Published by EH. Reviewed for EH. NET by Robert A. Margo, Department of Economics, Vanderbilt University. For many years, economic research on the origins and persistence of the Great Depression bore a striking resemblance to historical research on the causes of the American Civil War. Both sides to the respective debates talked past one another, and little, if any, intellectual progress was made.
Beginning in the s, the situation began to change, at least in case of the s, because of a simple methodological innovation. That innovation was to look beyond time series aggregates for a single country, either at dis-aggregated evidence within countries or at aggregate outcomes across countries. Essays on the Great Depression is divided into three parts, made up of nine substantive chapters in total, plus an index. Using a cross-country panel data set, Bernanke argues that monetary factors, along with the Gold Standard, should be according primary responsibility for the Depression.
Yet Ben Bernanke was unable to foresee, let alone forestall, the financial calamity which struck in In fact, his flawed narrative of the Great Depression informed the policies which produced the global financial crisis. For monetary policymakers, the one thing more dangerous than ignoring the lessons of history is trying to implement them. Both eras were characterised by a belief that the Fed had ended the cycles of boom and bust. Both periods were marked by the appearance of real estate bubbles. In both the s and s, low interest rates in the United States encouraged irresponsible lending to countries on the periphery of the global financial system.
Also, both booms ended after the U.
The market collapses were both followed by multiple bank failures and prolonged economic weakness. Despite impeccable academic credentials, however, Bernanke appeared oblivious to the risks accumulating in the financial system in the early years of the millennium.
Asked about the housing market in , he claimed that U. In truth they declined by around 25 percent after Why did Bernanke and so many other economists get things so wrong? Another effect of rapid technological change was that after the rate of capital investment slowed, primarily due to reduced investment in business structures. The depression led to additional large numbers of plant closings. It cannot be emphasized too strongly that the [productivity, output and employment] trends we are describing are long-time trends and were thoroughly evident prior to These trends are in nowise the result of the present depression, nor are they the result of the World War.
On the contrary, the present depression is a collapse resulting from these long-term trends. King Hubbert . In the book Mechanization in Industry , whose publication was sponsored by the National Bureau of Economic Research, Jerome noted that whether mechanization tends to increase output or displace labor depends on the elasticity of demand for the product. It was further noted that agriculture was adversely affected by the reduced need for animal feed as horses and mules were displaced by inanimate sources of power following WW I.
As a related point, Jerome also notes that the term " technological unemployment " was being used to describe the labor situation during the depression. Some portion of the increased unemployment which characterized the post-War years in the United States may be attributed to the mechanization of industries producing commodities of inelastic demand. Wells, . The dramatic rise in productivity of major industries in the U.
Corporations decided to lay off workers and reduced the amount of raw materials they purchased to manufacture their products. This decision was made to cut the production of goods because of the amount of products that were not being sold. Joseph Stiglitz and Bruce Greenwald suggested that it was a productivity-shock in agriculture, through fertilizers, mechanization and improved seed, that caused the drop in agricultural product prices.
Farmers were forced off the land, further adding to the excess labor supply. The prices of agricultural products began to decline after WW I and eventually many farmers were forced out of business, causing the failure of hundreds of small rural banks. Agricultural productivity resulting from tractors, fertilizers and hybrid corn was only part of the problem; the other problem was the change over from horses and mules to internal combustion transportation.
The horse and mule population began declining after WW 1, freeing up enormous quantities of land previously used for animal feed. The rise of the internal combustion engine and increasing numbers of motorcars and buses also halted the growth of electric street railways. The years to had the highest total factor productivity growth in the history of the U.
Most of the benefit of the increased productivity went into profits, which went into the stock market bubble rather than into consumer purchases. Thus workers did not have enough income to absorb the large amount of capacity that had been added. According to this view, the root cause of the Great Depression was a global overinvestment while the level of wages and earnings from independent businesses fell short of creating enough purchasing power.
It was argued that government should intervene by an increased taxation of the rich to help make income more equal. With the increased revenue the government could create public works to increase employment and 'kick start' the economy. In the USA the economic policies had been quite the opposite until The Revenue Act of and public works programmes introduced in Hoover's last year as president and taken up by Roosevelt, created some redistribution of purchasing power.
The stock market crash made it evident that banking systems Americans were relying on were not dependable. Americans looked towards insubstantial banking units for their own liquidity supply. As the economy began to fail, these banks were no longer able to support those who depended on their assets — they did not hold as much power as the larger banks. During the depression, "three waves of bank failures shook the economy.
The second wave of bank failures occurred "after the Federal Reserve System raised the rediscount rate to staunch an outflow of gold"  around the end of The last wave, which began in the middle of , was the worst and most devastating, continuing "almost to the point of a total breakdown of the banking system in the winter of — According to the gold standard theory of the Depression, the Depression was largely caused by the decision of most western nations after World War I to return to the gold standard at the pre-war gold price.
Monetary policy, according to this view, was thereby put into a deflationary setting that would over the next decade slowly grind away at the health of many European economies. This post-war policy was preceded by an inflationary policy during World War I, when many European nations abandoned the gold standard, forced [ citation needed ] by the enormous costs of the war. This resulted in inflation because the supply of new money that was created was spent on war, not on investments in productivity to increase demand that would have neutralized inflation.
The view is that the quantity of new money introduced largely determines the inflation rate, and therefore, the cure to inflation is to reduce the amount of new currency created for purposes that are destructive or wasteful, and do not lead to economic growth. After the war, when America and the nations of Europe went back on the gold standard, most nations decided to return to the gold standard at the pre-war price. When Britain, for example, passed the Gold Standard Act of , thereby returning Britain to the gold standard, the critical decision was made to set the new price of the Pound Sterling at parity with the pre-war price even though the pound was then trading on the foreign exchange market at a much lower price.
At the time, this action was criticized by John Maynard Keynes and others, who argued that in so doing, they were forcing a revaluation of wages without any tendency to equilibrium. Keynes' criticism of Winston Churchill 's form of the return to the gold standard implicitly compared it to the consequences of the Treaty of Versailles.
One of the reasons for setting the currencies at parity with the pre-war price was the prevailing opinion at that time that deflation was not a danger, while inflation, particularly the inflation in the Weimar Republic, was an unbearable danger. Another reason was that those who had loaned in nominal amounts hoped to recover the same value in gold that they had lent. This arrangement was codified in the Dawes Plan. In some cases, deflation can be hard on sectors of the economy such as agriculture, if they are deeply in debt at high interest rates and are unable to refinance, or that are dependent upon loans to finance capital goods when low interest rates are not available.
Deflation erodes the price of commodities while increasing the real liability of debt. Deflation is beneficial to those with assets in cash, and to those who wish to invest or purchase assets or loan money. More recent research, by economists such as Temin, Ben Bernanke , and Barry Eichengreen , has focused on the constraints policy makers were under at the time of the Depression.
In this view, the constraints of the inter-war gold standard magnified the initial economic shock and were a significant obstacle to any actions that would ameliorate the growing Depression. According to them, the initial destabilizing shock may have originated with the Wall Street Crash of in the U. According to their conclusions, during a time of crisis, policy makers may have wanted to loosen monetary and fiscal policy , but such action would threaten the countries' ability to maintain their obligation to exchange gold at its contractual rate.
The gold standard required countries to maintain high interest rates to attract international investors who bought foreign assets with gold.