Economic Lessons from the Great Depression

“What lessons from the great depression are relevant to restoring the global economy following the recent financial crisis?”

  1. Introduction:
  An understanding of the Great Depression is considered by some economists as the holy grail of macroeconomics (Bernanke, 1994). Aside from giving birth to macroeconomics as a distinctive field of study, the experience of the Great Depression (1929-1939) continues to guide macroeconomists' beliefs and policy recommendations (Romer, 2009). It is useful to reflect on that episode and what lessons it holds for policymakers today in the midst of the current global recession. In particular, what can we learn from the 1930s that will help us to end the worst recession since the Great Depression and restore the global economy? While Romer (2009) acknowledges that we are experiencing a less severe crisis than the Great Depression, she emphasizes that there are parallels that make it a useful point of comparison and a source for learning about policy responses today.

  Drawing on both theory and empirical evidence from the period of the Great Depression, this essay provides an overview of the most relevant lessons in restoring the global economy. The organization of the paper has the next section presenting the traditional aggregate demand mechanism (macroeconomic stabilization) while section three focuses on the less advocated notion termed endogenous propagation, which has its roots in the aggregate supply mechanism. The final section concludes.

  2. Macroeconomic Stabilization:

  The Great Depression provided economists with a new way of thinking- a shift from Classical economics which had proven to be ineffective, to the Keynesian school of thought (firstly introduced in1936) which endorsed Governments’ role through economic intervention as a remedy to recessions (Abel, Bernanke, & Croushore, 2008).[1] Keynesians subsequently proposed two approaches:

    i. An Increase in money supply/Monetary...