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The Great Depression and Mr. Keynes

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The 24th of October, 1929, known as Black Thursday, started just like any other day. It rained in New York City, and the temperature fluctuated between a low of 44 and a high of 59 degrees Fahrenheit. The previous day, according to the New York Times, “firm tone” prevailed on the London Exchange, “French stocks [were] uneven,” and on the German Boerse “losses due to profit-taking [were] mostly recovered.” Perhaps the only indication that something was amiss was the Times report that in the previous day unlisted stocks had sharply declined.

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More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment.

From the inaugural speech of President Franklin Roosevelt , 1933

I believe myself to be writing a book on economic theory which will largely revolutionize—not, I suppose, at once but in the course of the next ten years—the way the world thinks about economic problems.

From Keynes ’s letter of January 1, 1935 to George Bernard Shaw

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Notes

  1. 1.

    A good read on the conditions of the country in those years and indeed up to the early 1970s is William Manchester (1974). More recent books include David Kennedy (1999); and Adam Cohen (2009).

  2. 2.

    General MacArthur had exceeded his authority, but Hoover assumed full responsibility for the event. See, Kennedy (1999), p. 92.

  3. 3.

    For a background on this law, see “The battle of Smoot-Hawley,” The Economist, December 20, 2008, pp. 125–126.

  4. 4.

    It is not the intention of this section to present a full account of the New Deal , nor is such a feat possible in anything less than a whole book. Yet every macroeconomist needs to be quite familiar with these programs. There are a large number of books on the subject and hopefully the section whets the reader’s appetite to seek and study them.

  5. 5.

    Arthur Schlesinger (1958), pp. 180–181. The reader may find the echoes of the idea of limits to growth in the 1970 s and again in the early years of the twenty-first century.

  6. 6.

    These were different from the federal minimum wage laws . The first of such laws was passed in 1938 requiring a minimum wage of 25 cents per hour. Of course, each state has been free to set its own minimum wage, which could not be below the federal level.

  7. 7.

    Schlesinger Jr., op. cit ., p. 175.

  8. 8.

    Irving Fisher (1867–1947) was a great economist and statistician and a pioneer in the use of mathematics and statistics in economics. He was also a campaigner for many causes including promotion of healthy living and hygiene, prohibition, eugenics, and establishing a league of nations. The ideas presented here are based on his “The Debt-Deflation Theory of Great Depressions,” Econometrica (October 1933), pp. 337–357.

  9. 9.

    The reader could see the similarities between 1929 and the credit crunch of 2007 resulting from the subprime mortgage problem and the echo of Fisher ’s theory in some comments made by economists and financial analysts.

  10. 10.

    We shall discuss in more details this equation and the theory behind it in Chap. 9.

  11. 11.

    From Keynes ’s letter of January 1, 1935 to George Bernard Shaw, The General Theory and After, Part I Preparation, Vol. XIII of the Collected Writings of John Maynard Keynes, Donald Moggridge (ed.), MacMillan, 1973, p. 492.

  12. 12.

    Keynes ’s marginal efficiency of capital is the same as the internal rate of return . It is the discount rate which makes the present value of the future stream of revenues generated by an investment project equal to the replacement cost of capital required by that investment.

  13. 13.

    More generally, since consumption is a function of income, \(\beta\) is the derivative of consumption with respect to disposable personal income \(\beta = dC/d(Y - T).\)

  14. 14.

    Money is an asset with low and even negative (considering inflation) rates of return. So it may be asked why anyone would hold money balances. Three motives have been forwarded for why individuals, firms, and governments hold money. They need money to pay for purchasing goods, services, and assets (transactions demand), for a rainy day (precautionary demand), and for taking advantage of the opportunities to buy high yield assets (speculative demand).

  15. 15.

    Here it is assumed that the central bank has full control of the nominal money supply . This is not a precise statement. For a fuller discussion of this point see Chap. 9.

  16. 16.

    David Laidler (1999).

  17. 17.

    J. C. Gilbert (1982), p. 13.

  18. 18.

    F. A. Hayek (1983), June 11, p. 39.

  19. 19.

    Milton Friedman (1962), pp. 1–2.

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Correspondence to Kamran Dadkhah .

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Dadkhah, K. (2009). The Great Depression and Mr. Keynes . In: The Evolution of Macroeconomic Theory and Policy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-77008-4_1

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