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Essays on the Great Depression Ben S. Be the first to review this product. This is a collection of Ben Bernanke's essays on why the Great Depression was so devastating and lasted so long. The essays also show that while the it was an unparalleled disaster on a universal scale, some economies pulled up faster than others, and some made an opportunity out of a disaster. Availability: Day Delivery.
Overview Details Reviews. Products specifications. Write your own review Close Review Form. Only registered users can write reviews. But these correlations cannot answer the crucial questions: What is causing what? Are changes in the money stock largely causing changes in prices and output, as Friedman and Schwartz were to conclude?
Or, instead, is the stock of money reacting passively to changes in the state of economy? Or is there yet some other, unmeasured factor that is affecting all three variables? The special genius of the Monetary History is the authors' use of what some today would call "natural experiments"--in this context, episodes in which money moves for reasons that are plausibly unrelated to the current state of the economy.
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By locating such episodes, then observing what subsequently occurred in the economy, Friedman and Schwartz laboriously built the case that the causality can be interpreted as running mostly from money to output and prices, so that the Great Depression can reasonably be described as having been caused by monetary forces. Of course, natural experiments are never perfectly controlled, so that no single natural experiment can be viewed as dispositive--hence the importance of Friedman and Schwartz's historical analysis, which adduces a wide variety of such episodes and comparisons in support of their case.
I think the most useful thing I can do in the remainder of my talk today is to remind you of the genius of the Friedman-Schwartz methodology by reviewing some of their main examples and describing how they have held up in subsequent research. Four Monetary Policy Episodes To reiterate, at the heart of Friedman and Schwartz's identification strategy is the examination of historical periods in the attempt to identify changes in the money stock or in monetary policy that occurred for reasons largely unrelated to the contemporaneous behavior of output and prices.
To the extent that these monetary changes can reasonably be construed as "exogenous," one can interpret the response of the economy to the changes as reflecting cause and effect--particularly if a similar pattern is found again and again. For the early Depression era, Friedman and Schwartz identified at least four distinct episodes that seem to meet these criteria.
Three are tightenings of policy; one is a loosening.
Essays on the great depression / Ben S. Bernanke.
In each case, the economy responded in the way that the monetary theory of the Great Depression would predict. I will discuss each of these episodes briefly, both because they nicely illustrate the Friedman-Schwartz method and because they are interesting in themselves. The first episode analyzed by Friedman and Schwartz was the deliberate tightening of monetary policy that began in the spring of and continued until the stock market crash of October This policy tightening occurred in conditions that we would not today normally consider conducive to tighter money: As Friedman and Schwartz noted, the business-cycle trough had only just been reached at the end of the NBER's official trough date is November , commodity prices were declining, and there was not the slightest hint of inflation.
A principal reason was the Board's ongoing concern about speculation on Wall Street. The Federal Reserve had long made the distinction between "productive" and "speculative" uses of credit, and the rising stock market and the associated increases in bank loans to brokers were thus a major concern. Unfortunately, Strong was afflicted by chronic tuberculosis; his health was declining severely in he died in October and, with it, his influence in the Federal Reserve System.
The "antispeculative" policy tightening of was affected to some degree by the developing feud between Strong's successor at the New York Fed, George Harrison, and members of the Federal Reserve Board in Washington. In particular, the two sides disagreed on the best method for restraining brokers' loans: The Board favored so-called "direct action," essentially a program of moral suasion, while Harrison thought that only increases in the discount rate that is, the policy rate would be effective.
This debate was resolved in Harrison's favor in , and direct action was dropped in favor of a further rate increase.
Despite this sideshow and its effects on the timing of policy actions, it would be incorrect to infer that monetary policy was not tight during the dispute between Washington and New York. As Friedman and Schwartz noted p. Incidentally, the case that money was quite tight as early as the spring of has been strengthened by the subsequent work of James Hamilton Hamilton showed that the Fed's desire to slow outflows of U.
The next episode studied by Friedman and Schwartz, another tightening, occurred in September , following the sterling crisis. In that month, a wave of speculative attacks on the pound forced Great Britain to leave the gold standard.
Anticipating that the United States might be the next to leave gold, speculators turned their attention from the pound to the dollar. Central banks and private investors converted a substantial quantity of dollar assets to gold in September and October of The resulting outflow of gold reserves an "external drain" also put pressure on the U. Conventional and long-established central banking practice would have mandated responses to both the external and internal drains, but the Federal Reserve--by this point having forsworn any responsibility for the U. The policy tightening and the ongoing collapse of the banking system caused the money supply to fall precipitously, and the declines in output and prices became even more virulent.
Again, the logic is that a monetary policy change related to objectives other than the domestic economy--in this case, defense of the dollar against external attack--were followed by changes in domestic output and prices in the predicted direction. One might object that the two "experiments" described so far were both episodes of monetary contraction. Hence, although they suggest that declining output and prices followed these tight-money policies, the evidence is perhaps not entirely persuasive. The possibility remains that the Great Depression occurred for other reasons and that the contractionary monetary policies merely coincided with or perhaps, slightly worsened the ongoing declines in the economy.
Hence it is particularly interesting that the third episode studied by Friedman and Schwartz is an expansionary episode.
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This third episode occurred in April , when the Congress began to exert considerable pressure on the Fed to ease monetary policy, in particular, to conduct large-scale open-market purchases of securities. The Board was quite reluctant; but between April and June , it did authorize substantial purchases. This infusion of liquidity appreciably slowed the decline in the stock of money and significantly brought down yields on government bonds, corporate bonds, and commercial paper.
Most interesting, as Friedman and Schwartz noted p. Wholesale prices started rising in July, production in August. Personal income continued to fall but at a much reduced rate. Factory employment, railroad ton-miles, and numerous other indicators of physical activity tell a similar story. All in all, as in early , the data again have many of the earmarks of a cyclical revival.
Burns and Mitchell , although dating the trough in March , refer to the period as an example of a 'double bottom. In particular, as argued by several modern scholars, they took the mistaken view that low nominal interest rates were indicative of monetary ease.
Essays on the Great Depression
Hence, when the Congress adjourned on July 16, , the System essentially ended the program. By the latter part of the year, the economy had relapsed dramatically. The final episode studied by Friedman and Schwartz, again contractionary in impact, occurred in the period from January to the banking holiday in March. This time the exogenous factor might be taken to be the long lag mandated by the Constitution between the election and the inauguration of a new U.
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Franklin D. Roosevelt, elected in November , was not to take office until March In the interim, of course, considerable speculation circulated about the new President's likely policies; the uncertainty was increased by the President-elect's refusal to make definite policy statements or to endorse actions proposed by the increasingly frustrated President Hoover. However, from the President-elect's campaign statements and known propensities, many inferred correctly that Roosevelt might devalue the dollar or even break the link with gold entirely.
Fearing the resulting capital losses, both domestic and foreign investors began to convert dollars to gold, putting pressure on both the banking system and the gold reserves of the Federal Reserve System.