Economists' fascination with the description and interpretation of the severity and duration of the Great Depression has not flagged in the seven decades since its onset. What began as an investigation centering on the U.S. Depression experience has broadened in recent years to cover the experience of countries around the world.
At least five of the nine essays that Bernanke has collected in this volume (some with coauthors, and only one not previously published) analyze quantitative data for a sample of countries in addition to the United States. He is a careful econometrician, scrupulous in his discussion of weaknesses in the data and problems in the econometrics. His interpretation of his findings is consonant with the current consensus views on the Depression that the economics profession espouses.
Since the 1930s, economists have pursued at least three different directions in research. At first, "overproduction" of some industrial output or a decline in a real sector of the economy (residential housing construction, business fixed investment, or real consumption expenditures) was emphasized as the source of the Depression. Since the 1960s, the emphasis has shifted to monetary shocks as the source of the downturn. Finally, beginning in the 1980s, a select group of proponents of real business cycles have favored technology shocks as the source of downturns in general.
Research in the first direction has been largely superseded by the shift to the monetary shocks approach of the second direction, which Bernanke embraces. He rejects the technology shocks approach of the third direction, discussed in an essay in the final part of the book that examines the evidence for a sample of U.S. manufacturing industries from 1923 to 1939.
The book is organized in three parts. Part one provides an overview of the macroeconomics of the Depression that is found in Bernanke's 1995 Journal of Money, Banking, and Credit lecture. Three essays in the second part deal with money and financial markets. Of the five essays in the third part, the first four deal with labor markets by U.S. industry, while the final essay deals with international data.
There are two key questions about the Depression: What caused the collapse of nominal values--prices, nominal incomes, nominal interest rates, and nominal returns on safe assets? And how was the nominal collapse transmitted to the real economy?
Part two of the book discusses the overwhelming evidence that a contraction in money supplies in all countries at the outset of the Depression was the main factor in producing a sharp decline in demand for goods and services and in their prices. The international data confirm that adherence to the gold standard explains why declines in demand occurred simultaneously in so many countries. From 1931 on, however, the data reveal a sharp divergence between...