Barry
Eichengreen, an economics professor at UC-Berkeley, is a scholar of the first
order on The Great Depression. His “Golden Fetters” on how the operation of the
gold standard during the inter-war years was a significant cause of The Great
Depression is a classic. He argues in the Keynesian tradition on what the
crisis managers of 2008 learned, perhaps too well, the lessons of 1929-33. Thus
readers who prefer the views of James Grant’s “Forgotten Depression…” will
differ greatly with this history.
The
analogues between the 1920’s and 30’s with the 2000’s are many. Here are only a
few highlighted by Eichengreen:
· *Bernie
Madoff was the equivalent of Charles Ponzi.
· *The
Euro of today works the way the gold standard of the 20’s worked.
· *The
bailout of the Dawes Bank (Central Republic Trust) was similar to the Bear
Stearns bailout.
· * Letting
Lehman fail was analogous to the moral hazard issue associated with allowing
the Ford controlled Guardian Group of Banks to fail in 1933.
· *There
were real estate booms in both eras.
The lessons
our modern day policy makers learned were to flood the system with liquidity,
bailout the banks, engage in fiscal stimulus policies, avoid protectionism and
avoid debacles like the London Economic Conference of 1933 through
international cooperation. However, unlike the 1930s the problem in the system
was not really in the banks, but rather in the shadow banking system that grew
up in the 1990’s and reached full adulthood in the 2000’s.
Perhaps more
important instead of four years of grinding lower in the 1930’s the economy
began to recover after two years and most governments and central banks began
to pull back on stimulus policies which in Eichengreen’s opinion is the reason
for the slow growth the global economy has experienced since 2010. Further by
preventing another Great Depression the impetus to fully reform the financial
system waned and we ended up with a watered down version of financial reform
with Dodd-Frank. Eichengreen is a reformer in the Polanyi tradition.
Unfortunately as Keynes contemporaneously noted reform is the enemy of
recovery. Reform took place in the 1930’s because the old order collapsed, but
as many have noted the New Deal reforms delayed recovery. Even Eichengreen
concedes that National Industrial Recovery Act of 1933 was an economic
disaster.
In reading
Eichengreen’s book one has to sympathize with the policy makers of the early
Great Depression. They were operating in real time with inadequate information,
much as Bernanke et al were doing in 2008. Eichengreen is sympathetic to New
York Fed President George Harrison’s “direct pressure” approach to the stock
market boom which he characterizes as an early version of “macro-prudential”
policies. Unfortunately “macro-prudential” policies have yet to be tested and I
suspect they might have failed in the 2000’s in halting the sup-prime mortgage
boom. Why? The policy makers would have been accused of racism by preventing
Blacks and Latinos from buying homes.
I have a few
factual quibbles with the book. He understates the role of Hoover Treasury
Secretary Ogden Mills in being the true author of Roosevelt’s early banking
reforms; he fails to note the importance of the fiscal drag or tax on labor,
depending on your point of view, of the introduction of Social Security taxes
in 1936 without benefits being paid out until 1939. Remember at the time social
security was not included in the federal budget. Lastly he sometimes confuses
being long a credit default swap with being short the swap.
All told
Eichengreen has written an excellent book, especially The Great Depression
portion. However, because it is probably too long and towards the end he
pontificates too much on the Europe of the past years, which is too recent for
real history, I give the book four stars not five.
The Amazon Review appears at the following url:
