Joshua K. Hausman (U-M Gerald R. Ford School of Public Policy), Paul W. Rhode (U-M Economics Professor and Department Chair), and Johannes F. Wieland (University of California at San Diego) released a study entitled, “Recovery From the Great Depression: The Farm Channel in Spring 1933.” It examines the factors leading to the economic recovery following the Great Depression.
The authors emphasize the importance for recovery of the effect of dollar devaluation on farm prices, incomes, and consumption. This "farm channel" may explain 30% or more of the aggregate economy's
recovery in spring 1933. The authors conclude, “To the extent that the farm channel contributed to overall recovery in the U.S., it means that the lessons of 1933 for macroeconomic policy are more nuanced than often assumed. In particular, our work points to the importance of redistribution as a channel for macroeconomic policy.”
In the four months following the trough of the Great Depression in March 1933, industrial production rose 57 percent. We argue that an important source of recovery was the direct effect of dollar devaluation on farm prices, incomes, and consumption. We call this the farm channel. Using daily spot and futures crop price data, we document that devaluation raised prices of traded crops and their close substitutes (other grains). And using novel state and county auto sales data, we document that recovery proceeded much more rapidly in farm areas. These cross-sectional effects are large, explain a substantial fraction of cross-state variation in auto sales growth, and are concentrated in areas growing traded crops or close substitutes. We also find that given the same exposure to farm price changes, spending rose more in counties with more farm debt. We aggregate our cross-sectional results using a simple incomplete markets model in which indebted farmers have high MPCs. It implies that the farm channel accounts for 30% or more of the spring recovery.