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EH.NET BOOK REVIEW
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. <[log in to unmask]>
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 cannot 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 rest-of-the-world.
The Friedman and Schwartz influence is apparent in at least two important
respects: 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 Ficek
("The Expansion of Bank Credit," _Journal of Political Economy_, 1933, Vol.
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, 64th
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, 1-16).
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
errors."
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_.
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