Essays on the Great Depression – Introduction

In the introduction to his book, Ben Bernanke makes the argument that monetary factors, specifically the gold standard that many countries held two between the first and second World Wars, and the policies that resulted from this choice played an important role in the Great Depression. He makes the point that countries that left the gold standard were more easily able to adjust to changes in output and prices than those that didn’t.

Another point he makes that due to the gold standard, there can be actually multiple possible paths an economy can take (multiple equilibria). The equilibrium point can be one of flexibility and stability, or it can be one of pessimism and large fluctuations. Without belaboring the equations – the major difference between the different points is the confidence of both consumers and investors. When there is high confidence, things are well, and when there is low confidence, things are poor.  Bernanke then presents evidence to support the point that monetary contractions, thought under some theories to have no effect of import on an economy, actually did contribute to the extent of the Great Depression. This is evidence of the non-neutrality of money. This concept is a highlight of the Keynesian school, anathema to the neoclassicists, and as usual, no one is really sure where the Austrians stand on it.

The next portion of the introduction is dedicated to the failures on the Aggregate Supply side of the situation. He lists these as two – debt deflation and the slow reaction of nominal wages to adjust to price changes. Sticky wages, as they are called, are often the bane of an economy’s existence. While theory would suggest that wages should be able to fluctuate as rapidly as prices, in reality this never happens. Contractual obligations, political pressure, and habit will prevent wages from dropping when prices drop; and pressure to maintain profits will prevent them from rising quickly. A final point addresses the idea that wealth redistribution can have real negative consequences.

So what does this mean for us? First, any notion of a return to the gold standard should be squashed on first sight. Theory and evidence shows that a gold standard economy is not a nimble economy, leaving aside the reality that modern economies have far outstripped the world’s ability to supply such gold. Second, it would be great if we could come up with some way to be more flexible with wages. One way would be to encourage more part-time work, but that is difficult in this country with our aged employer-based health care system. Too many people are tied to jobs that they aren’t optimally productive at, or would be willing to work for less (in terms of hours), but can’t because they can’t pay their health care bills if they do so. This lack of flexibility in the economy is one that should be a sticking point for those who claim that the economic health of the country is foremost, but is sadly lost in partisan concerns about the intrusion of government. I’m sure we will get to that down the road.

 So there is the introduction. The next part discusses financial markets – we’ll slog through that one and hopefully get there before Professor X learns to roll over.

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1 Comment

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One response to “Essays on the Great Depression – Introduction

  1. Very interesting that our health care system is contributing to our current depression via “sticky wages”.

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