In this paper I plan to explore the immediate effects of the great depression, the dramatic fall in output, and the legacy of the great depression's monetary policy. This paper is written a little unconventionally and I plan on trying to make the best of it. The topic chosen here is one that has been a huge interest to many economists throughout time, it has been a very difficult topic and one that is not to be taken lightly. There are many opinions on the great depression, it's effects and the rights and wrongs that came of it. As stated previously this paper is written a little differently simply because I am not an expert, so I thought it best to use the words of the experts, the people and economists that have studied this time and it's effects so vigorously and undauntedly. The first economist I use is Margo, he examines the impact of the Great Depression on labor and labor markets.

Unlike most previous studies, Margo analyzes labor during the depression at both the macroeconomic and microeconomic levels. The main focus of his studies was at the microeconomic level. Margo draws heavily on the public use microdata sample (PUMS) to examine the great depression. Drawing on his previous research (Margo 1988, 1991), he notes that "the unemployed were disproportionately young or older and tended to have fewer skills and less education than employed persons.

These differences were stranger comparing the employed with the long-term unemployed or... with persons on work relief." In addition, Margo notes that the PUMS is useful in examining New Deal work-relief programs. A particularly interesting question, which Margo also addressed in a series of previous papers, concerns the impact of work relief on labor supply. Conventional wisdom holds that the Great Depression helped produce a more equal income distribution. Margo examines this conventional wisdom and finds that the data do not support it.

He finds that, "What appears to have happened is that wage differentials between skilled and unskilled labor widened in the early years of the depression." Margo further states, "The wage structure snapped back, however, and by 1939 it appears to have been little different from its counterpart in the late 1920 s." Margo goes on to note that the great compression of the 1940 s "produced a substantial narrowing in wage inequality." Margo also examines self-employment during the Great Depression and concludes, "Although there is much more work to be done, clearly it seems that self-employment was an option for many of the jobless... ." The second economist used here is Heim, he explores the effects of the great depression on different industries, regions, and nations. As Heim notes, "the impact of the Great Depression was highly uneven... although one-quarter of the U. S. labor force was unemployed at the low point in 1933, those who kept their jobs saw their purchasing power increase as prices fell." Heim examines the impacts of the depression on different regions in the United States and the United Kingdom.

She concludes that the great depression worsened the problems of the older industrial areas in the United Kingdom. In the United States, government policies that resulted from the great depression had positive long-run impacts on the south. Most important among these policies were the "New Deal" agricultural and minimum wage policies, which helped link southern labor markets with those in the rest of the U. S. economy.

Heim shows that in both the United Kingdom and the United States, some industries were much more affected than others. For example, Heim notes that shipbuilding in the United Kingdom fell by 90 percent during the 1929-1932 period. However, during the same period, output in the United Kingdom actually rose in industries such as paper and printing, leather, and food (Ald croft 1970). Heim states that in the United States, "Throughout the 1930 s, the food, leather, petroleum, and tobacco products sectors were relatively depression-proof." Heim notes that industrialization accelerated in many less-developed countries during the great depression and subsequent decades. She concludes that this industrialization resulted from the less-developed countries being not linked from the international economy.

This de liking, or lack of linking, caused countries in parts of Latin America, Africa, and Asia to shift production away from exports such as agricultural products and minerals and toward production of manufactured goods. Bernstein provides an interesting mix of economic history and he is the third economist that I have chosen to use. Bernstein views the great depression through the eyes of several authors who, over the years, have tried to explain the event. Bernstein's analysis contains a summary of the well-known views of such macroeconomist's as Friedman and Schwartz (1963), Keynes (1964), and Tem in (1976). However, Bernstein's major contribution is an analysis of the views of economists who attempted to examine the great depression outside the realm of what is consider as standard macroeconomic theories.

In this analysis, Bernstein draws on a rich body of economic theory. Bernstein notes that Harris (1948) and Sweeny (1939, 1968) argued that the distribution of income had become increasingly skewed in the 1920 s. This, they argued, "decreased the average propensity to consume and reduced national income." Other economists, such as Kindle berger (1973) and Lewis (1950), "focused on a secular shift in the terms of trade between primary products and manufactured goods, due to the uneven development of the agricultural and industrial nations." Bernstein also notes that industrial organization economists, "sought an explanation of the depression in the increasing extent of imperfect competition in the American economy of the early 20 th century." On the other hand, "held that the inter-war period was an era in which three major cycles of economic activity in the United States (and Europe) coincidentally reached their peak." Bernstein goes on to discuss ideas on economic maturity. All of which did not exactly find to be useful in my analysis of the analysis of the great depression. Fackler, being the forth economist, reviews and tests theories of the propagation of the Great Depression. The money view, argues that inappropriate monetary policy played a key role in the propagation ofthe Great Depression.

The autonomous spending view argues that a fall in autonomous consumption was the major cause of the decline in output during the depression. Fackler also draws on the recent work of Romer (1988) who argues that "uncertainty effects due to stock market variability can explain most of the unusual behavior of consumer spending on durable and semi durable goods in the first year and a half of the great depression." Fackler also examines the credit view and the debt-deflation hypothesis. As Fackler notes, "The credit view model demonstrates how a deflationary shock can disrupt the credit intermediation process and cause a sustained decline in output." Fackler constructs an econometric model to examine the degree to which the various theories explain the path of output during the Depression. The model is an IS-LM, AD-AS model augmented to incorporate the various theories of the very odd mechanism. Fackler finds that for the entire Depression period, there is not "a single, dominant explanation of the depression." However, shocks to the IS curve best capture the characteristic phases of the great depression.

(According to Fackler) Furthermore, the credit view works well in explaining the fall in output over the period of the stock market crash and around the bank panics in the early 1930 s. Bringing back Heim, he maintains that the great depression caused lasting changes in monetary institutions that ultimately gave monetary policy an inflationary bias. Heim goes on to argue that the Federal Reserve's inflationary policy led to the collapse of the Bretton Woods System and abandonment of international linkages altogether. A key event in the collapse of the Bretton Woods System was President Nixon's 1971 decision to suspend the convertibility of the dollar into gold in response to the increasing balance of payments deficit in the United States. Heim outlines the institutional reforms, enacted during the great depression that have the most important consequences for present monetary policy.

He notes that the most significant reforms were the Glass-Steagall act of 1932, which permitted the Federal Reserve to use government securities to back its note issues; suspension of the international gold standard by executive order on March 6, 1933 (ratified by Congress on March 9); the Thomas amendment to the Agricultural Adjustment Act of 1933, which, among other things, permitted the Federal Reserve to adjust commercial bank reserve requirements. Another being the Gold Reserve Act of 1934, which authorized the president to fix the dollar price of gold and established the treasury's exchange stabilization fund. And the last being the banking act of 1935, which markedly altered the structure of the federal reserve system and expanded the Fed's authority to adjust reserve requirements. According to Heim, these reforms, together with the rise of keynesian policymaking, led to the Fed's inflationary bias. As Heim notes, permitting Federal Reserve notes to be backed by U. S.

government securities enhanced the Federal Reserve's ability to monitor government debt and removed a major constraint on monetary policy. Suspension of the gold standard made possible the rising balance of payments deficit, as well as Nixon's response to it. Bringing back Margo, he tries to spell out lessons for current policy that can be gained from examination of monetary policy during the great depression. Margo begins by examining four common beliefs associated with the great depression: 1. The Great Depression was caused by the stock market crash of 1929.

2. The banking system of the 1920 s was fundamentally unsound. 3. The fact that nominal interest rates were approaching zero meant that Federal Reserve policy was loose and ineffective.

4. Tariff wars were primarily responsible for the spread and depth of the Depression. Margo demonstrates the fallacious nature of these four statements. Of particular interest is Margo discussion of the tightness of monetary policy during the great depression. He points out that nominal interest rates were low during the depression, but that real interest rates were extremely high due to the nature of the period's deflation.

If we consider real rates of interest, the Federal Reserves monetary policy was, in fact, extremely tight. Examination of the four fallacies leads Margo to three lessons for current policy: 1. The central bank's function as the lender of last resort is of primary importance in the short-term stabilization of the financial system. 2.

Deflation is extremely costly. 3. A gold standard is very dangerous. All in all Margo appeared to be right on with his ideas and his theories on the policies and the implicit and irreversible damage that the did. Margo, Heim, Bernstein, Fackler, expand our understanding of an important period in economic history. Although there views are not considered to be absolute, then again there is no science on earth where a certain groups views are deemed absolute.

Just as in economics, especially when you are dealing with a topic that is as reviewed and is as heavily studied, these thoughts and theories are based on the study done by the above listed economists. There thoughts and ideas are not the absolute but to me in my research they seemed to make the most sense do to what actually happened. The great depression was a time where they " re where many uncertainties in life and many people lost there lives, there jobs and there sanity. I can only do this paper according to the information that is afforded to me and the research that is allowed me. But to imagine the actual events in there ugliness is something I can say I am very very grateful that I did not have to live through. People having to work for near to nothing to put bread on the table, and literally I mean bread, no special foods no extras, many people suffered through the great depression by surviving on bread and water.

My grandfather was alive at the time of the great depression even though he was a young man on only 12 years old he does remember some of the time. I was interested in asking him and he said he couldn't remember much, and he then told me that from what little he does remember he can honestly say that he is very glad that he does not remember more. And that tells me something, he fought in World War II, he was a decorated officer that saw combat, and for him to say that tells me something of the terrible times that he and my family must have faced. Although he is glad that he does not remember we must, and that is all I am trying to do... remember the black days of the great depression.