New Perspectives on the Great Depression: A Review Essay

• Author: George S. Tavlas
• DOI: http://doi.org/10.1111/infi.12094
• Published date: 01 December 2016
• Date: 01 December 2016

BOOK REVIEW

New Perspectives on the Great

Depression: A Review Essay

George S. Tavlas

Bank of Greece and University of Leicester

Barry Eichengreen, Hall of Mirrors: The Great Depres sion, the Great Recession, and the Uses –

and Misuses –of History. Oxford: Oxford University Press. 2015.

Eric Rauchway, The Money Makers: How Roosevelt and Keynes Ended the Depression , Defeated

Fascism, and Secured a Prosperous Peace.NewYork:BasicBooks.2015.

I. Introduction

The Great Depression wa s the most devastating and destruc tive economic event to

afflict the global e conomy since the beginning of the 20th centu ry. The unprece-

dented depth and breadth of the depression, which ‘hung over th e world, poisoning

I am grateful to Har ris Dellas, Craufurd Goo dwin, Benn Steil and Mic hael Ulan for helpful

comments.

George Tavlas is a member of the Monetary Polic y Council of the Bank of Greece and the alternate to

the Bank of Greece’s Governor on the ECB Governing C ouncil. He is also a visiting professor at

Leicester University.

International Finance 19:3, 2016: pp. 353–374

DOI: 10.1111/infi.12094

© 2016 John Wiley & Sons Ltd

every aspect of social and material life and crippling the future of a whole

generation’(Ahamed, 2010, p. 6), have long provoked a fascination among econo-

mists about its causes and consequences. As Margo (1993, p. 41) put it: ‘The Great

Depression is to economi cs what the Big Bang is to physics’. Two recently published

books attempt to cast ne w light on the reasons it is important to understand the

origins of, and polic y responses to, the Great Depression.

Eric Rauchway’sThe Money Makers: How Roosevelt and Keynes Ended the Depression,

Defeated Fascism, and Secured a Prosperous Peace tells the story of the ways Franklin D.

Roosevelt drew on the ideas of John Maynard Keynes to place monetary policy front-

and-centre to underpin the recovery from the Great Depression and to underwrite the

blueprint of the Bretton Woods System. Barry Eichengreen’sHall of Mirrors: The Great

Depression, the Great Recession, and the Uses –and Misuses –of History sh ows the way

the lessons learned from analysis of the Great Depression helped shape policy makers’

response to the 2007–08 financial crisis, thus helping to avoid many of the mistakes

made by policy makers in the 1930s. In the following two sections, I review each book

in turn. Section IV concludes.

II. The Money Makers

Between 1929 and 1933 the US economy imploded.

1

Real gross domestic product (GDP)

fell by a third. The unemployment rate rose from 3.2% of the labour force to more than

25%. Wholesale prices dropped by 33% and consumer prices fell by 25%. At the trough

of the depression in March 1933, the output of durable goods had fallen to 20% of its

1929 level. From 1930 to 1932 more than 5,000 banks, accounting for more than

$3 billion in deposits (about 7% of total deposits) suspended operations. In 1933,

another 4,000 banks, accounting for more than $3.5 billion in deposits, would close. In

all, about one-third of the national banks suspended operations from 1930 to 1933. By

the time that Roosevelt assumed the US presidency on 4 March 1933, ‘the financial

system had ceased to function’(Walton and Rockoff 2005, p. 459).

The central theses of R auchway’sbookarethefollowing:first, Roos evelt took over

the reins of monetary polic y from what had been a passive Federal Reserve during

the four years of the Great De pression, and, by adopting a countercyclical monet ary

policy stance aimed at raising the price level and reducing unemployment,

succeeded in engineering an ‘exceptionally’rapid recovery (p. xvi). According to

Rauchway: ‘Under the New Deal, the US e conomy grew at rapid rates, even for an

economy in recovery. In Roosevelt’sfirst term, the US saw economic g rowth of about

nine percent per year on average’(p. 100). Second, the intellectual underpinnings of,

and respectably for, Roosevelt’s mon etary policy were provided by John Maynard

1

The data presented in this paragr aph are from Friedman and Schwartz (1963, Chapter 7) an d Walton

and Rockoff (2005, Chapter 23) .

354 George S. Tavlas

© 2016 John Wiley & Sons Ltd