The Great Depression Revisited.

AuthorGARRISON, ROGER W.
PositionReview

Professors Thomas E. Hall and J. David Ferguson, both of Miami University of Ohio, have combined social history and macroeconomic theory to achieve an understanding of the world between the wars. Their book The Great Depression: An International Disaster of Perverse Economic Policies (Ann Arbor: University of Michigan Press, 1998) takes its place on library shelves among many others with the same main title. A search in Auburn University's library reveals more than a dozen such volumes, differentiated only by their subtitles, as well as numerous others that deal with the same subject. Though the authors break no new ground, their book is distinguished by its particular blend of monetarist and Keynesian ideas and by a presentation liberally colored with the prose of John Kenneth Galbraith and Frederick Lewis Allen.

Hall and Ferguson's account of the world's longest economic slump has the distinct advantage of being reader-friendly. It begins with a "Great Depression Timeline" that chronicles the major economic, political, and military events on a year-by-year basis from 1914 to 1941. And it ends with a glossary that includes key players, key writers, and technical terms. The opening chapter presents the authors' list of seven important questions to be answered. Among them are the critical questions about the depression's origins, scope, intensity, duration, and eventual resolution. Was the bust related to the preceding boom? What gave the depression its worldwide character? Why was it so deep and so long-lasting? How was recovery eventually achieved? Still other questions in their list deal with subsidiary issues concerning movements in the operating ratios of the banking system (reserves to deposits and currency to deposits) and with the coexistence of unemployment and inflation during portions of the 1930s. The book's subtitle establishes the theme underlying most of the answers, and the sequencing of the issues in the middle chapters is partly logical and partly chronological. The final chapter repeats the seven questions and offers summary answers. To help readers who are not trained in economics to follow the arguments, the authors digress at several points to explain some fundamentals, such as the significance of the parity ratio that relates the values of two gold-based currencies, the quantity theory of money, and the real-bills doctrine.

Contrasting Visions

Perspectives on the Great Depression can be categorized in terms of two contrasting visions of the relationship between the economy and the government. In one vision, the economy is inherently unstable, and government policy is stabilizing; in the other, the economy is inherently stable, and government policy is destabilizing. Ferguson and Hall's perspective is largely but not wholly consistent with the latter vision. Referring to a critical phase of the depression (1930-31) during which unemployment increased dramatically, the authors hold that the worsening conditions are attributable to "a combination of economic ignorance, confusion, and incompetence [of] U.S. policymakers" (p. 104). Evidently, though, those policy makers were able to overcome their ignorance, confusion, and incompetence when they turned their attention (in 1933-35) to matters of banking and finance. In that area, they produced what Hall and Ferguson call the "best legislation to come out of the New Deal" (p. 115), the establishment of the Federal Deposit Insurance Corporation being "the single most important change" (116). The anticompetitive effects of that legislation (the cartelization of the banking industry, the prohibition of interest on checking account balances, the imposition of interest-rate ceilings on savings) are downplayed. The cumulative and still ongoing effects of the moral-hazard problem inherent in subsidized deposit insurance get no mention at all.

From Boom to Bust

The raw facts are that times were good in the twenties and bad in the thirties. Why so? The stark contrast between the two decades begs for an explanation. It seems helpful (to this reviewer) to make a first-order distinction between two general questions: (1) What was the nature of the transformation from good times to bad times? (2) Why were those particular bad times so awfully bad? Although Hall and Ferguson make this distinction in some contexts (e.g., p. 75), the critical importance of the first question can easily be overshadowed by the dramatic stories told in answering the second. Hall and Ferguson draw on Barry Eichengreen to characterize their view: "What converted a garden variety recession into the Great Depression was a disastrous series of policy errors" (p. 164). The perverse economic policies highlighted by Hall and Ferguson certainly have a claim on our attention. But what about the characterization of the initial downturn? To call it a garden-variety recession is to be wholly dismissive of the most critical--though not the most dramatic--aspects of this boom-bust episode. The question of what made a bad situation get worse is allowed to crowd out the question of why the situation was bad in the first place. Further, "garden variety" suggests that recessions of the sort that occurred in 1929-30 are...

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