Essays on the Great Depression [ペーパーバック]

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).