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Understanding the Great Depression: Lessons for Current Policy

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  • Stephen G. Cecchetti

Abstract

Over the four years beginning in the summer of 1929, financial markets, labor markets and goods markets all virtually ceased to function. Throughout this, the government policymaking apparatus seemed helpless. Since the end of the Great Depression, macroeconomists have labored diligently in an effort to understand the circumstances that led to the wholesale collapse of the economy. What lessons can we draw from our study of these events? In this essay, I argue that the Federal Reserve played a key role in nearly every policy failure during this period, and so the major lessons learned from the Great Depression concern the function of the central bank and the financial system. In my view, there is now a broad consensus supporting three conclusions. First, the collapse of the finance system could have been stopped if the central bank had properly understood its function as the lender of last resort. Second, deflation played an extremely important role deepening the Depression. And third, the gold standard, as a method for supporting a fixed exchange rate system, was disastrous.

Suggested Citation

  • Stephen G. Cecchetti, 1997. "Understanding the Great Depression: Lessons for Current Policy," NBER Working Papers 6015, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6015
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    References listed on IDEAS

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    1. Christina D. Romer, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 597-624.
    2. Hamilton, James D, 1992. "Was the Deflation during the Great Depression Anticipated? Evidence from the Commodity Futures Market," American Economic Review, American Economic Association, vol. 82(1), pages 157-178, March.
    3. Dominguez, Kathryn M & Fair, Ray C & Shapiro, Matthew D, 1988. "Forecasting the Depression: Harvard versus Yale," American Economic Review, American Economic Association, vol. 78(4), pages 595-612, September.
    4. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, January.
    5. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    6. Meltzer, Allan H., 1976. "Monetary and other explanations of the start of the great depression," Journal of Monetary Economics, Elsevier, vol. 2(4), pages 455-471, November.
    7. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
    8. Robert J. Gordon & James A. Wilcox, 1978. "Monetarist Interpretations of the Great Depression: An Evaluation and Critique," NBER Working Papers 0300, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Bingbing Dong, 2014. "Asset Pricing and Monetary Policy," 2014 Meeting Papers 881, Society for Economic Dynamics.
    2. Bernard LANDAIS, 2010. "The Monetary Origins Of The Economic And Financial Crisis," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 5(3(13)/Fal), pages 280-291.
    3. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
    4. Landais, Bernard, 2010. "The monetary origins of the financial and economic crisis," MPRA Paper 23769, University Library of Munich, Germany.
    5. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2004. "The Great Depression and the Friedman-Schwartz hypothesis," Working Paper Series 326, European Central Bank.

    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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