ian McLean for comments. The views expressed are those of the authors and not those of the BIS. We dedicate this paper to the memory of Charles Kindleberger, whose passing coincided with its completion. 2 See for example Bernanke and Gertler (1999) or Tornell and Westerman (2002). 3 See Vila (2000), Borio, Fufine and Lowe (2001), and Borio and Lowe (2002). That this is the right policy conclusion is, of course, not universally agreed. On the controversy over the role of asset prices and credit conditions in the conduct of monetary policy, see Bullard and

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Limits of the Possible for Economic Policy Choice

Türegün

2022

Policy Responses to the Interwar Economic Crisis

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A Macro Interpretation of Recovery: Australia and Canada

Cited by 4 publications

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The Great Depression as a Credit Boom Gone Wrong

The Great Depression as a Credit Boom Gone Wrong

The Great Depression as a Credit Boom Gone Wrong

Limits of the Possible for Economic Policy Choice

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