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The End of One Big Deflation. Peter Temin and Barrie A. Wigmore. Introduction. Explanation for the US recovery from the Great Depression in the second quarter of 1933 Explanation relies on Sargent’s (1983) model of changes in policy regimes

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the end of one big deflation

The End of One Big Deflation

Peter Temin and Barrie A. Wigmore

  • Explanation for the US recovery from the Great Depression in the second quarter of 1933
  • Explanation relies on Sargent’s (1983) model of changes in policy regimes
  • Friedman and Schwartz claim “the reopening of the banks was followed by a rapid spurt in personal income and industrial production”
  • This was not cause for recovery…

National Industrial Recovery act anticipated higher costs and prices which led to a rise in the money supply

  • Temin and Wigmore argue that the supply of money did not rise at the turning point of the Depression.
  • Devaluation of the currency was key to the turning point leading to recovery
  • More importantly, a change in expectations brought about recovery, but how?
sargent s explanation
Sargent’s explanation
  • “the key to a costless stabilization was the establishment of a new policy regime”
  • “immediate effects were through rapidly revised expectations”
  • “changing expectations were the key to stabilization”
  • Hoover supported the gold standard—devaluation was not an option
  • Roosevelt devalued the dollar within 6 weeks of inauguration
  • Devaluation had effects on prices and production throughout the economy

Before FDR

  • Economic actors expected continued contraction
  • People expected continued deflation because of government’s monetary and fiscal policies warranted those expectations
  • Required a change in the policy regime--taking action


  • That action was devaluation
    • Signaled the abandonment of the gold standard
    • It had expansionary effects on American industry
historical narrative
Historical Narrative
  • Hoover Administration
    • Supported Gold Standard
    • Focused on efforts to bolster credit markets rather than the economy directly
  • RFC
    • Relief of financial institutions to promote investment
  • Stock market a good index of expectations
  • Value of stock prices rise because of expected inflation
  • “change in expectations, therefore, stimulated business investment and expenditures on consumer durables, not consumption”


Producer Price Index

  • Roosevelt restricted gold transactions in March 1933
  • Grain and cotton prices rose as the value of the dollar fell, farmers had higher incomes
  • Rise in the demand for automobiles encouraged a rise in auto production, steel production, and industrial production
  • Inflationary expectations caused a shift in asset holding
  • Successful “reflationary” policy
  • “A dramatic shift in the policy regime had dramatic effects on the economy”
  • Temin and Wigmore suggest that if Hoover would have done what FDR did, the economy would have recovered earlier