In the wake of the Great Recession, the Federal Reserve took unprecedented measures to stem economic decline. This column uses the Fed’s open-market operations in 1932, another period of short-term rates near the zero lower bound, as a comparison for the QE1 operation of 2008-09. Although the 1932 policy boosted output and inflation, if the Fed had announced the operation in advance and carried it out for a full year, the Great Depression could have been attenuated considerably earlier.
Michael Bordo, Arunima Sinha, 20 November 2016
Martín Gonzalez-Eiras, Dirk Niepelt, 11 October 2016
The US fiscal system underwent a radical transformation in the 1930s. This column proposes a micro-founded general equilibrium model that blends politics and macroeconomics to explain the transformation. It rationalises tax centralisation and intergovernmental grants as the equilibrium response to the Sixteenth Amendment, which introduced federal taxation. The theory can also be used to forecast federal and regional taxes and government spending.
Peter Lindert, Jeffrey Williamson, 16 June 2016
Americans have long debated when the country became the world’s economic leader, when it became so unequal, and how inequality and growth might be linked. Yet those debates have lacked the quantitative evidence needed to choose between competing views. This column introduces evidence on American incomes per capita and inequality for two centuries before World War I. American history suggests that inequality is not driven by some fundamental law of capitalist development, but rather by episodic shifts in five basic forces: demography, education policy, trade competition, financial regulation policy, and labour-saving technological change.
Kris Mitchener , Gary Richardson, 28 May 2016
The Global Crisis emphasised the fragility of international financial networks. Despite this, there has been little historical research into how networks propagate financial shocks. This column explores how interbank networks transmitted liquidity shocks through the US banking system during the Great Depression. During banking panics, the pyramided-structure of reserves forced troubled banks to reduce lending, thus amplifying the decline in investment spending.
Miguel Morin, 16 April 2016
A longstanding question in economics is whether labour-saving technology affects firms in the medium term by increasing output, by decreasing employment, or both. This column provides evidence on this issue using a novel dataset from the concrete industry during the Great Depression. Cheaper electricity caused a decrease in the labour share of income, an increase in productivity and electrical capital intensity, and a decrease in employment. Furthermore, these effects were stronger in counties where the Depression hit hardest, consistent with the idea of ‘the cleansing effect of recessions’.
Giovanni Federico, Antonio Tena-Junguito, 07 February 2016
Parallels are often drawn between the Great Recession of the past decade and the economic turmoil of the interwar period. In terms of global trade, these comparisons are based on obsolete and incomplete data. This column re-estimates world trade since the beginning of the 19th century using a new database. The effect of the Great Recession on trade growth is sizeable but fairly small compared with the joint effect of the two world wars and the Great Depression. However, the effects will become more and more comparable if the current trade stagnation continues.
Gerben Bakker, Nicholas Crafts, Pieter Woltjer, 05 February 2016
The Great Depression is considered one of the darkest times for the US economy, but some argue that the US economy experienced strong productivity growth over the period. This column reassesses this performance using improved measures of total factor productivity that allow for comparisons of productivity growth in the Depression era and in later decades. Contrary to Alvin Hansen’s gloomy prognosis of secular stagnation, the US economy was in a very strong position during the 1930s by today’s standards.
Jonathan Ashworth, Charles Goodhart, 28 April 2015
When panic strikes, people tend to withdraw cash. While there were upticks in currency-to-deposit ratios in the autumn of 2008 and early 2009, they were modest and very short-lived compared to the Great Depression. This column argues that leading central banks learnt from the 1930s mistakes and acted decisively to check the panic. Key policies were the existence and upgrading of deposit insurance schemes, massive liquidity injections, and rapid cutting of interest rates. The most important were the guarantees that the biggest banks wouldn’t fail.
Francesco Bianchi, 22 April 2015
During the Great Recession, the possibility that the US might enter a second Great Depression was a real concern. This column argues that until early 2009, financial markets behaved in a manner consistent with the early years of the Great Depression. The large stock-market fall saw growth stocks outperforming value stocks. This pattern ended March 2009, arguably in light of robust policy interventions. These dynamics suggest that poor performance of growth stocks during regular times may be compensated by superior performance in crises.
David Chambers, Elroy Dimson, 20 October 2014
Yale University has generated annual returns of 13.9% over the last 20 years on its endowment – well in excess of the 9.2% average return on US university endowments. Keynes’ writings were a considerable influence on the investment philosophy of David Swensen, Yale’s CIO. This column traces how Keynes’ experiences managing his Cambridge college endowment influenced his ideas, and sheds light on how some of the lessons he learnt are still relevant to endowments and foundations today.
Hugh Rockoff, 04 October 2014
World War I profoundly altered the structure of the US economy and its role in the world economy. However, this column argues that the US learnt the wrong lessons from the war, partly because a halo of victory surrounded wartime policies and personalities. The methods used for dealing with shortages during the war were simply inappropriate for dealing with the Great Depression, and American isolationism in the 1930s had devastating consequences for world peace.
Michael Bordo, 21 March 2014
Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
Jeffrey Frankel, 29 January 2013
2013 marks the 100th anniversary of US federal income tax and the establishment of the Federal Reserve. What lessons have we learnt about macroeconomic policy since then? This column assesses the postwar lessons and argues that fiscal expansion is much more likely to be effective in the short term than any monetary expansion stimulus. Indeed, compared with fiscal policy, monetary policy seems more alchemy than science.
Henry Siu, Nir Jaimovich, 06 November 2012
The US economy is recovering. But what explains the stubborn malaise in its labour market? This column argues that future recovery from recession will likely be jobless because technological advances and mechanisation now enable troubled firms to shed middle-income jobs in favour of machines and automation. If these jobs are not recouped during subsequent economic recovery, future recoveries may well remain jobless.
Bradford DeLong, Barry Eichengreen, 12 June 2012
Charles Kindleberger’s classic book on the Great Depression was originally published 40 years ago. In the preface to a new edition, two leading economists argue that the lessons are as relevant as ever.
Chad Bown, Meredith Crowley, 28 April 2012
As the global economy entered a crisis not seen since the Great Depression, many feared a return of 1930s-style protectionism. This column asks why many countries avoided this fate, focusing on trade policy in the US and EU.
Barry Eichengreen, Kevin O'Rourke, 06 March 2012
The debate over stimulus versus austerity continues unabated. This column shows that, while industrial production and trade recovered much more quickly than during the Great Depression, both series now appear to be slowing down. It suggests that, as St Augustine would have said had he been managing director of the IMF, there is a case for additional fiscal consolidation and monetary normalisation, but not yet.
Alan de Bromhead, Barry Eichengreen, Kevin O'Rourke, 27 February 2012
The enduring global crisis is giving rise to fears that economic hard times will feed political extremism, as it did in the 1930s. This column suggests that the danger of political polarisation and extremism is greatest in countries with relatively recent histories of democracy, with existing right-wing extremist parties, and with electoral systems that create low hurdles to parliamentary representation of new parties. But above all, it is greatest where depressed economic conditions are allowed to persist.
Marcus Miller, John Driffill, 27 September 2011
Just what on earth is going on in the global economy? Rather than get caught up in the hysteria, this column says the answers are best found by looking through the pages of history and dusting down some old textbooks.
Douglas Irwin, 11 September 2011
The swift policy response to the recent financial crisis helped the world economy avoid a replay of the Great Depression of 1929-32. But can we avoid a replay of 1937-38? With the world economy weakening once again, this column addresses the question with a renewed urgency and comes up with an oft-overlooked explanation – the Treasury Department's decision to sterilise all gold inflows starting in December 1936.