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Essays on the Great Depression

Author(s):Bernanke, Ben S.
Reviewer(s):Margo, Robert A.

Published by EH.NET (July 1, 2000)

Ben S. Bernanke, Essays on the Great Depression Princeton: Princeton

University Press, 2000. vii + 310 pp. $35.00 (cloth), ISBN 0-691-01698-4.

Reviewed for EH.NET by Robert A. Margo, Department of Economics, Vanderbilt


For many years, economic research on the origins and persistence of the Great

Depression bore a striking resemblance to historical research on the causes of

the American Civil War. Both sides to the respective debates talked past one

another, and little, if any, intellectual progress was made. Beginning in the

1980s, the situation began to change, at least in case of the 1930s, because of

a simple methodological innovation. That innovation was to look beyond time

series aggregates for a single country, either at dis-aggregated evidence

within countries or at aggregate outcomes across countries. Both types of

evidence are examined in Ben Bernanke’s new book, a collection of (mostly)

previously published articles. (Currently, Bernanke is the Howard Harrison and

Gabrielle Snyder Beck Professor of Economics, Professor of Economics and Public

Affairs, and Chair of the Economics Department, at Princeton University.)

Essays on the Great Depression is divided into three parts, made up of

nine substantive chapters in total, plus an index. Following a very brief

preface, Chapter 1 (“The Macroeconomics of the Great Depression”) presents the

basic themes of the book. Using a cross-country panel data set, Bernanke argues

that monetary factors, along with the Gold Standard, should be according

primary responsibility for the Depression. Adherence to the Gold Standard

resulted in monetary “meltdown” — the declines in the money stock,

accordingly, were non-neutral, because of negative effects of financial crisis

and sticky nominal wages on output growth. Countries that remained on the Gold

Standard did far worse than countries that abandoned it, and a case can be made

that staying on the Gold Standard was more or less an exogenous event – that

is, a “natural experiment.”

Part Two is made up of three chapters. Chapter 2 (“Nonmonetary Effects of the

Financial Crisis in the Propagation of the Great Depression”) is justly famous.

The paper argues that the US financial crises of the early 1930s had (negative)

effects on the real economy, essentially by driving up what Bernanke calls the

“cost of credit intermediation.” One of two chapters in the book to rely on

aggregate time series data for a single country, Bernanke shows (p. 58) that

including deposits of failed banks and liabilities of failed business in an

otherwise standard time-series regression helps to (negatively) predict output

growth. Chapter 3 (“The Gold Standard, Deflation, and Financial Crisis: An

International Comparison,” written with Harold James) reports a similar finding

using the international panel, while Chapter 4 (“Deflation and Monetary

Contraction in the Great Depression: An Analysis by Simple Ratios,” written

with Ilian Mihov) uses very simple methods (an identity linking the price level

to the nominal money supply, the monetary base, international reserves, and the

quantity and price of gold reserves) to decompose the sources of world-wide

deflation before and after 1931

Part Three, on labor markets, is made up of five chapters. Chapter 5 (“The

Cyclical Behavior of Industrial Labor Markets: A Comparison of the Prewar and

Postwar Eras,” written with James Powell) introduces the second major data set

examined in the book, pre-war monthly data on output, employment, hours, and

average hourly earnings for eight US manufacturing industries. Among its many

findings is the striking observation (p. 175) that prewar employers used

shorter hours to reduce labor during a business cycle downturn, while postwar

employers have relied on layoffs. Chapter 6 (“Employment, Hours, and Earnings

in the Depression: An Analyses of Eight Manufacturing Industries”), perhaps the

most influential of the lot, argues that nominal average hourly earnings did

not decline as much as one might expect during the downturn (that is, nominal

wages were sticky) because average weekly hours fell as well, and workers were

unwilling to accept drastic declines in the former given the declines in the

latter. Chapter 7 (“Unemployment, Inflation, and Wages in the American

Depression: Are There Lessons for Europe?” written with Martin Parkinson), the

shortest in the book at eight pages, examines whether the experience of the US

in the 1930s can shed light on certain features of recent European

macroeconomic behavior; namely, the persistence of high unemployment, and the

apparent lack of any influence of high unemployment on either the rate of

inflation or real wage growth. Bernanke concludes that, while there are some

useful lessons, “there are also large enough differences to make inferences

about policy treacherous” (p. 253). Chapter 8 (“Procyclical Labor Productivity

and Competing Theories of the Business Cycle: Some Evidence from Interwar

Manufacturing Industries,” also written with Martin Parkinson) uses the US

industry data to investigate “short run increasing returns to labor” (SRIRL)

during the interwar period. The key finding is that the degree of SRIRL appears

to have been similar in magnitude to the postwar period, which Bernanke claims

is “troubling for the technology shocks explanation of procyclical productivity

(and thus for the real business cycle hypothesis).” Chapter 9 (“Nominal Wage

Stickiness and Aggregate Supply in the Great Depression” written with Kevin

Carey) considers several econometric refinements to Eichengreen and Sach’s

well-known 1985 Journal of Economic History article on the gold standard

and the Great Depression. It concludes that the refinements do little to alter

Eichengreen and Sach’s findings, and concurs with Eichengreen and Sachs that

nominal wage stickiness was an important mechanism for propagating monetary

declines in the early 1930s.

Overall, Essays on the Great Depression is a mixed bag. Two of the

papers — “Non-Monetary Effects” and “Employment, Hours, and Earnings” — are

certifiable classics, and all the chapters are worth reading (or re-reading, as

the case may be). The quality of the prose is several notches better than the

usual fare in professional economics journals. The empirical analysis

demonstrates a practiced eye for what is important and what is not, attention

to historical and institutional detail, and a willingness to explore

alternative explanations. Conditional on when they were written, the

statistical analyses are state-of-the-art, an order of magnitude beyond what

passed for econometric sophistication in economic history journals at the time.

On the other hand, the value-per-dollar ratio is not particularly high. Eight

of the nine chapters are essentially copied (the type-setting is new and

consistent throughout) from their original sources, and six of these, being

from the American Economic Review, Journal of Political Economy,

and the like, are easily available (indeed, I bet most economists who

considering buying this book will have the originals, or most of them, on their

shelves already). The other two chapters were originally published in NBER

volumes, hardly less accessible except to the most library-challenged. That

leaves the three-page preface, the previously unpublished Chapter 4, and an

index as the new material — not much for the reader’s $35.00. I’m not

questioning Bernanke’s right to reprint his admittedly influential articles,

nor Princeton University Press’s decision to package them in a handsome volume

complete with a striking period photograph on the cover and laudatory blurbs

from Peter Temin, Barry Eichengreen, and Randall Kroszner on the back cover.

However, in the long run, scholarship on the Great Depression, along with

readers’ pocketbooks, would have been better served had these essays been

re-written into real chapters; with a real introduction and conclusion;

regressions re-estimated taking into account new data and new econometric

techniques; and new textual material interwoven throughout — in brief, if

Bernanke had written a real monograph. Even with a proper introduction and

conclusion, such a book, I suspect, would be a good deal shorter than this

volume’s 301 pages of rather small print — there is much unnecessary

repetition, indeed confusion, across the various chapters.

As a case in point, consider the treatment of wage stickiness throughout. In

Chapter 2, using his international panel, Bernanke (p. 31) concludes that

“countries in which nominal wages adjusted relatively slowly toward changing

price levels experienced the sharpest declines in manufacturing output.” Table

9 of Chapter 3 reports first-difference regressions of industrial production

(in logs) using evidently the same data set, noting that (p. 101) “only when

the PANIC variable [the dummy variable for financial distress] is included does

nominal wage growth have the correct (negative) sign … but it is not

statistically significant.” In Chapter 6, Bernanke (p. 236) simulates his US

industry model assuming “perfect wage adjustment to the cost of living.”

Remarkably, this assumption “had virtually no effect on the ability to track”

employment and hours, suggesting that “the importance of lagged adjustment for

explaining observed real wage behavior” during the Depression “may not have had

great allocative significance.” Then, drawing again on the international

evidence, Chapter 9 notes (p. 300) that “the correlation across countries of

high nominal wages and low output is interpretable as an allocational effect of

sticky wages.” Exactly what is going on here? Bernanke clearly views wage

stickiness in the 1930s as an economic puzzle, since few of the standard

post-WW2 institutional stories (e.g., unions, efficiency wages, and the like)

seem to have explanatory power. While I don’t disagree with Bernanke on this

point, greater familiarity with the economic history literature would have

alerted him to the stylized fact that wage stickiness long-predated the 1930s,

in the United States and other countries.

While I applaud Bernanke’s willingness to move beyond the standard US time

series, readers should keep in mind that all of the US data come from

conventional, if somewhat neglected sources, as do the international data.

Other than occasional asides, not much attention is paid to data quality, and

only rarely do readers get any sense of the sort of archival work that might

improve matters for future research. Some of the regressions (for example, in

Chapter 7) were estimated prior to Christina Romer’s revisions to the standard

(that is, Lebergott) labor force series, and thus invite re-estimation.

Finally, in a book of essays about the Great Depression, one might have

expected more attention paid to unemployment, particularly its uneven incidence

across the workforce, and the strikingly high levels of long-term unemployment

prevailing in the US and elsewhere.

Criticisms aside, Essays on the Great Depression displays one of the

great contemporary masters of applied macro-econometrics at work. In the grand

scheme of things, I am glad that Ben Bernanke is fascinated by the Great

Depression. Hopefully his personal obsession will translate in an expanded

audience for the work of economic historians. In any case, his book will more

than do as a fine and ready example of why the past continues to have useful


Robert A. Margo is Professor of Economics and of History at Vanderbilt

University, Nashville, TN, and a Research Associate of the National Bureau of

Economic Research. He will be on leave during the 2000-01 academic year as

Visiting Senior Scholar and Visiting Research Professor of Economics at Bard

College in Annandale-on-Hudson, NY. His most recent books are Wages and

Labor Markets in the United States, 1820-1860 (University of Chicago Press,

2000) and Women’s Work? American Schoolteachers, 1650-1920 (with Joel

Perlmann, forthcoming, University of Chicago Press, 2001).

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII