Debunking Economics, Part X: Causes of the Great Depression (and Great Recession)

Chapter 12 of Steve Keen’s Debunking Economics is a critique of a pervasive neoclassical interpretation of the Great Depression (and, by extension, the Great Recession): that the severity of the downturn can be attributed to contractionary monetary policy at the Federal Reserve. As you’d expect, this doesn’t mesh well with the endogenous money theory to which Keen (and I) subscribe, which says that the money supply is largely controlled by private banks.

Keen begins by cataloging Ben Bernanke’s evaluation of the Great Depression, which built on Friedman and Schwartz’ A Monetary History of the United States. From the quotes Keen presents, Bernanke’s offering really seems to be neoclassical economics at its reality denying worst:

the failure of nominal wages (and, similarly, prices) to adjust seems inconsistent with the postulate of economic rationality


[On Minsky’s FIH] I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.

Having said that, the case that the Federal Reserve exacerbated the Great Depression by contracting the money supply does have some substance to it, and is worth discussing.

There is no denying that the Federal Reserve contracted base money at the onset of the Great Depression. But it is a leap to suggest this was the primary cause of the prolonged slump – firstly, the contraction of base money was less than 2% on average. Secondly, there has been one other occasion where base money has contracted nominally (1948-50), and six other occasions where it has contracted when adjusted for inflation. All of these – bar one – were correlated with recessions, but none were correlated with depressions.

Keen presents a graph showing a complete lack of correlation between unemployment and M0:

Instead, there is a much clearer correlation with broader, credit-based measures of the money supply:

From this, it’s quite clear from that the primary cause of the Great Depression was a collapse in aggregate demand, caused by a contraction of credit by private banks. Bernanke and other neoclassical economists are reluctant to accept this conclusion, because it conflicts with the neoclassical vision of the economy as inherently stable, bar perhaps a few frictions, and also renders invalid many of their preferred modelling techniques. For someone like Friedman, the conclusion is simply unacceptable, because it conflicts with his insistence that ‘the government’ is the cause of most significant problems.

The money multiplier, again

Keen catalogues the evidence against the money multiplier story that lies behind Bernanke and Friedman’s interpretation of the Great Depression. In this story, the Central Bank (CB) expands reserves, and private banks then make loans, keeping a fraction of the reserves so that they can accommodate demand for money from customers. These loans are then deposited, and a fraction is kept, and this process continues until no more can be lent out. The amount of loans is that inverse of the fraction banks are required to hold as reserves.

What are the problems with this story? First, the observed reality in banks is that they create loans and deposits simultaneously, and as such do not require reserves before they lend. Second, the change in credit and broader measures of the money supply precedes changes in reserves, rather than the other way around. Third, the failure of monetarism – a disastrous policy used in the 1980s where the CB tried to stabilise money growth, but consistently overshot their target. Fourth, Bernanke’s increases in base money during 2008, which resulted in little to no change in economic activity:

For a more in-depth treatment of the money multiplier by Keen himself, see here.

It is worth noting that it is strictly true that the CB controls base money, and as such some might interpret the endogenous interpretation as one of policy. But the fact is that endogenous money reflects the reality of capitalism: firms need capital before they make sales, and banks must accommodate this to keep the economy moving. The CB – though it has some discretion – simply has to play the role of passively accommodating endogenous activity, otherwise capitalism will not work.

Onto the Great Recession

Keen ends the chapter by documenting a few papers that have attempted to understand the Great Recession – McKibbin and Stoeckel (2009); Ireland (2011); and Krugman and Eggertson (2011). The first two, unfortunately, do not even attempt to create a role for private debt. Instead, the recession is due to a series of external shocks – such as changes in preferences and technology – whilst its length can be attributed to factors such as wage and price rigidity, which get in the way of capitalism’s underlying tendency to stability.

Krugman and Eggertson’s, on the other hand, commendably notices how important private debt seems to be, but only gets as far as modelling it as a special case, in which ‘patient’ agents save, and ‘impatient’ agents borrow. In some ways this observation is true – when money is paid back, it disappears into extremely ‘patient’ agents: banks, who have an MPC of 0. However, banks create rather than save this money, and hence it is added to aggregate demand. This process is, unfortunately, something Krugman says he “just doesn’t get.”

Ultimately, Krugman’s paper is the same story as the others: a one-off event, imperfection, special case, creates a problem in an otherwise stable economy. All three papers fit Bob Solow’s characterisation of New Keynesian models – they fit the data better because economists add “imperfections…chosen by intelligent economists to make the models work better.” All briefly reconsider building new theories from scratch, before simply reasserting the neoclassical core. There really needs to be more soul-searching from economists than this.


, , , , ,

  1. #1 by Louis-Philippe Rochon on September 19, 2012 - 4:30 pm


    I read your post and there is an inconsistency at the beginning where you write that the standard view of the Great Depression is that it was caused “contractionary monetary policy at the Federal Reserve. As you’d expect, this doesn’t mesh well with the endogenous money theory to which Keen (and I) subscribe, which says that the money supply is largely controlled by private banks.”

    This view does not contradict the endogenous money view at all. Even under an endogenised view, you can still have contractionary monetary policy in the form of increased rates of interest. WHat you should have stated, rather, to be more accurate, is that the standard Bernanke view sees contractions in the money supply. This would have made more sense. There is a difference in saying contractions in the money supply and contractions in monetary policy, which could be in money supply (which we agree to reject because of endogenous money) or interest rates.

    ************************************** LOUIS-PHILIPPE ROCHON Associate Professor,Laurentian University Director,International Economic Policy Institute Founding Co-editor, Review of Keynesian Economics (ROKE)

    Like ROKE on Facebook (here)

    Department of Economics Room A350 Laurentian University / Universit Laurentienne 935 Ramsey Lake Road Sudbury, Ontario CANADA P3E 2C6 1-705-675-1151, ext. 4350 (Work) 1-705-675-4886 (Fax)

    “Credit is the pavement along which production travels, and the bankers if they knew their duty, would provide the transport facilities to just the extent that is required in order that the productive powers of the community can be employed at their full capacity” (Keynes, CW, VI, p.197).

    • #2 by Unlearningecon on September 19, 2012 - 4:49 pm

      Hi, thanks for the comment. Yes you are absolutely right and that was a case of sloppy use of terminology.

      (Btw, hope you don’t mind – there seemed to be some formatting problems in your comment so I cleared them up).

  2. #3 by J St. Clair on September 19, 2012 - 4:39 pm

    and…..since government economy is big ie. buildings, etc. being built….then a lot of money is going into government “capital”….

  3. #4 by Min on September 19, 2012 - 7:31 pm

    “In some ways this observation is true – when money is paid back, it disappears into extremely ‘patient’ agents: banks, who have an MPC of 0. However, banks create rather than save this money, and hence it is added to aggregate demand. This process is, unfortunately, something Krugman says he “just doesn’t get.”

    Sorry, that is not clear to me. First, banks create money when they lend it. When it is paid back, then, it disappears. It does not matter whether the banks are patient or not, the money is gone. Right?

    Then when you talk about “this money” being added to aggregate demand, you have lost me. You seem to be on a previous page.

    • #5 by Unlearningecon on September 20, 2012 - 2:40 pm

      The money is not destroyed, it is simply taken out of a circulation. I was just being snarky when I referred to banks as ‘patient’ – perhaps it was misleading.

      I don’t understand what you don’t understand. When banks create credit, they add to net purchasing power, no?

      • #6 by Min on September 20, 2012 - 5:10 pm

        Back in the day when banks printed bank notes and lent them out, when that money came back to the bank, they didn’t burn it, right? (Unless it had become too worn, I suppose.) But nowadays when banks make loans they credit your account, right? (I suppose they could give you a cashier’s check or letter of credit or some such, as well, but let’s stick to crediting your account.) At the same time they increase their assets by the amount of the loan. When you pay them back, they decrease their assets by how much you pay, right? The don’t credit their own account somewhere by how much you pay, do they? When you pay them back, the amount of money in bank accounts drops by how much you pay, right?

        As for the creation of credit, as I said, you seemed to be on a previous page, before the bank was paid back. The flow of the text is what bothered me.

      • #7 by Unlearningecon on September 22, 2012 - 5:33 pm

        Yes, you are correct.

      • #8 by Nathanael on September 25, 2012 - 12:41 pm

        Remember, the only “amount of money” which matters is money in circulation — when ever it’s out of circulation, it basically doesn’t exist. It’s just a claim on future generations, and one where the “deal” can be changed at any time by politics. (If people try to put too much out-of-circulation money back into circulation all at once, a disruptive amount, governments have been occasionally known to use repudiation to reject this.)

  4. #9 by ivansml on September 19, 2012 - 9:03 pm

    (hope I didn’t screw up HTML in quotes bellow)

    Keen begins by cataloging Ben Bernanke’s evaluation of the Great Depression

    That would be the same book Keen admitted he hadn’t read, right?

    There is no denying that the Federal Reserve contracted base money at the onset of the Great Depression. But it is a leap to suggest this was the primary cause of the prolonged slump
    Keen presents a graph showing a complete lack of correlation between unemployment and M0: […]
    Instead, there is a much clearer correlation with broader, credit-based measures of the money supply:

    My (second-hand, I admit) understanding of work by Friedman and Schwartz was that the main problem was decrease in higher monetary aggregates (i.e. deposits) caused by collapsing banking sector, which should have been (but wasn’t) offset by increase in monetary base. So the evidence presented by Keen not only doesn’t contradict them,but in fact it’s pretty much consistent with what they’ve said.

    And, BTW, R^2 = 0.44 would mean correlation coefficient of 0.66, which is not exactly same as “complete lack of correlation”. But then, second graph has R^2 negative, so frankly I have no idea what Keen was computing.

    From this, it’s quite clear from that the primary cause of the Great Depression was a collapse in aggregate demand, caused by a contraction of credit by private banks. Bernanke and other neoclassical economists are reluctant to accept this conclusion

    Perhaps if Keen was more familiar with Bernanke’s actual work, instead of using him as straw-man representation of “neoclassical economists”, he would come across this paper (ungated copy), in which Bernanke explicitly investigates the role of credit channel in worsening the downturn. But then, careful presenting of research by others wouldn’t sell as much books as simplistic misrepresentation, would it?

    It is worth noting that it is strictly true that the CB controls base money […] The CB – though it has some discretion – simply has to play the role of passively accommodating endogenous activity, otherwise capitalism will not work.

    That sounds like two mutually contradicting statements to me.

    Ultimately, Krugman’s paper is the same story as the others: a one-off event, imperfection, special case, creates a problem in an otherwise stable economy. […] All briefly reconsider building new theories from scratch, before simply reasserting the neoclassical core. There really needs to be more soul-searching from economists than this.

    I see. So instead of actually engaging with ideas in those papers, regardless of the methodological language they’re presented in, we should simply dismiss them because of some handwaving about “neoclassical core”. Yes, that will certainly lead us to better economics…

    • #10 by Mathieu Dufresne on September 20, 2012 - 9:56 am

      A positive correlation indicates that unemployment rise as money base increase, obviously it doesn’t make sense, the central bank is just reacting to the collapse of the economy so we’re talking about a complete lack of correlation in the sense that decreasing monetary base isn’t correlated with increasing unemployment.

    • #11 by Unlearningecon on September 20, 2012 - 2:32 pm

      Keen admitted he hadn’t read it in 2009. Debunking Economics was released in 2012! I’m pretty sure he has read it now.

      Mathieu has commented on the correlation – it should be negative, not positive. Friedman and Schwartz’ interpretation, if it was that, was dishonestly stated by Friedman when he repeatedly asserted the government ’caused’ the depression. In any case it is belied by Bernanke’s actions, and also by reverse causation from M1+ to M0.

      The statements are not contradictory. The CB can control base money – at the expense of destroying the economy.

      As for the neoclassical papers: Keen discusses them in more detail than I do (come on, it’s just a blog post. Do you expect me to repeat everything he said verbatim?) But my representation is still accurate – they use ridiculous interpretations like preferences changes and technology shocks to try and model a financial crisis.

      In any case, the neoclassical core is not ‘handwaving.’ I have posted about it a few times, channeling this essay.

      • #12 by ivansml on September 20, 2012 - 10:33 pm

        So I read the whole chapter by Keen. It’s even worse than I thought from your summary. Keen cherry-picks quotes from Bernanke’s book to paint him as staunch neoclassical, when those quotes were clearly just rhetorical questions describing defficiencies of basic neoclassical models, meant to motivate actual Bernanke’s contributions. He even quotes verbatim his explanation of Great Depression (decrease in M1), and then presents charts with M0, as if there was no difference. So no, I don’t think he read Bernanke’s work. Or if he read it, he didn’t understand it, and if he actually understood it, he’s just plain lying. As for his discussion of more recent papers on Great Recession, it’s superficial and irrelevant, basically just repeating his previous misguided criticisms (and the claim that in February 2011 there were just two new-keynesian papers about Great Recession is just hillarious).

        About neoclassical core – that essay and your posts merely define essential elements of neoclassical economics. That you choose to use this definition to lazily dismiss at will any work by mainstream economists is something entirely different.

        That’s exactly why correlation != causation, so even if chart with M0 was relevant here, simple correlation is not enough to make strong causal claims.

        @ Hedlund
        I just used blockquote tags directly (now I see there’s a list of supported tags at the bottom).

      • #13 by Unlearningecon on September 21, 2012 - 12:15 am

        ivan, you’re simply being completely unfair to both Keen and myself. I don’t know why you’d expect him to go through every single paper on the Great Recession in the chapter, and given that you don’t substantiate your assertions that his criticisms are ‘misguided,’ I find it hard to believe you really have a case for those papers, which are, as Keen says, based on massive contortions and in which the mechanics have nothing to with a financial crisis.

        On the neoclassical core: no, I did not ‘lazily dismiss’ all neoclassical models based on that essay. The purpose of discussing it is to show what I meant by ‘neoclassical core,’ which you said was ‘handwaving.’ You were wrong – it exists, it is important, and economists are unwilling to try to move away from it, despite some rhetoric to the contrary.

        On the Great Depression: Bernanke certainly believes (or believed, prior to 2008) that it was primarily the Fed’s fault. Keen is not misrepresenting him here. And Keen does not claim Bernanke says the ‘money multiplier’ (a worthless tautology) was stable, either. Keen is disputing the mechanics of the banking sector, and frankly the evidence is convincingly in his favour.

      • #14 by Mathieu Dufresne on September 20, 2012 - 11:18 pm

        I think you don’t understand Keen’s argument. Bernanke argue that the decline in M1 is caused by the Fed contracting monetary base and if it was the case, you should find a negative correlation between monetary base and unemployment. Bernanke actually didn’t looked at M0, he just show the negative correlation between the change in M1 and unemployment, assume the causality runs from M0 to M1 and blames the Fed for letting the ratio of M0 to gold reserves decrease, which in turn, caused the decline in M1. Keen argues that the causality is in fact running the other way around, the central bank is only accommodating banks need for M0 and increasing monetary base mostly decrease M1 to M0 ratio without boosting M1. The fact that deleveraging is the cause of M1 decline is simply overlooked by Bernanke, since he does argue that delevraging in only a transfert of spending power from a borrower to a creditor.

      • #15 by ivansml on September 20, 2012 - 11:53 pm

        No, I understand Keen’s argument perfectly, I’m just saying it’s false. Although Bernanke discussed some earlier episodes of monetary tightening, he claims that large decrease in M1 after 1931 was due to decrease in money multiplier, which was in turn caused by collapsing banking system. He most certainly doesn’t claim that decrease in M1 was caused by corresponding decrease in M0 implied by stable money multiplier.

      • #16 by Mathieu Dufresne on September 21, 2012 - 12:13 am

        We’re talking about the causes of the Great Depression and Bernanke clearly say the decline in M1 in 1928-1930 is caused by the contraction in the ratio of base to reserves. It does imply a causality running from base to M1 and that’s what Keen is criticizing, along with the debt issue.

      • #17 by ivansml on September 21, 2012 - 1:40 am

        @UE: I provided plenty of support for my criticisms, both in this thread and in previous ones. Do you really feel that quotes in Keen’s book provide a faithful representation of Bernanke’s work? That carelessly switching between M1 and M0 is OK? That one can “refute” decades of research by a couple of Excel charts and some crude correlations?

        You were clearly dismissing Krugman & Eggertson only because it conforms to neoclassical methodology. So let’s forget about preferences, equilibrium and all that stuff – here’s their core idea as far as I understand it:
        1) deleveraging means that borrowers save more and consume less
        2) for output not to fall, lenders must instead consume more; they will do so if interest rates fall
        3) if the fall is sufficiently big, interest rates will hit zero lower bound, at which moment this mechanism fails, output will fall and economy will head into demand-side recession
        What’s wrong with it?

        And no, I don’t expect anyone to read every paper on Great Recession. But I definitely expect any economist to do a reasonable literature search, especially when he criticizes others (in a pretty condescending tone) for not doing the same just a few pages later. From the top of my head, some relevant and more influential papers Keen missed (and I’m not an expert on New-Keynesian macro, so this may still not be the best selection):
        – Woodford’s “Simple Analytics of the Government Expenditure Multiplier”, which I recall seeing in spring 2010 in my graduate macro course
        – 100+ page ECB working paper published in May 2010 by Christiano, Motto & Rostagno (“Financial factors in economic fluctuations”)
        – Fall 2010 issue of Journal of Economic Perspectives, with several papers on the crisis
        – etc., if I turned to Google Scholar, I’d find plenty more.

      • #18 by Unlearningecon on September 21, 2012 - 12:32 pm

        The point is that Bernanke understands M1 to be a result of actions by the CB.

        That one can “refute” decades of research by a couple of Excel charts and some crude correlations?

        This is known as falsification. And I don’t know which ‘research’ to which you refer: the money multiplier is simply a textbook fantasy. You provide no justification for your snarky use of the word ‘crude’ – there are pretty robust correlations between debt and other indicators.

        The Krugman and Eggertson paper still contains the ‘banks as intermediaries’ line that you repeat endlessly, ignoring swathes of evidence in favour of endogenous money (which you refer to as ‘crude’ because it doesn’t repeat the standard story). This is another part of the ‘core’ to which I was referring. There is nothing wrong with the story conceptually, and it contains some truth. But it isn’t how the financial system works.

        Do any of these papers use endogenous money? Are any of them Stock Flow Consistent? Or do they all just repeat standard lines about frictions, shocks and so forth that prevent an otherwise stable economy from reaching equilibrium?

      • #19 by Eric L on September 21, 2012 - 3:58 am


        “What’s wrong with it?”

        I can’t speak for UE or Keen, but I’d say this part:

        “2) for output not to fall, lenders must instead consume more; they will do so if interest rates fall”

        There are two problems with this. First, it misunderstands why the ultra-wealthy save. They don’t view their savings as such, in that they don’t ever intend to draw down their savings to consume — their savings are what generate their income, some of which they spend and some of which they “save”, or re-invest really. A drop in interest rates is a drop in income, so it does not spur spending; why would they start doing spending they easily could have done yesterday after their income drops?

        It also misunderstands why the middle class save — it is to spread out future expenses, not to get a return. I save for my retirement and my childrens’ college tuition, and I would do so if the return were 0%. It’s not because it’s cheaper, it’s because I will not be able to pay for those only out of the income I’m making then. Any decrease in my incentive to save due to lower interest rates is cancelled out by the need to save more to get the same result.

        So dropping interest rates doesn’t do that much to increase the consumption of savers. What it does is it makes it profitable to loan where it would not be profitable at higher interest rates, thus increasing consumption by debtors. Now this leads to a similar conclusion about monetary policy being ineffective at the zero bound but having some effect when rates are higher. But the underlying cause is different, and in my view trying to push rates even lower to get more people to borrow is going to be counter-productive in the long run; the low rates are a symptom of the fact that the economy has become too financialized and the distributional problems with our economy can no longer be ignored.

      • #20 by ivansml on September 21, 2012 - 1:47 pm

        For 100th time, correlation is not causation. For example, in a world where CB hit it’s target perfectly, unemployment would be constant and there would be no correlation with base money – and you would victoriously proclaim that money plays no role, which would be obviously wrong. There’s a large literature that actually tries to estimate _causal_ impact of monetary shocks on output using structural vector autoregressions, which both you and Keen are totally ignoring. These charts you’re showing at best document correlations that could be consistent with many theories, neoclassical included.

        Endogenous money theory describes a world with one single bank, whose deposits are universally accepted as medium of exchange. Does that sound even remotely like to the financial system we live in? Seriously? This empirical evidence you’re so fond of shows that the econ 101 model of stable money multiplier is wrong – but nothing more.

        And btw, you’re doing it again, invoking your favorite buzzwords instead of engaging in serious discussion. Your arguments are not different from those of microfoundations purists – only in your case the bogeyman is endogenous money instead of Lucas critique.

        Allright, that could be a reasonable objection. But the world you describe would be strange – central bank could increase consumptions and reduce saving by increasing interest rates… In any case, it’s an empirical question.

      • #21 by Unlearningecon on September 21, 2012 - 4:57 pm

        Jesus ivan, if you are seriously characterizing the evidence in favour of endogenous money as confusing correlation and causation then I’m not sure you even want to pay attention. Endogenous money does not describe a world with one bank. My god. And no, saying that the money multiplier is not stable is not the same as endogenous money. How many times do I have to have this debate?

        Exogenous money: CB increases reserves. Banks need these before they can lend out money; the degree to which various endogenous factors encourage them to do so determines the money multiplier, whilst regulation limits it.

        Endogenous money: banks create loans and deposits based on their capital, regulation and own risk perceptions. They find reserves either through the CB or in the overnight market. The CB exercises some discretion by setting the interest rate, and is willing to let a few people go bust to show it ‘means business.’ This discretion is limited, however, else the economy will simply grind to a halt as businesses, banks and consumers cannot find credit, and multiple credit crunches ensue.

        If Exogenous money were true, we’d expect base money to move first. We’d expect people who actually worked in banks to tell you they had to check reserves to make loans. Neither of these are true.

        Maybe we’d expect the level of private debt to perhaps be correlated with activity, but would it move first every time, as in Keen’s data? Would the correlation be quite so tight? Correlations as tight as Keen’s are not meaningless, despite your obvious disdain for data that falsifies exogenous money.

        No, I’m not using buzzwords. I’m asking which neoclassical explanation of the crisis you find most pertinent, and why it is better than an SFC Godley-Keen-Kaldor style financial model?

      • #22 by Mathieu Dufresne on September 21, 2012 - 2:42 pm

        If both the change in the money supply and unemployment are constant (acceleration of the money supply and change in unemployment would both be 0), you would find a perfect correlation between the two variables…

        A strong correlation between two variables does strongly suggest a causal link, altought it doesn’t tell you anything about the direction of the causality. If you want to dismiss a causal link, you have to find the confonding variable. If you have a correlation superior to 0.9 caused by a confonding variable, it’s usually obvious and easy to prove.

      • #23 by ivansml on September 21, 2012 - 8:36 pm

        annoying exogenous money proponent is back 😉

        In reply to your latest post, I think I’m paying above average amount of attention. Let me refer to an authority on the subject:

        The best place to start to analyse the monetary system is therefore to consider a model of a pure credit economy […] a bank is a third party to all transactions, whose account-keeping between buyer and seller is regarded as finally settling all claims between them. […] Thus in a credit economy, all transactions are involve one commodity, and three parties: a seller, a buyer, and a bank whose transfer of money from the buyer’s account to the seller’s is accepted by them as finalising the sale of the commodity.
        (Steve Keen: Roving cavaliers of credit)

        That’s a system with single bank. Allowing for multiple banks means either
        1) that each produces its own money, so we have to deal with exchange rates between them; this is similar to free-banking system admired by austrians, yet it doesn’t describe the world we currently live in.
        2) OR there is an underlying asset serving as a common unit of account and medium of exchange, and deposit in each bank can be converted into it at fixed rate. This is much closer to reality. It’s also consistent with mainstream theory.

        In setting #2, banks cannot create purchasing power (=medium of exchange) unless the monetary base increases. It might be true that central bank has to accommodate demand for base money at any given rate of interest (or maybe not – I’m sure those guys on Wall Street would figure something out). But CB can also set interest rate, so then it controls monetary base indirectly. In any case, I don’t see how any of this supports assertions that banks are not financial intermediaries, that aggregate demand exceeds aggregate output, or any other similar claims.

        Regarding empirics – yes, increase in base money should under normal circumstances lead to increase in deposits, ceteris paribus. But of course when you just take two time series and compute correlation, nothing is ceteris paribus – money multiplier varies over time, monetary policy varies over time, supply and demand for loans vary over time and everything may depend on expectations. So no, I don’t consider the type of evidence presented by Keen sufficient, not by a long shot.

      • #24 by Unlearningecon on September 22, 2012 - 2:11 am

        Oi, annoying:

        I am planning a post to try and pinpoint the exogenous versus endogenous face-off. If that does not address the points in your post I will reply here, later.

      • #25 by Eric L on September 22, 2012 - 10:03 pm

        @ivansml, interesting, I would not expect that. I suppose in theory it is possible for raising interest rates to raise consumption, but anything is possible in economic theory. I would say that lowering interest rates generally increases consumption, but the effect isn’t one of increasing consumption among savers. Keep in mind that the central bank doesn’t simply decree that loans be made at a lower interest rate; it prints money to buy treasury bonds, thereby encouraging savers to move away from treasury bonds to other investments. This enables whoever is borrowing that money to consume, while the government still consumes thanks to the Fed’s money, so total consumption increases even if consumption by savers does not change. However there is a finite amount of loans that can be made with a positive expected return, and as the amount of debt approaches that monetary policy becomes ineffective.

  5. #26 by Hedlund on September 20, 2012 - 12:46 pm

    @ivan: HTML looks fine. You just manually inserted the blockquote tags, or did you do some intermediate step that WordPress parlayed into that? I’d try it myself, but I can’t preview, so…

    @UE: The Bernanke quote is given as: “[On Minsky’s FIH] I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”

    However, according to Wray, that’s not even the point: “[T]his is a good antidote to the usual “Minsky moment” or euphoric bubble approach to Minsky usually taken. That is more Kindleberger than Minsky. Kindleberger was a great economist and a close personal friend to Minsky, but Minsky’s approach did not rely on irrationality. No “tulip bulb mania” for Minsky. … Sure there were bubbles and irrationality, and sure those made things worse, but they do not explain the dynamics.”

    I guess I really should just read Minsky myself and be done with the endless procession of interpreters.

    • #27 by Unlearningecon on September 20, 2012 - 2:26 pm

      I guess Bernanke could have meant ‘economic rationality’ in the sense that the entire economy behaves rationally.

      But good point nonetheless.

  6. #28 by stickman on September 20, 2012 - 2:17 pm


    What are your thoughts on the Hawtrey-Cassel diagnosis of the depression, i.e. that the proximate cause was severe deflation brought on by the international monetary demand for gold. (Including, most notoriously, the Bank of France’s “insane” gold accumulation efforts.)

    Of course, this is the view expertly championed by David Glasner over the last year or so. Personally, I find it the most complete and compelling explanation of the GD available…

    PS – Speaking of Glasner, here’s an old post on his blog that you may find particularly interesting. It’s fairly long, but it’s really only the last three paragraphs that are most relevant.

    • #29 by Unlearningecon on September 22, 2012 - 5:30 pm

      I think that is a largely accurate explanation of the scope and scale of the depression, yes, and is compatible with both Keen’s private debt hypothesis and the Keynesian idea that high interest rates caused the crash.

  7. #30 by Matías Vernengo on September 21, 2012 - 6:26 pm

    • #31 by Unlearningecon on September 22, 2012 - 5:35 pm

      Excellent paper. I’m extremely tired of New Deal revisionism.

  1. Endogenous Versus Exogenous Money, One More Time « Unlearning Economics