There were three theories about what made the Great Depression great, and how it could have been avoided by better policy.
- Milton Friedman: the Depression was Great because of a lack of liquidity, and if only the Federal Reserve had kept the money stock from falling everything would have been fine.
- DeLong-Summers: the Depression was Great because expectations of continued deflation became entrenched, and when those expectations were broken–by Roosevelt's New Deal–recovery began.
- Ben Bernanke: the Depression was Great because of the collapse of the banking system, and the resulting credit channel failures that robbed businesses seeking to expand of capital.
The past fifteen months have been a big strike against Friedman: Ben Bernanke has kept the economy liquid, and yet we are in a recession which may become a deep recession. The past fifteen months have been a strike against DeLong and Summers: no expectations of deflation have emerged, and yet here we are.
Bernanke's theory of the Depression is the only one standing (which doesn't mean that it is right, only that it may be right).Advertisements
Posted by: Tobias | October 17, 2008
What made the Great Depression great?
- climate change
- International Relations/Foreign Policy
- The Wisdom of Krauts
- War & Peace
- War on Terror