Christina Romer on Learning from the Great Depression

Former Obama CEA chair Christina Romer’s interview on Five Books is a highly useful resource — check out her recommendations for further reading on the Great Depression. Example – here’s Dr. Romer’s first recommendation:


Let’s get to your books. The first three are about what caused the Great Depression, and the last two are about what ended it. Your first choice is A Monetary History of the United States by Milton Friedman and Anna Schwartz. Please give us a précis of the book and explain how it changed the debate about the causes of the Great Depression.

I frequently tell students: If you buy only one economics book, it should be A Monetary History. The book is obviously important for our understanding of the Great Depression, but its impact goes far beyond that. Friedman and Schwartz show us that monetary events and monetary policy have affected real output throughout American history.

That’s a fundamentally important finding. It tells us that a monetary development that affects aggregate demand has an impact on the things we care about, like employment, unemployment and how much we produce in the economy. The other thing that Friedman and Schwartz do is show us how to use historical evidence on policymakers’ motivation and thinking to help establish a causal relationship between money and output.

When you asked me for my list of books, I debated about whether to put The General Theory by John Maynard Keynes on the list. The General Theory is an incredibly important book, but it’s basically a theoretical explanation of how aggregate demand could affect output. It was Friedman and Schwartz who provided the empirical evidence that supported the theory. That’s why A Monetary History went to the top of my list.

With regard specifically to the Great Depression, Friedman and Schwartz show that there were large declines in the money supply associated with repeated waves of banking panics. They also provide compelling evidence that bad economic ideas and a dysfunctional organisational structure were key reasons why the Federal Reserve did so little to stop the panics.

The book was published nearly 50 years ago. Do its explanations still hold up or has other research superseded it?

One of the reasons why A Monetary History is still such a classic is that it has held up to a remarkable degree.

The essence of the Friedman and Schwartz approach was very different from what modern economists do. Modern economists get data. They run regressions. It’s all statistical work. Friedman and Schwartz understood that even if you have all the data you could want on the money supply and output, it’s still going to be very hard to identify the causal relationship between the two because money changes for lots of reasons. Sometimes it changes because output is changing, and changes in output affect how much banks lend and the money multiplier. Other times, the money supply changes because the Federal Reserve makes a mistake or there’s a deliberate policy action unrelated to the state of the economy.

The brilliance of this book is that Friedman and Schwartz use a lot of non-statistical or narrative evidence. They read the diaries of people running the Federal Reserve in the 1930s and they went through the records of the policymaking process. They were able to identify times when the money supply moved for relatively independent or exogenous reasons – not in anticipation of what was going to happen to output or because of other things going on in the economy. What they found was that after these relatively exogenous movements in the money supply, output moved strongly in the same direction.

A Monetary History

very much affected the kind of research that I’ve done in my career. There have been many times when I’ve needed to go back and read the same primary documents that Friedman and Schwartz read. What almost always strikes me is just how right they were. This book is an example of exceptional scholarship. They looked at documentary evidence carefully and honestly, and came up with an interpretation that has stood the test of time. That’s why it remains such an important book for our understanding of the macroeconomy and the Great Depression.

Nobel-prize winning economist Robert Solow famously quipped: “Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper.” What point was Solow making?

Milton Friedman believed deeply that monetary forces had an important impact on the economy, and he never missed an opportunity to remind people of that fact.

In the 1960s there was a fight between monetarists like Friedman and Schwartz, who thought that monetary forces were very important, and Keynesians like [Paul Anthony] Samuelson and Solow, who tended to focus on the impact of changes in government spending and taxes. Modern economists tend to see monetarists and Keynesians as being on the same side. They both believe, based on strong empirical evidence, that changes that affect the demand side of the economy – taxes, monetary changes or government purchases – affect output and employment.

Highly recommended!

One thought on “Christina Romer on Learning from the Great Depression

  1. Frank Eggers

    One of the problems with economics is that there are often too many variables to pin down. Also, there is the fallacy of pro hoc ergo propter hoc.

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