The Great Depression by Ben Bernanke (2000)

This is a complex book for the average reader, with lots of formulas, but there are some nuggets that I will delineate here from this compilation of 9 essays. These were written over a 20 year period, by a variety of scholars working with Dr. Bernanke, our current Federal Reserve Chairman long before he took that position:


(1) Aggregate demand collapsed in the 1930's. Why? Because of a world-wide contraction in the world money supply from banking panics and business failures that choked credit.


My comment: This is why Dr. Bernanke's extensive studies of this period have him, in my opinion, in the best job for this crisis. It is why he has flooded the economy with money and encouraged other central banks to do the same.


(2) Expansionary monetary policies aided recovery and those countries that were first to abandon the gold standard were the first to experience a rebound. The U.S. was one of the last to do so.


(3) In 6 months (August 1931 through January 1932), 1,860 banks failed. All banks were closed from March 1933 through June 1933 to be re-evaluated by the government (think 'stress test' today) and only 25% were federally licensed to re-open that summer. The final number of bank failures was over well over 2,000.


(4) The Great Depression was caused by mismanagement of the gold standard, failure to defend banks and the decreased money supply. Unfortunately, to curb what the Federal Reserve (only in existence since 1913) considered a boom in the U.S. stock market of the 1920's, the Fed's contractionary policy (holding down the money supply) resulted in the depression being much longer and much more severe than probably it needed to be.


My comment: Of-course, we will never know for sure. But this time around, the expansion of the money supply appears to have slayed the deflation/severe depression dragon. It is bad enough that unemployment is as high as it is, hundreds of banks have failed and trillions of dollars of wealth has evaporated. What might have happened without the experience of the missteps of the 1930's not being repeated?


There are a few more interesting statistics:

(1) The annual deficit in 1929 was 9% of GDP; but by 1933 had grown to 19.8% with mortgage defaults in the 38%-62% range. Today's deficit (annual) has grown from 3% before the crisis to about 12% now (2009) for perspective.

(2) For those who had jobs (about 75% of the population; 90% today), nominal wages remained constant (no raises for awhile), but "real" wages increased because prices deflated for years. This "extra" spending/saving power helped the recovery in the stock market and the economy. Today we are experiencing no inflation right now and only mild deflation so we will not experience this kind of increase in "buying power" as they did back then.

(3) Inflation from 1933 to 1937 was about 20% in total - or about 4% per year - once the Federal Reserve and the government created aggregate demand increases by making credit more available and government spending programs took effect.