Comment on “The Great Depression”

Put together, my remarks constitute an unsubtle attempt at rendering explicit the elegant implicit comparisons between the Great Depression and today’s “Great recession” that make Alan Brinkley’s article an insightful delight for the reader. At the end of his paper, Brinkley points out to some similarities between the two crises. In the brief following comment, I will push forward his conclusion but on a somewhat different path: in my view, if the consequences of the Great Depression and the “Great Recession” have so far been quite different, their causes appear to be in many respects alike, or at least parallel.

Brinkley starts by quoting figures that help understand the brutality of the economic shock that the Great depression was. Comparative historical data for United States industrial production compiled by Barry Eichengreen, Kevin O’Rourke and others¹ from June 1929 and April 2008 onwards show that if the drop in economic activity was not as severe since last year as 80 years ago, it nevertheless was considerable (see graph).

Graph 1.

Index of US Industrial Production

Source: B. Eichengreen, K. O. Rourke et al., 2009.

The major difference in terms of economic and social impact lies in the contrasted response of public authorities to the two crises. There is first a question of timing. As noted by Brinkley, “Roosevelt entered office with a commitment to pragmatic experimentation” and “was determined not to let discredited orthodoxy to determine his course.” This echoes the resolve of the Obama administration to move on from the free-market consensus back into the kind of old-fashioned Keynesian policies that had been invented in the midst of the Great Depression but largely discredited in mainstream academia after the mid-1970s stagflation episode and the subsequent theoretical counter-revolution started by Milton Friedman. Yet, the decisive advantage of Barack Obama was the speed with which he took office, merely six months after the collapse of Lehman Brothers, when it took almost four years for Hoover to leave the White House and Roosevelt to move in. The contrast between the macroeconomic policies implemented by the Federal Reserve and the federal government in the first months of the Great Depression and the “Great Recession” could thus hardly be greater. Alan Brinkley makes in this respect a key reference to the 1963 Friedman and Schwartz volume on the monetary history of the United States. Chairman Bernanke, himself a thoughtful student of the Great Depression, actually participated in a conference honouring Milton Friedman on his 90^th birthday. At the end of his speech, later reproduced in a revised edition of the 1963 book, he quips:

Graph 2.

Federal Reserve Discount Rate

Source: B. Eichengreen, K. O.Rourke et al., 2009.

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”²

Simply put, Bernanke kept his word. The Federal Reserve, thanks to its speed and willpower, has indeed been the key actor in avoiding the 1930’s mistakes in economic policy (see graph 2).

But if the Fed of 2009 moved far quicker in the right direction than the Fed of the 1930s, the same can not be said in the area of federal banking and financial regulation, at least so far. As pointed out by Brinkley, the Emergency Banking Act, the Glass-Steagall Act and the Securities and Exchange Commission creation were bold moves that the Obama administration and the Democratic Congress have yet to follow.

The fiscal policy response also strikingly differs between the two crises. While Hoover was ill-obsessed with the idea of balancing the budget, Obama ignored the poor state of public finance inherited from the Bush era and managed to convince Congress to approve the biggest stimulus package in the nation’s economic history. Still, as pointed out recently...