Customer Reviews

Essays on the Great Depression

5 star:		(7)
4 star:		(5)
3 star:		(3)
2 star:		(1)
1 star:		(4)

 

 

This is a collection of nine academic research papers written by Ben S. Bernanke during his two decades long academic career at Stanford University and at Princeton, where he ended up chairing the economics department. In these papers Bernanke, now chairman of the Federal Reserve System, along with several coauthors, examines the Great Depression, understanding of which he calls "the Holy Grail of macroeconomics" (p. 5).

Bernanke distinguishes financial theories and labor-market theories to explain what caused and prolonged the Great Depression. Financial explanations include monetary shocks, such as the collapse of the money supply that turned a run-of-the-mill recession into a once-in-a-lifetime depression. The collapse of the money supply was in turn caused by a clinging to the gold standard. Nonmonetary factors include banking panics, business failures, and a choking off of normal flows of credit (nonindexation of financial contracts, debt deflation).

Labor-market theories center around the phenomenon of so-called sticky wages: why did nominal wages fail to decline commensurately with prices (deflation) in the face of massive unemployment? This is clearly a factor behind the persistent unemployment during the Great Depression, but the reason has as of yet not been fully explained.

Bernanke's analysis is representative of the so-called New Keynesian view of macroeconomics, which frames different theories as supplementary rather than competing. The book contains one overview paper, while the remaining eight papers cover some of the component theories. Although the papers were written separately, as a collection they fit.

For the most part the papers are empirical investigations. Their technical nature means that the book may be a tough ride unless you are a professional macroeconomist. But it is instructive to see how Bernanke's understanding of the Great Depression has informed his economic views, as expressed recently in his famous November 2002 anti-deflation speech and in the fact that Bernanke, like his predecessor Alan Greenspan, does not favor targeting asset bubbles.

Bernanke rigorously explains the economics of the Great Depression. A massive monetary contraction (reduction in the money supply) was the cause of the Great Depression, in large part due to the mechanisms of the flawed version of the gold standard that was created following World War One. The massive banking collapse (due to weak regulation) further worsened the disaster as lending contracted sharply and the money supply severely contracted. Those were the two main causes.

Sticky wages and other factors contributed to the slow recovery. To a lesser extent, the Smoot-Hawley tarriff, which very sharply raised tariffs extremely high, contributed to the cause.

Bernanke shows decisively that the gold standard as it was designed in the 1920's was a disaster. The countries that abandoned the gold standard the soonest, such as Britain, were the ones that recovered the quickest. The countries that clung to the gold standard the longest, such as France, were the ones that suffered the depression the longest. The countries that were not on the gold standard at all - perhaps using the silver standard - avoided the Great Depression in the first place!

Due to the gold standard and other misguided judgements, the Federal Reserve constricted the money supply again and again. The gold standard caused a run on the gold supply, followed by further Fed tightening of the money supply to defend the currency, leading to widespread bank panics, which constricted the money supply further due to the sharp drop in bank loans and the loss of consumer confidence in the financial services industry, which was hardly regulated.

The economic crisis was made worse by the massive banking collapse. Thousands of undercapitalized banks went insolvent, and thousands of people lost their savings. Bank panics swept across the country. Other banks refused to make new loans for fear of loan default. The banking crisis resulted in a further contraction of the money supply. The banking industry completely collapsed at the end of Hoover's presidency.

Sticky wages also contributed to the depression, although not as much as Keynesians think, according to Bernanke. Hoover and FDR may have made this worse by trying to maintain and increase the spending power of workers, although the counter argument is that this increased worker spending power increased spending and demand. The book examines many other factors too numerous to list in this review. This is the best book on the economics of the Great Depression.

Once taking office in 1933, Franklin Roosevelt quickly removed America from the disastrous gold standard (which previous administrations would never have done), which stopped the strangling of the economy by the gold standard, and then FDR saved the collapsed banking industry, which stopped the strangling of the economy by the banking collapse. Recovery followed, the statistics clearly show. According to Bernanke, industrial output in America grew 5% PER QUARTER from 1933-37. Real wages grew substantially. Productivity grew substantially. Unemployment dropped.

The contraction was stopped in 1933 and economic growth began, so technically the depression ended in 1933. GDP grew over 50% in four years. This period of high growth was interrupted by a severe recession in 1937-38, which was followed by more high growth. According to Bernanke, "Quarterly growth rates for manufacturing employment, hours, and input in 1938-40 were 1.8, 2.8, and 4.9 percent, respectively." Despite the recovery, Bernanke says that the Great Depression still lasted several years because the economy took awhile to get back to where it was before the Great Depression.

I used a pencil to highlight the conclusions and summary points in this book because much of the information is academic and loaded with technical analysis. A massive amount of rigorous economic data is included, so only an economist will understand everything, but anyone can understand the conclusions. Bernanke inserts summary sentences so anyone can understand the conclusions if you wade through the technical analysis.

Highest recommendation.

Ben Bernanke's Essays on the Great Depression is a collection of 9 essays written in the 80's and 90's about the financial and labor markets during the 1930's. The essays are essentially a synthesis of prior work with greater mathematical rigor. For anyone wanting to know what caused the Great Depression, without reading an entire book, please read the first essay "The Macroeconomics of the Great Depression: A Comparative Approach." [...]

Bernanke's views regarding the Great Depression largely avoid the pre-80's debate over the 'money' hypothesis and 'spending' hypothesis. These views, argued by Friedman and Temin, used a quantitative analysis of the domestic markets and government policy. Instead, Bernanke assumes, and strongly supports, the view of Barry Eichengreen and Jeffery Sachs (1986) that the Gold Standard was the cause of the Great Depression. A sharp drop in the supply of money created a sharp drop in aggregate demand. Other factors, like sticky wages and prices, contributed to the Great Depression but were not the main factors. It was not until countries got off the Gold Standard that they were able to grow.

It is likely that the Federal Reserve or the Bank of England could have prevented a widespread depression between 1929-1930. However, after that period it remains doubtful whether either country could quell the Depression while maintaining the Gold Standard. It is important to note that the Great Depression was not caused by the USA alone (as commonly held before the 1980's). Bernanke is unable to explain what caused the Depression but can prove that it was not only the US (by inference the cause was international).

Due to the limited amount of statistics about the Great Depression Bernanke is forced to make MANY assumptions when building econometric models. At points his methodology becomes somewhat questionable (to his credit he often mentions this to the reader). Nevertheless, when Bernanke reaches his conclusions he is quite confident of the results (which is somewhat troubling...).

Overall: a great analysis of the Great Depression. In the academic circles, to my knowledge, Bernanke's conclusions remain the standard. (For some reason Macroeconomic textbooks seem to ignore both Beranke and Eichengreen's work -- I don't know why).

This book is not a fun read, it is really ment for professional economists. But if you look at the conclusions in the various essays you get the impressions that the Great Depression could have beed avoided if it had not been for a badly flawed gold standard and sticky-wages. This is very diffrent from the impression you get from the "popular media". I was worth pushing on through this book. I now feel better about the economy.

In one of those amazing twists of fate Ben Bernanke made his academic reputation through his research and analysis of the Great Depression; it has been said that nobody alive knows more about the economics of the Great Depression than this man, our current central banker. These essays are not for the easily daunted--they aren't the easiest of reads--but even if you don't completely understand everything he says they are still worthwhile for those interested in learning in depth about the depression (and trying to apply its lessons to today's mess). I definitely recommend this book, along with John Kenneth Galbraith's The Great Crash 1929 and also The Pecora Report: The 1934 Report on the Practices of Stock Exchanges from the "Pecora Commission".

He's one of the most powerful men of the world as chairmen of the fed, need I say more. It's worth a read to see how Bernanke looks into things. I've taken a couple of economic courses and this book still feels overwhelming to me. At the very least I can say that I whole heartedly have faith in the guy.

This book is a serious read, almost an economics textbook, albeit a collection of essays. But if one was to look at the conclusions in these essays one tends to think that the Great Depression could have beed avoided if it had not been for a badly flawed gold standard and sticky-wages. Bernanke illustrates that the countries that left the gold standard the earliest, like Britain, recovered the quicker. A definite read for any serious economist especially one who is trying to see parallels with the Great Depression and the events in the past years of the Great panic of 2007.

This review is intended to focus on special aspects of the book in greater detail. For a general review of the book, please see Jerry H. Tempelman's and Richard Gibson's (above).

The first section of the book addresses comparative analysis of different countries during the Depression. It needs to be understood that Bernanke was adding to a very long-standing debate over the causative roles of money; at the time, the nature of the debate had evolved so that questions to be resolved were: why did the money supply react as it did to the peculiar conditions and policies in place? More precisely, which components of the monetary aggregates (and in which countries) were the _independent_ variables? And also, did the financial crises of the period 1922-1933 demonstrate conditions of multiple equilibria?

The two questions are interrelated, because the monetary aggregates have a complicated relationship to the global financial system's gold reserves. During the interwar gold standard arrangement, countries were continually restoring convertibility until 1930, and continually leaving afterward. When a country's central bank pegged its currency to gold, there was the additional question of pegged value; the pound sterling, for example, was pegged at a high rate, while the French franc was pegged at a low one. This was to have a strong impact on the country's economic growth rate during the interwar period. Additionally, the reserve ratios for the individual countries' banking systems determined the maximum (but not the minimum) rate of M1 growth. The tendency of M1 to shrink in most countries even when gold stocks were increasing, had emerged as the big mystery for scholars of the period. Bernanke established a three-tiered connection between supplies of monetary gold and M1. Each of these tiers was vulnerable to multiple equilibria (better known as self-fulfilling prophecy). In effect, "the market" for bank assets never had a single equilibrium towards which it could settle; instead, it could move to a permanently high level, based on greater ability to pay for assets by the public; or it could move to a permanently low level.

The distinction here is that the difference between "soundly administered" banks whose net present assets were adequate, and those that were not, was indeed likely to be determined by prior policy decisions and public expectations. It did not exist as absolute truth, waiting to be revealed by an infallible market.

Bernanke also introduced the crucial component of debt-deflation to explain the mechanism for multiple equilibria. Debt-deflation is when owners of assets are compelled to meet current obligations by selling those assets in a falling market. The emergency sales of assets pushes their market price down, of course, which leads to more pressure on the same group of asset holders. In the past, economists had dismissed this as a major recessionary force since debt-deflation really just redistributed wealth to the people buying the assets in the falling market. Bernanke noted that the wealth-losing parties in debt-deflation tended to be job creators whose costs were pushed to economy-stopping levels.

While an obvious inference to draw from Bernanke's regressions of economic data is that _withdrawing_ from gold convertibility was certainly good for the withdrawing country's industrial productivity, it's much trickier to establish what a good alternative to "the" gold standard would have been. Other important issues besides the then-dominant expectation of gold-backed money was the low floor for M1 relative to member nations' reserves of monetary gold; M1 in France, for example, fell during the late '20s despite immense inflows of bullion to the Bank of France.

UPDATE (4 February 2012): I felt it is worth drawing reader's attention to Steve Keen, "Bernanke an Expert on the Great Depression??" *Steve Keen's Debtwatch* blog (11 January 2009). Keen's critique of Bernanke's description of debt-deflation and the views of Fisher's/debt-deflation's critics is pretty devastating and focuses on a very real slip up by Bernanke: Bernanke says "Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects" (The Macroeconomics of the Great Depression) I ignored this because it's the sort of schematic oversimplification that economists make all the time. But as Keen, et al., note, it's actually a serious misrepresentation. For a link to article, see my comment below.
_________________________________________________________

The other major question Bernanke addresses in this book is the mystery of falling employment (particularly measured in labor hours) accompanied by rising real wages. Usually economists maintain that wages are "sticky downward," perhaps because of unions, and during a period of deflation they remained so. Employers respond by laying off workers and closing plants, but real wages still rise because wage cuts never catch up with rising purchasing power. Bernanke's attack on this problem is truly one of the most mathematically demanding I've ever seen in an economic monograph. Empirically, he used surveys of wage data from eight different industries; he also uses a constrained optimization model of extreme richness (i.e., incorporating a very detailed description of the economy).

The model is the method used for testing a mechanism (here, a narrative) of how firms could have felt constrained to offer higher real wages in an economy where unemployment was massive. Bernanke's narrative-model does not require unions (which practically did not exist in the USA prior to the Wagner Act of 1934), and in other respects is very rich: it distinguishes between hours and numbers of employees, primary and secondary sectors, etc. He concludes (supported by anecdotal evidence, which is unfortunately all we have) that a common strategy by employers was "labor-sharing," or sharply reducing the number of weekly hours per employee. This reduced hours worked, and sharply reduced hours worked per worker; average hourly wages remained high but many workers were now on such reduced hours that they were reduced to poverty, even as the cost of living fell.

Moreover, Bernanke showed that, even as employees' reservation wages fell, there was still an irreducible slope from the newly reduced _marginal_ wage and the reduced nominal _average_ wage. Allowing for different skill levels of employees has a minor effect, but increases the slope from marginal to average wages. His model has immanently reasonable assumptions, most of which were corroborated by what I have read about labor conditions during the Depression.

In sum, I have to admit I was very profoundly impressed by Bernanke's skill and originality. While somewhat difficult to explain, the mysteries of the Depression that he addressed are (or were) central to understanding why it was so severe and how it altered social conditions for US workers; and he supplied compelling solutions.

"Essays on the Great Depression" is not written for laypeople, even though you can find this in the store sharing a shelf with popular favorites like "Freakonomics." Even people with strong backgrounds in macroeconomics will find themselves rereading passages for clarity's sake. The book has a fair share of graphs, charts, and models. The models are by no means hard or esoteric, but they require a fair degree of familiarity with conventional macroeconomics and econometrics.

Bernanke's views on the Depression are very reminiscent of Eichengreen, Friedman, and Schwartz. He attributes the Great Depression to the gold standard and labor market conditions (namely, sticky wages) and spends the great majority of the book talking about that. He spends time talking about financial markets but it is not the focus. And he spends virtually no time discussing the New Deal, a common element in popular narratives of the Depression and its subsequent recovery. In fact, Bernanke notes that financial rehabilitation is arguably the "the only major New Deal program that successfully promoted economic recovery."

The monetary explanation of the Great Depression (focusing on the gold standard) has become popular in recent years and Bernanke's choice of citations is a testament to this fact; most of his sources are fairly recent, making this book a must-have for anyone who wants to keep up-to-date with developments in economic history.

This book is a must-have for economists, especially those interested in monetary policy, labor markets, and economic history. People without backgrounds in macroeconomics will find this book intimidating and even indecipherable at times.

This volume is useful in bringing together most of Bernanke's writings on the Great Depression of the 1930s. As far as I can tell, apart from a three page preface, all of the chapters were previously published in academic journals. So, they were already available to anyone with access to the electronic journals collections of a university library. Given how technical these articles are, I have a feeling that few people who do not have access to a university library will find them worthwhile. That said, given the current state of academic economics, these articles are relatively readable. That is, most of them require little or no understanding of advanced math or statistics. They are, though, focused primarily on issues of interest to macroeconomists rather than to the broader reading public.

You should also note that this collection was compiled back in 2000, before Bernanke had begun his career in government. So, nothing he may have learned from serving at the Fed or at the Council of Economic Advisers is reflected in these essays. Still, if you are interested in the research that has informed some of Bernanke's actions at the Fed, this is the place to go.