The Household Balance Sheet and the Great Depression

The Journal of Economic History

Volumn 38, Issue 4, 1978, Pages 918-937

  Mishkin, Frederic S ^a  

^a UNIVERSITY OF CHICAGO   (United States)

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EID: 0001464773     PISSN: 00220507     EISSN: 14716372     Source Type: Journal    
DOI: 10.1017/S0022050700087167     Document Type: Article

References (56)

1. See Milton Friedman and Anna J. Schwartz, A Monetary History of the United States (Princeton, 1963).
2. See Ben Bolch and John Pilgrim, “A Reappraisal of Some Factors Associated with Fluctuations in the United States in the Interwar Period,” Southern Economic Journal, 39 (Jan. 1973), 327-44;
3. Robert A. Gordon, Economic Instability and American Economic Growth: The American Record (New York, 1974); and
4. Peter Temin, Did Monetary Forces Cause the Great Depression? (New York, 1976).
5. See George D. Green, “The Economic Impact of the Stock Market Boom and Crash of 1929,” in Federal Reserve Bank of Boston, Consumer Spending and Monetary Policy: The Linkages, Monetary Conference (June 1971), pp. 189-220; and
6. John B. Kirkwood, “The Great Depression: A Structural Analysis,” Journal of Money, Credit and Banking, 4 (Nov. 1972), 811-37.
7. Both Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica, 1 (Oct. 1933), 337-57, and
8. Charles P. Kindleberger, The World in Depression 1929-39 (London, 1973), promote the view that the deflation did affect aggregate demand and that it is one explanation for the seriousness of the contraction.
9. Albert Ando and Franco Modigliani, “The Life-Cycle' Hypothesis of Saving: Aggregate Implications and Tests,” American Economic Review, 53 (Mar. 1963), 55-84, and
10. Frederic S. Mishkin, “Illiquidity, Consumer Durable Expenditure, and Monetary Policy,” American Economic Review, 66 (Sept. 1976), 642-54.
11. Friedman and Schwartz, A Monetary History.
12. Models of the demand for household liabilities either are set in a nominal framework [Michael K. Evans and Avram Kisselgoff, “Demand for Consumer Installment Credit and Its Effects on Consumption,” in James Duesenberry, Gary Fromm, Lawrence Klein and Edwin Kuh, eds., The Brookings Model:. Some Further Results (New York, 1969)] or have an adjustment mechanism that views the change in liabilities as a function of real variables
13. [Frederic S. Mishkin, “Household Liabilities and the Generalized Stock-Adjustment Model,” Review of Economics and Statistics, 58 (Nov. 1976), 481-85 and
14. Brian Motley, “Household Demand for Assets: A Model of Short-Run Adjustments,” Review of Economics and Statistics, 52, (Aug. 1970), 236-41]. These models have the characteristics that a severe deflation will cause an increase in the real value of household liabilities in the short run, even if the consumers' desired levels of liabilities in real terms have fallen. The desired drop in real liabilities thus may not occur for several years, as was the case during the Great Depression.
15. The impact of household balance-sheet shifts on aggregate demand during the 1973-1975 recession is analyzed in Frederic S. Mishkin, “What Depressed the Consumer? The Household Balance-Sheet in the 1973-75 Recession,” Brookings Papers on Economic Activity, 1977:1, pp. 123-64. Household balance-sheet changes during this period do appear to have been an important factor promoting the severity of the 1973-75 recession, as seems to have been the case during the Great Depression.
16. Franco Modigliani, “Monetary Policy and Consumption,” in Federal Reserve Bank of Boston, Consumer Spending.and Monetary Policy: The Linkages, Monetary Conference (June 1971), pp. 9-84. In this article, Modigliani also cites references which lend further support to the life-cycle hypothesis.
17. The life-cycle models estimated in the current version of the MPS model (see MIT-PENN-SSRC, Quarterly Econometric Model Equations, January 1975, mimeo) and in Mishkin, “What Depressed….,” use different sample periods, different definitions of the wealth variable, and, in Mishkin, a different estimation technique. The overall wealth effect is still highly significant and does not deviate more than 10 percent from the.053 value.
18. See Barry Bosworth, “The Stock Market and the Economy,” Brookings Papers on Economic Activity, 1975:2, pp. 257-90 and Mishkin, “What Depressed….”
19. See Mishkin, “Illiquidity, Consumer Durable Expenditure,…,” for the specifics of the formal analysis from which this discussion is derived. The liquidity-hypothesis model also allows for perceptions of risk-influencing expenditure behavior. This aspect of the hypothesis is not discussed here as it is not crucial to the analysis of this paper.
20. Mishkin, “Illiquidity, Consumer Durable Expenditure,” Frederic S. Mishkin, Illiquidity, the Demand for Consumer Durables and Monetary Policy, Ph.D. Thesis, Massachusetts Institute of Technology, 1976, published as Research Report 61, Federal Reserve Bank of Boston, Boston, 1977; and
21. J. R. Kearl and Frederic S. Mishkin, “Illiquidity, the Demand for Residential Housing, and Monetary Policy ” Journal of Finance, 32 (Dec. 1977), 1571-86.
22. Kearl and Mishkin's expenditure model uses houshold liabilities excluding mortgage debt as the DE BT variable because mortgage debt is not expected to influence the consumer's decision to purchase new housing. See Kearl and Mishkin, “Illiquidity, the Demand for Residential Housing…,‘ for a discussion of this point.
23. Kearl and Mishkin, “Illiquidity, the Demand for Residential Housing…” and
24. Mishkin, “Illiquidity….”contain more detailed discussion of the estimated models above. The consumer expenditure model given here does not allow for a distributed lag on stock market asset holdings in the determination of the desired consumer durables stock, a feature of some of the estimated models in Mishkin, “Illiquidity….” The expenditure model given here is more useful than models with these lags for the calculations in the next section, as it has less complicated dynamic short-run balance-sheet effects.
25. Kearl and Mishkin, “Illiquidity, the Demand for Residential Housing…,” indicate that liquidity considerations might be important to consumers' desires for leased assets, such as multi-family housing, and find significant balance-sheet coefficients in multi-family housing equations. These coefficients, however, are not that robust when credit rationing variables are added as explanatory variables, and post-sample tracking of a multi-family housing equation with balance-sheet effects in Mishkin, “What Depressed…,” casts doubt on the existence of these effects for multi-family housing. Therefore, the multi-family housing equation with balance-sheet effects is not used for the analysis of the following section and is not reported on here.
26. See Mishkin, “What Depressed…,” and the references in footnote 16.
27. Analyzing the impact of household balance-sheet changes on the business cycle by using the desirable methodology of dynamic simulation experiments with a macroeconomic model of the U.S. economy is possible with postwar, quarterly data. Mishkin, “What Depressed has carried out this exercise”.
28. Clearly, at least one group of consumers, the farm population, suffered severe financial distress during the Great Depression. J. Munger, A Preliminary Study of Farmer Bankruptcy Experiences in the Dakotas 1928-1952, Agricultural Economics Pamphlet (Mar. 1955), Agricultural Economics Department, South Dakota State College, estimates that 29 percent of all farms in the United States underwent forced sales (foreclosures) in the decade 1930-1939.
29. See Ben Bolch, Rendigs Fels and Marshall McMahon, “Housing Surplus in the 1920's?” Explorations in Economic History, 8 (Spring 1971), 259-83; Bolch and Pilgrim, “A Reappraisal…”; and
30. Bert G. Hickman, “What Became of the Building Cycle?” in Paul David and Melvin Reder, eds., Nations and Households in Economic Growth: Essays in Honor of Moses Abramooitz (New York, 1973).
31. See R. A. Gordon, Economic Instability, for example.
32. See Lloyd J. Mercer and W. Douglas Morgan, “Alternative Interpretations of Market Saturation: Evaluation for the Automobile Market in the Late Twenties,” Explorations in Economic History, 9 (Spring 1972), 269-90.
33. See Temin, Did Monetary Forces….
34. The work of E. Cary Brown, “Fiscal Policies in the Thirties: A Reappraisal,” American Economic Review, 46 (Dec. 1956), 857-79, indicates that government fiscal policy was not a primary factor in the collapse of aggregate demand during the Great Depression period, and thus fiscal policy is not cited as an important cause of the Depression.
35. Friedman and Schwartz, A Monetary History.
36. Friedman and Schwartz, A Monetary History, mention the large decline in velocity in 1930, but are unclear as to its cause. There is also a problem of causality in the Friedman and Schwartz argument. See Temin, Did Monetary Forces…, for a discussion of this point.
37. See Gilbert Burck and Charles Silberman, “What Caused the Great Depression?” Fortune, 51 (Feb. 1955), 94-99, 204, 206, and 209-11.
38. Kirkwood, “The Great Depression…,” pursues an econometric analysis of the Depression that attributes the decline in aggregate demand to the stock market crash, yet his explanation for the stock market impact is essentially that discussed above.
39. See Temin, Did Monetary Forces….
40. J. K. Galbraith, The Great Crash, 1929 (London, 1955) is one exception. For a typical reaction of economists to the stock market view of the Depression, see Green, “The Economic Impact…,” and the comments on his article. The discussion so far also has ignored the view that economic events outside the United States were important in causing the Depression. See Kindleberger, The World in Depression, for example. Although it is entirely possible and probable that the collapse of the European economies increased the severity of the downturn in the United States, causality seemed to flow from the U.S. economic collapse to Europe and not the other way around.
41. Fisher, “The Debt-Deflation Theory.” In addition, see
42. E. Clark, ed., The Internal Debts of the United States (New York, 1933) and
43. H. P. Minsky, “Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions,” American Economic Review, 54 (May 1964), 324-35.
44. Many economists (Green, “The Economic Impact…,” for example) object to an important stock market role in business cycle fluctuations during the Great Depression because stock market assets were highly concentrated in the hands of a small segment of the U.S. population. The highly skewed distribution of stock market assets does not invalidate the argument contained here which cites the importance of stock market effects. The calculations of balance-sheet effects found in Table 4 use coefficient estimates that already reflect the skewed distribution of stock market wealth. In addition, some recent cross-section work by
45. Irwin Friend and Charles Lieberman, “Short-Run Asset Effects on Household Saving and Consumption: The CrossSection Evidence,” American Economic Review, 65 (September 1975) 624-33, indicates that the skewed distribution of stock market holdings would not greatly diminish the aggregate stock market impact, as has often been thought to be the case. The analysis of the stock market role in the Great Depression presented here is quite different from the expectations view of stock market effects. The liquidity and life-cycle hypotheses imply that even if the consumer's mood did not change as a result of the stock market crash, he still would have cut back on his expenditures because of the deterioration of his balance sheet. Certainly, to the extent that pessimism was bred by the stock market decline, the economy was affected. The approach here also differs from other discussions of stock market effects on the economy, such as
46. James Tobin, “Monetary Policy in 1974 and Beyond,” Brookings Papers on Economic Activity, 1974:1, 219-32, in that it focuses on the consumer rather than on the firm.
47. See: James Tobin, “A General Equilibrium Approach to Monetary Theory,” Journal of Money, Credit and Banking, 1 (Feb. 1969), 15-29;
48. D. Foley and M. Sidrauski, Monetary and Fiscal Policy in a Growing Economy (New York, 1971);
49. Modigliani, Monetary Policy… Beryl Sprinkel, Money and Stock Prices (Homewood, 111., 1964); and the references in
50. Richard V. L. Cooper, “Efficient Capital Markets and the Quantity Theory of Money” Journal of Finance, 29 (June 1974), 887-908.
51. Tobin, “A General Equilibrium Approach…” and
52. Modigliani, “Monetary Policy….”
53. Gregory Chow and A. Lin, “Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series,” Review of Economics and Statistics, 4 (Nov. 1971), 372-75.
54. Raymond W. Goldsmith, R. E. Lipsey and M. Mendelson, Studies in the National Balance Sheet of the United States (Princeton, 1963).
55. Albert Ando and E. Cary Brown, “Lags in Fiscal Policy,” in Studies for the Commission on Money and Credit, Stabilization Policies (Englewood Cliffs, N. J., 1963) 97-163.
56. Raymond W. Goldsmith, A Study of Saving in the United States (Princeton, 1962).