Here, Ben Bernanke has gathered together his essays on why the Great Depression was so devastating. This broad view shows us that while the Great Depression was an unparalleled disaster, some economies pulled up faster than others, and some made an opportunity out of it. Bernanke is particularly interested in the economic and political causes of the Great Depression, which he has written about extensively, but as I look through the articles written by Bernanke, he speaks on a broad range of topics, such as inflation, unemployment, the housing . BEN S. BERNANKE: 3 For many years, the principal debate about the causes of the Great Depression in the United States was over the importance to be ascribed to monetary factors. Ben S. Bernanke served as chairman of the Federal Reserve from to He was named Time magazine’s Person of the Year in and was a professor of economics at Princeton University prior to his career in public service/5. 2 Ben S. Bernanke, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, 73 (June ): ; reprinted in Bernanke, Essays on the Great Depression (Princeton, NJ: Princeton University Press, ).
Remarks by Governor Ben S. Among economic scholars, Friedman has no peer.
His seminal contributions to economics are legion, including his development of the permanent-income theory of consumer spending, his paradigm-shifting research in monetary economics, and his stimulating and original essays on economic history and methodology.
Generations of graduate students, at the University of Chicago and elsewhere, have benefited from his insight; and many of these intellectual children and grandchildren continue to this day to extend the sway of Friedman's ideas in economics. What is more, Milton Friedman's influence on broader public opinion, exercised through his popular writings, speaking, and television appearances, has been at least as important and enduring as his impact on academic thought.
In his humane and engaging way, Milton Friedman has conveyed to millions an understanding of the economic benefits of free, competitive markets, as well as the close connection that economic freedoms such as property rights and freedom of contract bear to other types of liberty.
Today I'd like to honor Milton Friedman by talking about one of his greatest contributions to economics, made in close collaboration with his distinguished coauthor, Anna J. This achievement is nothing less than to provide what has become the leading and most persuasive explanation of the worst economic disaster in American history, the onset of the Great Depression--or, as Friedman and Schwartz dubbed it, the Great Contraction of Remarkably, Friedman and Schwartz did not set out to solve this complex and important problem specifically but rather addressed it as part of a larger project, their magisterial monetary history of the United States Friedman and Schwartz, I was hooked, and I have been a student of monetary economics and economic history ever since.
As everyone here knows, in their Monetary History Friedman and Schwartz made the case that the economic collapse of was the product of the nation's monetary mechanism gone wrong. Contradicting the received wisdom at the time that they wrote, which held that money was a passive player in the events of the s, Friedman and Schwartz argued that "the contraction is in fact a tragic testimonial to the importance of monetary forces [p.
But what is most important about the work, and the reason that the book is as influential today as ever, is the authors' subtle use of history to disentangle complicated skeins of cause and effect--to solve what economists call the identification problem. A statistician studying data from the Great Depression would notice the basic fact that the money stock, output, and prices in the United States went down together in through and up together in subsequent years.
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.
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.
ben bernanke s fed
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. 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.
Essays on the Great Depression
As Friedman and Schwartz noted p. Moreover, Friedman and Schwartz went on to point out that this tightening of policy was followed by falling prices and weaker economic activity: 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. 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. 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. 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.
Bank failures and the Fed's defensive measures against the gold drain further reduced the stock of money. The economy took its deepest plunge between November and March , once more confirming the temporal sequence predicted by the monetary hypothesis. Once Roosevelt was sworn in, his declaration of a national bank holiday and, subsequently, his cutting the link between the dollar and gold initiated the expansion of money, prices, and output.
It is an interesting but not uncommon phenomenon in economics that the expectation of a devaluation can be highly destabilizing but that the devaluation itself can be beneficial. These four episodes might be considered as time series examples of Friedman and Schwartz's evidence for the role of monetary forces in the Depression. They are not the entirety of the evidence, however. Friedman and Schwartz also introduced "cross-sectional"--that is, cross-country--evidence as well.
This cross-sectional evidence is based on differences in exchange-rate regimes across countries in the s.
The Gold Standard and the International Depression Although the Monetary History focuses by design on events in the United States, some of its most compelling insights come from cross-sectional evidence.
Anticipating a large academic literature of the s and s, Friedman and Schwartz recognized in that a comparison of the economic performances in the s of countries with different monetary regimes could also serve as a test for their monetary hypothesis. Facilitating the cross-sectional natural experiment was the fact that the international gold standard, which had been suspended during World War I, was laboriously rebuilt during the s in a somewhat modified form called the gold-exchange standard.
Countries that adhered to the international gold standard were essentially required to maintain a fixed exchange rate with other gold-standard countries. Moreover, because the United States was the dominant economy on the gold standard during this period with some competition from France , countries adhering to the gold standard were forced to match the contractionary monetary policies and price deflation being experienced in the United States.
Importantly for identification purposes, however, the gold standard was not adhered to uniformly as the Depression proceeded. A few countries for historical or political reasons never joined the gold standard.
Others were forced off early, because of factors such as internal politics, weak domestic banking conditions, and the local influence of competing economic doctrines. Other countries, notably France and the other members of the so-called Gold Bloc, had a strong ideological commitment to gold and therefore remained on the gold standard as long as possible.
Friedman and Schwartz's insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard and, by default, the more closely bound to follow U.
One can read their discussion as dividing countries into four categories. The first category consisted of countries that did not adhere to the gold standard at all or perhaps adhered only very briefly. The example cited by Friedman and Schwartz was China. As they wrote p. As a result, it had the equivalent of a floating exchange rate with respect to gold-standard countries.
A decline in the gold price of silver had the same effect as a depreciation in the foreign exchange value of the Chinese yuan.