Ronald Grey

Book Review: Bernanke Essays on Economic History

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What did I know about America’s economic tradition before my recent library discovery of “Essays on the Great Depression” by Ben Bernanke, current chairman of the Federal Reserve?

For one, the first Great Depression — after the 1873 financial crisis — was related to the end of the Civil War, as previously described by economist John Chown, who documented post-war measures to establish a bimetallic standard for sound money.

The measures of 1873 were followed by the long recession known (at least to historians writing before 1931) as ‘the Great Depression.’

I’ve thought about the economic tradition behind America’s two Great Depressions since reading “Manias, Panics, and Crashes” by MIT economist Charles Kindleberger. He explained not only how a financial crisis can occur from displacement seven to ten years after the start or end of a war — such as the crises of 1720, 1772, 1825, 1873, 1929, and by extension, our recent economic woes that are described by Barack Obama in terms of mops and cars — but also how a lender of last resort like the Federal Reserve can shorten the economic downturn that follows a financial crisis.

The evidence turns mainly on 1720, 1873, 1882 in France, 1890, 1921, and 1929. In none of these was a lender of last resort effectively present. The depressions that followed them were much longer and deeper than others. Those of the 1870s and 1930s were both known as “Great Depressions.”

Thus knowing our first Great Depression was the longest cyclical contraction in American history, I was excited to learn more from the essays Chairman Ben Bernanke compiled before President George W. Bush appointed him in 2002 to the Federal Reserve, during his tenure with the Department of Economics at Princeton.

“My particular research specialty is macroeconomics,” says Bernanke, beginning the book’s preface by explaining how he is not a historian. “I guess I am a Great Depression buff, he adds, “the way some people are Civil War buffs.”

Overview, Money and Financial Markets

Inspired by Bernanke’s preview about how the book can serve as a guide to overcome disappointing change, by “studying the link between economic policies and institutions on the one hand and economic performance on the other,” one may feel a bit frustrated that the book — a compilation of nine essays in three parts — doesn’t also compare and contrast the Great Depressions throughout American history.

Such frustration aside, Bernanke succeeds convincingly in the first two parts with presenting a case against putting the dollar back on a metallic standard. Despite establishing some measure for sound money, it would also risk the danger of debt deflation capable of pushing the economy into a third Great Depression.

Patriot in the Best of Tradition

The book’s part three — with an emphasis on labor markets — is especially relevant in the current economy, with the potential for high cyclical unemployment to become structural in nature, as Americans continue losing their skills and connection to the labor force due to Obama’s disappointing change in fiscal policy.

Overall, Bernanke proves to be far from the treason accused of him by the harsh critics of our Federal Reserve system. The former economics professor instead proves to be the most avid of patriots, a history buff who shows how America can overcome disappointing change in the economy by adapting and improving on the best of tradition.

Coordination of Fiscal and Monetary Policy

What Bernanke and fellow Americans need is not some political celebrity making childish accusations while at the same time practicing blatant corruption, but a volunteer for president who understands the principle that economic policies need to be coordinated to achieve economic expansion, as explained by the experts in “Handbook of Government Budgeting.”

The fiscal policy actions of the president and Congress profoundly affect the monetary policy options available to the Fed, and the actions it takes. While in theory the reverse is also true, in practice the Fed largely adapts to the constraints imposed by fiscal policy because its policy decisions are more frequent, more flexible, and less constrained by political considerations … The fiscal and monetary policy mix that results from their independent but coordinated actions has major implications for both economic stabilization and economic growth.

We have not yet begun to succeed.

Promote the general welfare through 4% growth in the economy — join me

References

Ben S. Bernanke, Essays on the Great Depression (Princeton: Princeton University Press, 2004).

John F. Chown, A History of Money: From AD 800 (London: Routledge, 1996).

Rendigs Fels, American Business Cycles: 1865-1897 (Chapel Hill: The University of North Carolina Press, 1959).

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises, Revised Edition (New York: Basic Books, 1989).

Van Doorn Ooms, Ronald S. Boster, and Robert L. Fleegler, “The Federal Budget and Economic Management,” in Handbook of Government Budgeting, ed. Roy T. Meyers (San Francisco: Jossey-Bass, 1999).

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