The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Era

Published by EH.NET (November 2007)

Randall E. Parker, The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Era. Cheltenham, UK: Edward Elgar, 2007. xi + 257 pp. $125 (cloth), ISBN: 978-1-84542-127-4.

Reviewed by David C. Wheelock, Federal Reserve Bank of St. Louis.

The Economics of the Great Depression is Randall Parker’s second collection of interviews with leading economists about the Great Depression. Parker, a professor of economics at East Carolina University, published the first collection, Reflections on the Great Depression (2002), after interviewing economists who began their professional careers or were students during the Depression. The interviews with Paul Samuelson, Milton Friedman, Moses Abramovitz, Charles Kindleberger, Anna Schwartz, and others explored how the Depression had influenced their life’s work, although some, such as the interview with Anna Schwartz, also dug deeply into recent research on the causes of the Great Depression.

For this second collection, Parker interviews a group of younger economists: Most were born after World War II and all have written important papers or books about the economics of the Great Depression. Some are obvious choices ? Peter Temin, Ben Bernanke, and Allan Meltzer, for example, though all of the interviewees deserve to be included in the collection.

Parker himself has studied and written about the Depression and obviously was well prepared for each interview. Each interview explores the particular subject’s expertise: The interviews with Barry Eichengreen and Michael Bordo focus on the international gold standard, for example, while those with James Butkiewicz and Allan Meltzer dig into the reasons behind the Federal Reserve’s policy errors. But all of the interviews include the following key questions: What caused the Great Depression? What ended it? And, could it happen again? The answers reveal that leading scholars continue to have sharp differences of opinion about the cause or causes of the Great Depression.

As with the older literature, the sharpest disagreement in the recent literature on the Great Depression is about the role of monetary forces. Although the protagonists of the Monetarist-Keynesian debate of thirty years ago now largely agree that monetary and financial shocks were important, a new view has emerged based on so-called real business cycle theory that attributes the Great Depression to adverse productivity shocks. Among those interviewed, Lee Ohanian argues the strongest for the real business cycle view, though Robert Lucas expresses sympathy and others applauded the use of modern theoretical tools to understand the Depression. Most of the interviewees are not convinced that the real business cycle approach yields much insight about why the Depression happened, but several agree with Cole and Ohanian (2004) that the National Recovery Act and certain other New Deal programs slowed economic recovery.

Other notable differences of opinion among the interviewees concerns the extent to which monetary contraction would have occurred in the absence of the gold standard, whether the gold standard prevented the Federal Reserve from adopting an expansionary monetary policy, and the impact of deflation. I was struck particularly by the strong disagreement about whether deflation was anticipated or not and whether deflation was a cause or merely a symptom of the decline in economic activity. Nearly all of the subjects agree, however, that an important lesson of the Great Depression is that price stability should be a paramount objective of monetary policy. Furthermore, the interviewees also agree that another Great Depression is unlikely, though some are more pessimistic than others about the prospects for serious macroeconomic calamities in the future.

In his interviews, Parker makes little attempt to hide his personal views or refrain from asking leading questions. “What a rotten system,” Parker opines about the gold standard in his interview with James Hamilton, for example. And “Do you not see the evils of deflation?” he asks Allan Meltzer. While I am not bothered by these types of statements and questions, I do find somewhat distracting the inclusion of notes indicating that the interviewer and interviewee were “chuckling,” “laughing,” or otherwise drifting away. The interviews also frequently refer to charts or data that appear in other sources; I wish that these had been reproduced in the book.

One of the best parts of the book is Parker’s overview of the events and literature on the economics of the Great Depression, which is a revised and updated version of the overview written for his first book. A reader has to be fairly knowledgeable about the underlying research of the interviewee to get a lot out of these interviews. However, the overview chapter is one of the best surveys of the literature on the causes of the Great Depression that I have seen and makes the book worth recommending even to those who might not gain from reading all of the interviews.

References:

Harold L. Cole and Lee E. Ohanian, “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis,” Journal of Political Economy, Volume 112, Number 4, August 2004.

Randall E. Parker, Reflections on the Great Depression (Edward Elgar, 2002).

David C. Wheelock is an assistant vice president and economist at the Federal Reserve Bank of St. Louis. His recent publications include “Why Did Income Growth Vary across States during the Great Depression?” (with Thomas A. Garrett), Journal of Economic History 66 (June 2006). David.C.Wheelock@stls.frb.org.