Bernanke on the Great Depression

 

The great depression was one o0f the major economic historical events in United States history. Traditionally history considers this tine period from the stock market crash of 1929 and running either until 1939 with American economic involvement in the European war or the end of world war two in 1945. In order to best analyze this time period in history and explain or analyze the economic situation and its impact on the history of the United States important to review and understand the economic philosophy behind the crash and subsequent depression.

One such view is espoused by macroeconomics Ben Bernanke in his article the Macroeconomics of the Great Depression: a comparative analysis published in the Journal of money Credit and Banking. He uses economic concepts like supply, demand, the gold standard, and monetary shocks to describe the outcomes caused by the great contraction. To emphasize the effects of monetary shocks Bernanke focusses on deflation influence financial crisis and increases in real wages brought about by incomplete adjustments of nominal wages to price changes. In totality this is at least two separate avenues. However, Bernanke combines them to address them in concert.

Focusing first on monetary shocks Bernanke suggests that truly the issue was aggregate demand shocks mainly demonstrated through monetary shocks. These shocks being the rapid falling and rapid recovery of money supply, output, and prices. This can present either in real products or financial aspects combine ed with crisis in the banking industry in the 1930s. more modern economists have used a marker of the international gold standard during the inter war period. As a demonstration of the issues of the gold standard Bernanke demonstrates that countries who abandoned the old standard in the early 1930s were able to rebound quicker than countries who stayed fixed to the gold standard. Many countries in Europe who had temporarily abandoned the gold standard returned to the gold standard in the mid-1920s a few years prior to the eventual crash. Ac countries left the gold standard, they gained additional market speculators and gold reserves as they became more stable then overpriced countries committed to the gold block.

A second perspective of economic factors contributing to the great depression is the exchange rate crisis that took pale after shifts in the gold standard. Money stocks in these countries dropped significantly. While leaving gold may have thought to be a symptom of devaluing of money and rapid hyperinflation but instead the stability created by the lack of gold standard produced monies that were not over valued or devalued.

Bernanke goes on to address the deflation through debt deflation and bank capital stability. Debt deflation being simply reducing assets creating pressure on debtors as prices dropped. This results in quick and cheap asset sales there for further devaluing items of value creating further deflation. Debt deflation would then affect not only companies and households but also effect financial institutions. Financial institutions effected need to preserve their liquidity and therefore decrease available funds for borrowing. In a real service perspective lower borrowing reduces the need for local branches of banks and therefore decreases the ability for local borrowing from smaller business and households.

Banking reductions harms the ability to adjust to the monetary constraints suggested in the first point Bernanke makes. He intertwines both aspects of these potential issues and combined them to feed onto each other to create the depression system that took place worldwide in the 1930s.

The final piece that Bernanke suggests feel into place between these aspects was the nominal wages inability to adjust to the monetary shocks. Simply falling wages would lead to reemployment however sharp inclines in real wages lead to lowering employment and reduction of output. The starkest contrast being in 1932 when comparing the nominal wage adjustment of gold standard versus non gold standard countries. Its this balance of wage price behavior and the debt deflation that Bernanke suggests is the proximate cause of the great depression.

While there are a number of theories surrounding the causes of the great depression Bernanke does a good job at combining the most popular aspects of great depression historical and economic review and addressing the stark comparativeness of these items probability focusing on monetary shocks, debt deflation and the effects of the gold standard not as stand-alone causes but when combined.

 

Sources

Bernanke, Ben S. "The Macroeconomics of the Great Depression: A Comparative Approach." Journal of Money, Credit and Banking 27, no. 1 (1995): 1-28.

Garraty, John A. The Great Depression : an Inquiry into the Causes, Course, and Consequences of the Worldwide Depression of the Nineteen-Thirties, as Seen by Contemporaries and in the Light of History San Diego: Harcourt Brace Jovanovich, 1986.

Stuckler, David, Christopher Meissner, Price Fishback, Sanjay Basu, and Martin McKee. "Banking Crises and Mortality during the Great Depression: Evidence from US Urban Populations, 1929—1937." Journal of Epidemiology and Community Health (1979-) 66, no. 5 (2012): 410-19. 

Temin, Peter. Did Monetary Forces Cause the Great Depression? First edition. New York: Norton, 1976.