Book review

Book review – Lessons from the Great Depression, by Peter Temin

The Great Depression was caused by policymakers following the wrong economic ideology. In 1930s, the governments in major countries tried to maintain gold standard and took little effort to fight deflations (deflation was 40% from 1925 to 1932). The book was written in 1989 in the context that U. S. since in early 1980s adopted very tight monetary policy and fought against inflation so future deflation risk was high. The deflation was not materialized thanks to the Fed reverse its policy at right time.

The lessons learned from the Depression, however, in my view, are helpful to understand the expansionary policies since the recent financial crisis and the Great Recession. “To the extent that we mean the distress and poverty of the Depression” we can avoid a repetition of the Great Depression.

First, macroeconomic control theories have evolved significantly. The central banks have much better understanding of the economic dynamics. Ample policy tools are available to maintain the system stability.

Second, countries are now more open than 1930s. Flexible currency exchanges, international trade and capital movement can mitigate consequences of financial and economic crisis in one country.Third, social programs that put in place after the Depression have insulated the population from the harshest effects of unemployment. Hence consumer demand will not be significantly impaired when crisis happens.

Maintaining gold standard was a major policy mistake in 1930s. Flexible currency exchange provides tilt control of economies in the global setting, without it, a nation would be left the only option of deflation.