Published by EH.NET (November 1998)

Thomas E. Hall and J. David Ferguson, The Great Depression: An International

Disaster of Perverse Economic Policies, Ann Arbor:

University of Michigan Press. 1998, Pp. xvii + 194, pp. $42.50 (cloth),

ISBN: 0-472-09667-2.

Reviewed for EH NET by Elmus Wicker, Dept. of Economics, Indiana University.

The authors assert that they wrote this book for two reasons:

disillusionment with how macroeconomics is taught at the college level and a

commitment to the Friedman and Schwartz interpretation of the Great

Depression that the Federal Reserve was an “incredible source of policy

errors.” From the first assertion, I infer that the audience for this book is

primarily college students, though I think it deserves a wider

readership among the economically literate. From the second assertion, I

infer that they believe that policymakers had the knowledge to have acted

differently. However, at no point do the authors make a serious effort to

defend that presumption. I will illustrate their neglect with several

crucial examples further on.

The book makes no pretence at being a contribution to our knowledge of the

Great Depression and can not be judged by such a narrow criterion. It must be

appraised by a different standard; that is, how well the authors pose the

major questions that must be answered and the skill and judiciousness with

which they evaluate the current state of our

knowledge of the Great Depression, given the audience to which the book

is addressed. Lester Chandler’s America’s Greatest Depression,

1929-1941 (New York: Harper and Row, 1970) is the only competitor

that immediately comes to mind, but Chandler’s purpose was not to assess the

current state of our knowledge of the Great Depression but to describe

what happened. Nevertheless, the audience is apparently the same.

Although the authors stress that the Great Depression was a global event

and not simply a U.S. debacle, the emphasis remains on what happened in the

United States. For example, output and unemployment in the

rest-of-the-world, excluding the U.S. and two European countries, is not

described. Hall and

Ferguson follow the current fad of placing the gold standard as the central

focal point. But what they and others have not done is to show specifically

how the gold standard was causally significant for the Great Depression in the

U.S.. Gold standard considerations played a very minor role, if they played

any role at all, in the decision of the New York Fed to advance the

discount rate in 1931; moreover, the bank failure rate had accelerated two

and one-half weeks before the discount rate was advanced. Only three of

the thirteen chapters address foreign country issues. France, Germany, and

Great Britain are treated in chapter 4, economic recovery in Germany in

chapter 10, and the world financial crisis in chapter 7. The

reader can easily come away with the view that what was truly significant

occurred in the U.S. and a few European countries and not in the


The Friedman and Schwartz influence is apparent in at least two important


the overarching significance accorded the behavior of the money stock and

the negative assessment of the behavior of the policymakers,

neither of which is critically evaluated. If the jury is still out on the

money-income causal nexus, the burden of the historical evidence is too

great to warrant any conclusion about the Fed’s ineptness.

What is absolutely crucial to appraising the performance of Fed officials is

to know the extent of their knowledge of the determinants

of the money stock. Whether or not they could have offset the increase in the

currency-deposit ratio turns on what they knew or did not know about the

role of the C/D and R/D ratios as determinants of the money stock. The authors

set out the modern textbook version of the determinants of M:

M = {(1 + cd)/(cd + rd)}B but they say nothing

about the origins of that equation. The currency-deposit ratio was

not fully modeled until 1933 in a pair of articles

by James Harvey Rogers (“The Absorption of Bank Credit.”

Econometrica, 1933, Vol. l, 63-70) and by James Angell and Karel


(“The Expansion of Bank Credit,” Journal of Political Economy, 1933,


41, 1-31 and 152-93). Rogers’ formal

framework had appeared in an earlier book, Stock Speculation and the

Money Market, (Lucas Brothers: Columbia,

Missouri, 1927, pp. 53-62) which was completely ignored by the economics

profession. Less formally, Benjamin Strong, Governor of

the Federal Reserve Bank of New York, introduced the currency-deposit

ratio in the Stabilization Hearings in 1926 (Benjamin Strong, Hearings

Before the Committee of Banking and Currency, House of Representatives,

1926, 69th Congress, parts 1-2, 334-5 and 422) and even earlier in The Report

of the Joint Committee of Agricultural Inquiry in 1922 (Agricultural

Inquiry: Hearings Before the Joint Commission of Agricultural Inquiry, 1922,


Congress. 1st Session). Although Strong’s testimony includes a simple

expansion process with a C/D ratio, this is by itself a mighty thin reed on

which to hold the Federal Reserve System accountable for not forestalling a

decline in the money stock between 1929 and 1933. Neither Friedman and

Schwartz nor Hall and Ferguson have demonstrated that knowledge of the

determinants of the money stock was available to Fed officials. In its

absence the case for the Fed’s ineptness collapses.

Friedman and Schwartz have made a distinguished contribution to our

understanding of the Great Depression, but Hall and Ferguson’s uncritical

acceptance of some of their historical interpretations of particular

episodes reveals a lack of acquaintance with more recent contributions

. For example, the authors repeat and apparently accept the Friedman and

Schwartz view that had Benjamin Strong lived Fed policy would have been

better. But that is no longer a defensible hypothesis. The Fed did in 1930

exactly what it had done in

1924 and 1927–that is reduce the indebtedness of the New York Fed to $50

million. It worked in 1924 and 1927; it did not work in 1930! Moreover,

there are no defensible grounds for criticizing the Fed’s behavior for

ignoring the demand for excess reserves when raising reserve requirements in

1936 and 1937. I know of no American economist who had any knowledge of a

demand for excess reserves.

In attempting to explain the slow recovery from the Great Depression, the

authors pay no attention at all to Michael Darby’s unemployment estimates

(“Three and a Half Million Employees Have Been Mislaid: An Explanation of

Unemployment, 1934-1941,” Journal of Political Economy, Vol. 84,


He maintained that the slow recovery from 1934 to

1941 was a fiction–there was a strong movement toward the natural rate after

1935. There are good reasons to question Darby’s estimates, but no good

reasons for completely ignoring them.

Hall and Ferguson appear to be carried away with their negative assessment of

Fed policymakers. At one point they refer to the camps of the

unemployed and destitute peoples as “Federalreservevilles” instead of

“Hoovervilles”. Neither appellation is apt. It is obvious that both go far

beyond what either the historical of statistical evidence warrants. The tone

is stridently judgmental.

The book may very well succeed in

rejuvenating moribund students who are

trying to master macroeconomics, but the authors fail to present a

convincing case that Fed policy was an “incredible sequence of policy


Elmus Wicker Department of Economics Indiana University

Elmus Wicker is Professor of Economics, Emeritus at Indiana University. He is

the author of Banking Panics of

the Great Depression, Cambridge University Press. 1996, and has

recently completed a manuscript titled

Banking Panics of the National Banking Era.