Straight away in chapter 10 Wheelan writes about the importance of "effective monetary policy" (Wheelan 220.) Wheelan also references Robert Mondell who is famous for his theories on causes of inflation and deflation in the 1920's and 30's. Mundell won the Nobel Prize in 1999 for his theories on the effects of an insufficient monetary policy on the long lasting deflation in the 1920's and 30's. Mundell even argued that the "bungled" monetary policy instilled throughout the early 1900's ultimately caused the Great Depression. I thought this was so interesting and perplexing, so I decided to look up Mundell's Nobel Prize lecture from 1999, in order to learn more.
The first thing I didn't understand was what caused the deflation in the United States that caused the Great Depression. Mundell proposed that because of Great Britain's "deficit spending" during WWI (which went straight to the United States) they were pushed off of the gold standard. When all of that gold came to the United States, the newly founded Federal Reserve monetarized the gold in a way that caused the dollar to double in price level and the value of gold to decrease by 50%. After WWI European countries switched back to the gold standard, but the dollar price was still at a 40% increase causing a world wide deflation in the value of gold. This deflation caused the demand of gold reserves to go way up, and prices of goods and services to decrease. The monetary distribution of gold was also facilitated poorly. Half of the world's gold supply was in the United States.
I still don't understand this completely, but Mundell proposes that the ultimate cause of the Great Depression was a shift in aggregate demand, and a shortage of money throughout the U.S.
A link to the page I found Robert Mundell's lecture on:
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1999/mundell-lecture.html
No comments:
Post a Comment