Hall of Mirrors: The Great Depression, the Great Recession, and the Uses - and Misuses - of History

by Barry Eichengreen

The two great financial crises of the past century are the Great Depression of the 1930s and the Great Recession, which began in 2008. Both occurred against the backdrop of sharp credit booms, dubious banking practices, and a fragile and unstable global financial system. When markets went into cardiac arrest in 2008, policymakers invoked the lessons of the Great Depression in attempting to avert the worst. While their response prevented a financial collapse and catastrophic depression like that of the 1930s, unemployment in the U.S. and Europe still rose to excruciating high levels. Pain and suffering were widespread.

The question, given this, is why didn't policymakers do better? Hall of Mirrors , Barry Eichengreen's monumental twinned history of the two crises, provides the farthest-reaching answer to this question to date. Alternating back and forth between the two crises and between North America and Europe, Eichengreen shows how fear of another Depression following the collapse of Lehman Brothers shaped policy responses on both continents, with both positive and negative results. Since bank failures were a prominent feature of the Great Depression, policymakers moved quickly to strengthen troubled banks. But because derivatives markets were not important in the 1930s, they missed problems in the so-called shadow banking system. Having done too little to support spending in the 1930s, governments also ramped up public spending this time around. But the response was indiscriminate and quickly came back to haunt overly indebted governments, particularly in Southern Europe. Moreover, because
politicians overpromised, and because their measures failed to stave off a major recession, a backlash quickly developed against activist governments and central banks. Policymakers then prematurely succumbed to the temptation to return to normal policies before normal conditions had returned. The result has been a grindingly slow recovery in the United States and endless recession in Europe.

Hall of Mirrors is both a major work of economic history and an essential exploration of how we avoided making only some of the same mistakes twice. It shows not just how the "lessons" of Great Depression history continue to shape society's response to contemporary economic problems, but also how the experience of the Great Recession will permanently change how we think about the Great Depression.

Genres: Economics, History, Nonfiction, Finance, Business, Politics, Money

520 pages, Hardcover

First published August 28, 2014

About the author

Barry Eichengreen* is the George C. Pardee and Helen N. Pardee Professor of Economics and Professor of Political Science at the University of California, Berkeley, where he has taught since 1987. He is a Research Associate of the National Bureau of Economic Research (Cambridge, Massachusetts) and Research Fellow of the Centre for Economic Policy Research (London, England). In 1997-98 he was Senior Policy Advisor at the International Monetary Fund. He is a fellow of the American Academy of Arts and Sciences (class of 1997).

Professor Eichengreen is the convener of the Bellagio Group of academics and economic officials and chair of the Academic Advisory Committee of the Peterson Institute of International Economics. He has held Guggenheim and Fulbright Fellowships and has been a fellow of the Center for Advanced Study in the Behavioral Sciences (Palo Alto) and the Institute for Advanced Study (Berlin). He is a regular monthly columnist for Project Syndicate.

His most recent books are Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (January 2011)(shortlisted for the Financial Times and Goldman Sachs Business Book of the Year Award in 2011), Emerging Giants: China and India in the World Economy, co-edited with Poonam Gupta and Ranjiv Kumar (2010), Labor in the Era of Globalization, co-edited with Clair Brown and Michael Reich (2009), Institutions for Regionalism: Enhancing Asia's Economic Cooperation and Integration, coedited with Jong-Wha Lee (2009), and Fostering Monetary & Financial Cooperation in East Asia, co-edited with Duck-Koo Chung (2009). Other books include Globalizing Capital: A History of the International Monetary System, Second Edition (2008), The European Economy since 1945: Coordinated Capitalism and Beyond (updated paperback edition, 2008), Bond Markets in Latin America: On the Verge of a Big Bang?, co-edited with Eduardo Borensztein, Kevin Cowan, and Ugo Panizza (2008), and China, Asia, and the New World Economy, co-edited with Charles Wyplosz and Yung Chul Park (2008).

Professor Eichengreen was awarded the Economic History Association's Jonathan R.T. Hughes Prize for Excellence in Teaching in 2002 and the University of California at Berkeley Social Science Division's Distinguished Teaching Award in 2004. He is the recipient of a doctor honoris causa from the American University in Paris, and the 2010 recipient of the Schumpeter Prize from the International Schumpeter Society. He was named one of Foreign Policy Magazine 's 100 Leading Global Thinkers in 2011. He is Immediate Past President of the Economic History Association (2010-11 academic year).

* This is the biosketch available at his faculty page.

Reviews

[Bfisher · Rating 4 out of 5]

The author contrasts the course of the Great Depression and the Great Recession of 2007- One of the great strengths of the book is that it discusses the impacts on the financial systems of both the United States and Europe, treating them as a part of a global financial system. One of the weaknesses of the book is that it does not discuss the impact of the more recent crisis on the Asian economies.

The best take away from this book is how the memory of the Great Depression both faded, and thereby led to the weakening of financial oversight which facilitated the meltdown of the financial system in 2007, and yet informed the response of governments enough that the recession did not become Great Depression II. The author argues that the partial success in preventing another Great Depression also hampered the effectiveness of the responses, leading to a prolongation of the recession into a Great Recession, and an incomplete reform of the financial system.

[Stefania Dzhanamova · Rating 5 out of 5]

Barry Eichengreen’s book is about financial crises and the events that bring them about. It examines why markets and governments respond as they do, and what the consequences are.

Barry Eichengreen, Professor of Economy at Berkeley, draws an analogy between the Great Depression of 1929-1933 and the Great Recession of 2008-09. The parallels between the two great finically crises are clearly visible, and many consider the Depression as “the lesson” that shaped the response to the events of 2008-09. And because the the events of the 2000s so conspicuously resembled those of 1930s, the earlier episode provided a lens through which to view them. As Eichengreen explains, the tendency to view the new crisis through the perspective of the Great Depression was even greater for the fact that key policy makers, such as Ben Bernanke (whose Essays on the Great Depression I highly recommend), chairman of the Board of Governors of the FRS, has studied that history.

Consequently, the policy makers drew lessons and prevented the worst. They asserted – after the catastrophic failure of the Lehman Brothers – that no additional significant financial institution would be allowed to fail and kept their promise. They opposed the beggar-thy-neighbor tariffs and controls that caused the crash of international transactions in 1930s. Central banks flooded financial makers with liquidity and extended credit to one another in a peerless display of solidarity.

In his book, Eichengreen states that those decisions were powerfully informed by acquired wisdom from the mistakes of the predecessors. In 1930s, guided by outdated economic dogma, governments cut public expenditure at the most inopportune time and wrongly sought to balance budgets. Central banks, for their part, thought that they should provide only as much credit as was demanded for the legitimate needs of business.

In 2008, heeding the lessons of the past, policy makers did better. They responded with expansionary monetary and financial policies; they dealt decisively with the banks and applied stimulus to the budget instead of balancing it. Before, the collapse of international cooperation had aggravated the world’s problems, so they used personal contact and multilateral institutions to to ensure the policy was adequately coordinated.

As a result, the decline in output and employment, the suffering, and the social dislocations were far less. However, the disturbing question, asked by Queen Elizabeth II in 2008, remained: “Why did no one see that coming?”

Hall Of Mirrors aims to explain the nature of financial crises, if not to forecast them. Barry Eichengreen shows how importantly the Great Depression shaped perceptions and reactions the the Great Recession. His book looks closely not only at the event itself, but also at the developments that led to it, thus contributing to the understanding of the way history is used and misused.

An outstanding work. Five stars.


*In my review of Golden Fetters, I complained about Barry Eichengreen’s style. My complaints do not apply to Hall of Mirrors, which is a brilliantly written study.

[Breakingviews · Rating 3 out of 5]

By Edward Chancellor

No event in economic history has been more closely studied than America’s Great Depression. The last chairman of the U.S. Federal Reserve was even an acknowledged expert on the subject. Yet Ben Bernanke was unable to foresee, let alone forestall, the financial calamity which struck in 2008. In fact, his flawed narrative of the Great Depression informed the policies which produced the global financial crisis. For monetary policymakers, the one thing more dangerous than ignoring the lessons of history is trying to implement them.

In “Hall of Mirrors,” Berkeley economist Barry Eichengreen finds commonalities between the periods leading up to the Great Crash of 1929 and to the bankruptcy of Lehman Brothers in 2008. Both eras were characterised by a belief that the Fed had ended the cycles of boom and bust. Both periods were marked by the appearance of real estate bubbles. In both the 1920s and 2000s, low interest rates in the United States encouraged irresponsible lending to countries on the periphery of the global financial system.

Also, both booms ended after the U.S. property market turned down and the Fed hiked rates. The market collapses were both followed by multiple bank failures and prolonged economic weakness.

Considering the similarities between these two periods, it seemed like the right person was in charge of America’s monetary policy and regulating its banking system in 2008. After all, Ben Bernanke, the former head of the Princeton economics department, was the author of the 2000 book, “Essays on the Great Depression.”

Despite impeccable academic credentials, however, Bernanke appeared oblivious to the risks accumulating in the financial system in the early years of the millennium. Asked about the housing market in 2005, he claimed that U.S. home prices had never fallen nationally. In truth they declined by around 25 percent after 1929. “As an expert on the Great Depression,” Eichengreen says, “the [Fed] chairman was surely aware of the fact.”

Why did Bernanke and so many other economists get things so wrong? The best answer is their intellectual framework, which assumed that people behave rationally and that markets are generally in equilibrium. Asset bubbles were considered all but impossible and the ill consequences of credit booms were ignored.

Taking his lead from the enormously influential “Monetary History of the United States” by Milton Friedman and Anna Schwartz, Bernanke believed that the Great Depression was primarily due to the failure of the Federal Reserve to prevent the onset of deflation in the early 1930s. He paid little attention to the role of the irresponsible actions of Wall Street in the 1920s.

Indeed, Bernanke and Alan Greenspan, his predecessor at the head of the central bank, turned out to be unwitting supporters of financial excess. After the dotcom bust in 2002, Bernanke – at the time a recently installed Fed governor – saw a risk of self-reinforcing deflation. He promised to avoid falling prices by any means necessary, up to dropping cash out of helicopters. This easy money policy was intended to avoid a repetition of the Great Depression. Instead, Greenspan and Bernanke delivered the Great Recession.

Although the global financial crisis came as a surprise to Bernanke and his colleagues, their knowledge of history informed the dramatic policy response. The Fed pushed interest rates towards zero and vastly expanded its balance sheet, acquiring hundreds of billions of dollars of dodgy financial assets. Successive bouts of massive bond-buying, known as quantitative easing, inflated asset prices whilst pushing down the value of the dollar, which boosted the competitiveness of U.S. industry.

Nor did the U.S. government emulate the fiscal stringency of the early 1930s. After Lehman’s failure, Washington ran record peacetime deficits. As a result, the United States avoided a 1930s-style deflationary bust.

The great institutional difference between the Fed in the early 1930s and its current incarnation is that the U.S. central bank is no longer bound by golden fetters. The absence of the gold standard in the modern age gave American policymakers greater flexibility to respond to the Lehman shock.

Europe’s policymakers were less fortunate. Once the global financial crisis had struck, members of the euro zone found themselves in a similar position to adherents of the gold standard in the 1930s. Economies which had lost competitiveness, such as Greece and Spain, couldn’t devalue their currencies. Internal devaluation, or deflation, was the only alternative. This problem was exacerbated by the reversal of capital flows as money was sucked out of Europe’s periphery.

The European Central Bank, bound by its restrictive founding charter, also had less freedom than the Federal Reserve to respond to Europe’s crisis. In fact, the gold standard had a singular advantage over Europe’s single currency. It was easy to jettison, as Britain demonstrated in 1931. The euro zone, by contrast, turned out to be a roach motel; countries could check in, but there was no way to check out.

In “Hall of Mirrors,” Eichengreen does a good job showing how both the Great Depression and Great Recession followed from credit abuses on Wall Street and the key role played by monetary policy in fuelling both booms. His analysis of the aftermath of the global financial crisis, however, is less satisfactory.

Eichengreen asserts that the Fed should have pursued even more extreme monetary measures. Yet not once, in nearly 400 pages, does he consider the potential ill consequences of such policies.

Bernanke has avoided repeating the Fed’s errors of the 1930s only to produce a novel set of problems. The reflation of asset prices has exacerbated inequality, both at home and abroad. Low interest rates have encouraged the return of irresponsible lending practices, as evidenced by recent record issuance of leveraged loans in the United States. Investors seeking higher yields have poured capital into emerging markets, helping to fuel an almighty credit bubble in China.

Interest rates are still at all-time lows, the Fed’s balance sheet remains bloated and China’s economy is faltering. It is far too early for a definitive judgment on monetary policy in the wake of the Lehman bust.

[Marks54 · Rating 4 out of 5]

This is a book by a Berkeley economist who does fine work in economic history. The premise of the book is a set of questions of the following form: given that the Great Depression was such a traumatic experience and so widely written about and given that many of the regulators on duty at the onset of the financial crisis of 2007-2009 and the Great Recession associated with it were experts on the Great Depression, why wasn't it possible to do a better job of anticipating the Great Recession and managing economies to escape its damage. Sure, another Great Depression was prevented, but the resulting recession was long and damaging. Wasn't it possible to do more, given what everyone knew?

To address these issues, Eichengreen produces a detailed comparison and contrast of the Great Depression and the Great Recession - how were they alike? how were they different? I have read a lot about this history and the accounts in this book are informative and interesting.

... but this is more than just a comparison and contrast. Eichengreen's book is a book about how policies are made and implemented during crises. So the analysis of the Great Depression and the Great Recession is in terms of what policy makers were trying to do, how they thought the world works, and the constraints they were working under when making their decisions. This move the book from being a good economic historical analysis to being an extraordinary study of how capable decisibion makers work when the going gets tough. The story is far too complex to summarize but a few takeaways are in order. First, even if historical events are thoroughly understood, it is often difficult to apply the lessons of history to new situations, in which the details of the application are far from clear. For example was bank run behavior duplicated in the "shadow" banking system? Another takeaway is that in "crises" decision makers are facing complex problems, that are changing rapidly, and that have potentially dire consequences if decisions go poorly. These are not situations in which thorough and dispassionate analysis of all the options are possible. In crises, there are often high costs to waiting. "Paralysis by analysis" may often be used as a cop-out, but in some situations, the danger is real. The final point that I would mention from this wonderful book is that there can be unintended consequences by having success in predicting from the past. In the case of the Great Recession after 2008, the argument is that because a greater recession was averted, it may not have been possible to muster the political support needed to make fundamental system changes. If the worst crises are averted, established interests have a chance to organize more effectively against significant reform.

There is much more to this book than I could possibly summarize here. It is a thorough and well written book, but be prepared to invest some time. There are lots of details, a complex history, and much good analysis. Thinking and reflection will be needed to take advantage of what this book has to offer. It is well worth the effort.

[Peter · Rating 5 out of 5]

Barry Eichengreen's 2014 Hall of Mirrors: The Great Depression, the Great Recession, and the Uses—and Misuses—of History is among the very best economic histories of financial crises, ranking near the Monetary History of the United States published in 1963 by Milton Friedman and Anna Schwartz. Eichengreen is a highly regarded economic historian at the University of California, Berkeley, and his thorough research is admirable. In this book he takes on the periodic fiscal and monetary crises of the 20th century as seen through the lens of his solid understanding of macroeconomic history and policy. This is a serious book, written in layman’s terms, that should be read by anyone interested in the history of financial crises. There will be things that don’t resonate with many readers, such as the all-too-brief discussion of the now-discredited real bills doctrine that guided international monetary policies from the early 19th century well into the 20th century. (this doctrine is outlined near the end of this review; also attached is a list of lessons that can be drawn from the 1920s and later episodes.

The Friedman-Schwartz tome covered U. S. financial and monetary history from the American Revolution to the 1960s. Eichengreen begins with the post-WWI state of international monetary affairs in the early 1920s. This decade has played an important role in the history of financial collapse, and it shapes modern attitudes about financial policies—-in particular, the inflation phobia of the German-dominated European Central Bank. Furthermore, as Eichengreen shows, it demonstrates some of the salient lessons that have (or have not) been learned about financial chaos. This review will focus almost entirely on the 1920s to draw out a number of lessons that inform us about the international financial crises that followed.

[A political aside: everyone has a point of view. Eichengreen's academic perspective is more "liberal" than Rush Limbaugh's (as is mine); no surprise there. Though the meat of the book is apolitical, there are some indications of a slant, whether worthy or not. An example is his discussion of the 2011 debate over federal budget policy leading to the failed "Grand Bargain." Set in the context of the looming August debt ceiling crisis that threatened to close the government down, the central question was the balance between revenue increases and spending cuts in closing the federal budget deficit: Democrats were solid for revenue increases, Republicans for spending cuts. The chief participants were President Obama and Speaker of the House Boehner. Eichengreen, suggesting that the House Republicans had won through intransigence, states that, "The White House capitulated...in the form of an agreement...to cut spending by $1.2 trillion over ten years." But this is too one-sided: John Boehner had also "capitulated" by agreeing to a $1.2 trillion increase in tax revenues, well up from his initial ceiling revenue increase of $800 million revenue. One's interpretation of this event is, I think, a litmus test of their ideology. Another is one's interpretation of why the deal collapsed. According to Boehner and most Republicans, at a late stage Obama increased the additional tax revenues demanded; according to Obama and most Democrats, Boehner couldn't deliver Republican support for the agreement. In fact both views are correct: Obama did "move the goalposts," angering Boehner and making it more difficult for him to sell the plan; and Boehner could not deliver because of hearty Tea Party opposition to any revenue increases. As often happens when causes are disputed, all parties have equal claim to truth]

Economic Turmoil in the 1920s

At French insistence the Treaty of Versailles imposed harsh reparations on Germany; this was the first abrogation of the 1648 Peace of Westphalia that ended the Thirty Years War--a treaty that ensured that after a conflict between European states all parties would return to the status quo ante of equal and sovereign states. After the war Germany ran a large postwar government deficit to finance its own industrial needs and its reparations payments. Because foreign investors shied away from loans to Germany, the government issued paper marks to finance the deficit. France also ran a large inflationary deficit as it rebuilt its lost infrastructure, and it financed the deficit through short-term notes purchased by the central bank--a method no different in effect than directly issuing new francs.

In both countries the money creation from deficit finance created inflation, though far greater in Germany than in France. The result was depreciation of both the franc and the mark, and increased difficulty in getting either public or private credit as domestic investors switched to assets denominated in stable currencies (primarily the pound and dollar) and foreign investors reduced lending to the inflating counties. Both countries had wasted their foreign reserves (gold, dollars, pounds) during the war and could not effectively support their currencies. The only solution to currency depreciation--which made things worse by causing even greater inflation and a greater flight from the depreciating currencies, was to raise interest rates which, in turn, weakened their economies further.

So France and Germany—-especially Germany—-were experiencing both domestic and international financial problems that adversely affected their economies through lack of credit and high interest rates. The German inflation ended with the 1923 introduction of the rentenmark, a commodity-based currency, and with new fiscal restraints. The French inflation, much more moderate, ended with new monetary and fiscal policies adopted in 1926.

But just as Germany and France began to get their financial houses in some order, Britain shot itself in the foot. In 1926, having benefited from the credit and foreign reserves brought in by the German and French, Britain, under Winston Churchill's leadership and with strong US support, returned to pound-gold convertibility at the prewar parity. This was a predictably devastating mistake prompting John Maynard Keynes to write his prescient The Economic Consequences of Mr. Churchill. Prewar parity significantly overvalued the pound because Britain had experienced so much inflation during the war; added to this was Britain's loss of much of her gold reserves during the war, and a weak postwar economy. That fateful decision caused a drop in British exports and an increase in its imports, thus creating unemployment and reducing the amount of foreign credit Britain could obtain.

To maintain the overvalued pound Britain had to sacrifice more of her dollars and gold to buy pounds in the foreign exchange markets—-further reducing her foreign reserves, tightening the money supply, raising interest rates, and weakening its economy. Investors anticipating the pound’s devaluation, and no longer concerned about inflation in France and Germany, speculated against the pound by buying dollars, francs, and marks. Thus, while the pound was under pressure to devalue, the franc and mark were appreciating. In Germany and France the appreciation led to reduced exports and increased imports, hurting their economies. As one wag put it, it was as if the captain of the Titanic had tried to prevent its sinking by having passengers shift to the deck chairs on the high side--it didn't matter where you were, the ship was sinking.

Both the Bank of England and the US Federal Reserve System had badly wanted the return to parity for the pound--as a matter of pride more than of economics--so they were committed to maintaining the pound’s overvaluation. To mitigate the British currency problem, the Federal Reserve System and the Bank of England tried to mitigate Britain's capital outflows by reducing U. S. interest rates and increasing interest rates in Britain. There were several adverse effects: first, higher British rates impeded investment spending and weakened the British economy further; second, lower US interest rates encouraged a boom in technology-based products (autos, electricity, radio)--and in the stocks of those companies--that ended in the 1929 Crash and the subsequent Great Depression. It turns out that even in finance, no good deed goes unpunished!

Eichengreen's discussion of the 1930's is enlightening, focusing on the Roosevelt administration's policies and the US banking collapses of 1931 and 1933. This is more familiar territory and requires no space here.

The Recent Financial Crisis

What is Eichengreen's take on the 2008-2009 crisis? He argues that while the Fed (and, for the most part, the economics profession) failed to see the crisis coming, it behaved in a masterful out-of-the-box way in response, departing from its long-time policy of doing open-market operations solely in short-term Treasury bills and notes and adopting programs collectively called "Quantitative Easing" that involved direct investments in problem securities: In QE1 the Fed bought "toxic" asset-backed commercial paper in the TALC program, an effort to remove these from bank balance sheets and reliquidify financial institutions. In QE2 the Fed bought long-term treasury securities to drive longer-term interest rates down; in "Operation Twist" the Fed returned to buying long-term Treasuries but simultaneously sold an equal amount of short-term Treasuries, the goal being to tilt the yield curve without increasing the Fed's balance sheet. In QE3 the Fed focused on buying securitized mortgages. The goal's were several: to change the level and structure of interest rates, to provide liquidity to the banks and the shadow banks, and to add to the solvency of those institutions by allowing them to sell assets at better-than-market prices. These programs generated a very large increase in the Fed's balance sheet and inspired an unwarranted fear of inflation (the real prospect was of deflation). In addition to the Fed's actions, the Treasury was busy: its focus was on recapitalizing weak institutions through purchases of preferred stock (TARP). However, Eichengreen faults the financial authorities for seeing the crisis solely as a liquidity problem, disregarding solvency issues that lurked in the background.

Finally, general fiscal policy was used though, Eichengreen (and others) believe, not enough. In 2008 the Bush administration gave a per-capita tax rebate totaling $150 billion, and in 2009 the Obama administration endorsed an $800 billion spending program. Eichengreen argues that both had positive effects, but that the effects were far less than the administration's initial rosy projections, creating the impression that the the effects were small or none. This gave grist to critics who claimed that there were no effects, and that further spending programs would be fruitless. I think the insufficiency of the fiscal spending is the conventional wisdom among most economists, and that it is correct.

Eichengreen certainly has his economics right, and his interpretation of common misunderstandings of events is always instructive. For those who ask me, "What do you think of Ben Bernanke's chairmanship of the Fed during the latest crisis?" I say that he handled the crisis well but failed to understand its source and--unfortunate for a scholar of the Great Depression--he simply missed its arrival. Eichengreen gives a great example of this: Bernanke believed that our large international trade deficit with China had fed the US market for securitized mortgages (certainly true) but he discounted any European connection because we had no net imbalance with Europe: we were buying as much of their securities as they were buying from us.

Eichengreen argues that Bernanke's assessment that Europe was not a part of the problem depended on a confusion between gross flows and net flows. True, we were investing as much in Europe (gross outflows) as it was investing in the US (gross inflows), so there were only small net flows. But, Eichengreen rightly notes, it was gross flows that set up much of the U. S. problem, and most of Europe's. The Chinese were investing primarily in Treasury and Agency securities (particularly FNMA and FHLMC bonds). But Europe was investing in U. S. securitzed mortgages, often subprime, and it was borrowing from U. S. banks and shadow banks to do it. Thus, even though there was net balance with Europe, the types of gross credit flows was very destabilizing--in effect, U. S. banks were making short-term loans to European institutions, which then invested in highly risky long-term U. S. securities. This subtlety should not have been beyond Bernanke's ken.

Eichengreen's discussion of the role of the Euro and the European Union in the fragility of finances in Ireland, Spain, and Greece is equally illuminating, but again, sore space is not available (assuming you are still reading this!)

The Real Bills Doctrine

OK. If you've made it this far, your dedication deserves a reward--a clarification of the real bills doctrine of central banking. The doctrine says that a central bank should adjust the amount of money and credit to meet the "needs of business," i.e. the production and transportation of goods; in other words, when the production and transportation of goods is high, there should be more credit to finance it. If this discipline is maintained, the doctrine claimed, there would be no inflation or deflation because the extra credit was used to provide extra goods. For example, the Act that created the Federal Reserve System in 1913 charged the Fed with providing an "elastic currency." i.e. expanding the money supply only when there was evidence that business needs required it. The thermometer for "business need" was the movement of interest rates--when rates were rising the supply of credit was too low; when rates were falling it was too high. In short, it rested on a supply side explanation for credit, disregarding the demand side.

The doctrine sounds reasonable, but it is, in fact, destabilizing because it exacerbates both booms and recessions. The reason is that the sign that business needed more (less) credit was a rising (falling) money rate of interest. But the money interest rate (also called the nominal interest rate) is pro-cyclical, rising in booms and declining in recessions. So the doctrine encouraged a central bank to expand credit in boom periods and contract it in recessions--exactly the wrong thing to do.

Lessons for Economic Policymakers

Eichengreen’s review of the 1920s and its parallels in later financial crises is a detailed history of monetary and financial excesses, each having some common elements. There are many lessons that can be drawn to inform modern policy.

Lesson 1: Those who want a return to the gold standard don't know their history. The gold standard operates as an international stabilization method only under circumstances that don't prevail in an international economic crisis--full employment, appropriate fiscal policies, only temporary international imbalances, price flexibility, and gold reserves sufficient to make the exchange rate credible. To see a modern "gold standard" one need look no further than the present-day European euro countries, where austerity has maintained the fixed exchange rate at the price of far worse declines in output and employment than experienced in the U. S.

Lesson 2: Financial systems are like Rube Goldberg machines, with lots of intermediate cogs and wheels that lead to unforeseen results—-collapses emerge from complex interactions between domestic and international problems and policies. The opaqueness of the financial instruments used in the 2000s, and of the flows of funds between banks and shadow banks, both domestic and international, is a recent demonstration.

Lesson 3: Financial collapses share some common predictors—-preceded by low interest rates, and a euphoria created by new technology that is not fully understood: autos, the airplane, electricity, and radio in the 1920s; financial innovations like securitization in the 2000s. Associated with this are perceived shifts in economic structure that encourage psychological under-assessment of risk relative to reward. One example is the remarkable macroeconomic stability experienced in the US from 1985-2007, prompting Alan Greenspan to proclaim a “New Economy.”

Lesson 4: Inflexible fiscal (budget) policies create unresolvable dilemmas. When fiscal policies are not flexible—-both France and Germany needed to run government deficits in the 1920s to restore their battered economies—-then the only tools left to balance an economy are interest rates and currency depreciation. If depreciation isn’t acceptable (think Britain, France, and Germany in the 1920s), then only interest rate policies are available--but should they be high to maintain the exchange rate or low to stimulate the economy? Both goals can't be simultaneously achieved, creating a Hobson's choice. Greece is a modern example: it had to retrench its government budget, and it had no control over interest rates (those we set by the ECB), nor could it depreciate its currency (because it was on the euro).

Lesson 5: Fiscal policy inflexibility creates problems of “financial dominance”. If a government is dead set on running a deficit, as were both France and Germany in the early 1920s, and if sufficient buyers might not come to buy the government bonds, the central bank is forced to buy the new bonds--to have a government bond issue fail would have very serious consequences. The effect of financial dominance is an increase in the supply of money and consequent inflation. This happened to France as it tried to reconstruct its economy when international demand for French long-term bonds was low—-the government resorted to issuing short-term notes that were bought by the bank of France, hence increasing the money supply. The result was inflation that led to further economic problems.

Lesson 6: Hot money creates and compounds financial problems. International capital flows rapidly transmit and exacerbate problems of financial instability. German investors fled to other currencies as the hyperinflation developed, leaving less money to be invested in Germany to finance the deficit and the needs of German businesses, and weakening the German economy when it needed to be bolstered. Similarly, when the money came flooding back after the success of the rentenmark, the mark appreciated and even though credit was more readily available, the appreciated mark reduced demand for German goods and increased German imports.

There is a parallel in the recent European experience. When the euro was introduced in 1999, interest rates were high in some countries (Ireland, Spain, and Greece) and low in others (France, Germany). But with a common currency (the euro) interest rate divergence must be small—-with no exchange rate risk, every country stands (almost) equal in capital markets. So money flowed from northern Europe and the US into those countries, fueling boom conditions with consequences we now know: the increased leverage became a problem with the coming financial collapse, and those countries were hurt the most.

[Nilesh Jasani · Rating 3 out of 5]

The premise of “Hall of Mirrors” is right: policymakers focussed on learning from the errors committed while responding to the Great Recession took a divergent and almost opposite path in 2008. Clearly, they succeeded as a result, but the book could have done more analysis of why it worked or why it may not work in some other systems or at some other times. Rather, the focus is excessive on an early withdrawal and what the author saw as a double-dip in Europe.

The Great Recession and The Great Depression are often paired together, like in the book, because of the chief policymakers’ work on the lessons from the crises of the 1930s. The book could have analyzed the validity of the juxtaposition more: for instance, we avoid juxtaposing the latter with other significant economic downturns, such as the stagflation of the 1970s, the financial crises in Japan and Europe during the Weimar era or the Japanese Depression. As the book successfully shows, the two events, separated by nearly eight decades, were completely different in the causes and effects apart from in systems that were structurally different.

This narrow lens is a missed opportunity, particularly given the globalized nature of modern economies. The exclusion of Asia and China from the narrative is especially glaring. Their innovative and impactful responses to the 2008 crisis are almost entirely ignored, while the book devotes considerable attention to Europe’s struggles, particularly in countries like Greece. The author’s decision to focus so heavily on Europe while neglecting Asia feels like a relic of an older, Eurocentric approach to economic history.

The book does shine in its meticulous detailing of the 2008 crisis. It provides a thorough account of the lead-up to the collapse, the immediate fallout, and the following policy responses. However, the analysis often feels overly descriptive rather than prescriptive. Unlike economic theorists such as Galbraith or Keynes, the author refrains from drawing bold conclusions or offering actionable insights into improving economic policymaking or new theoretical constructs. While it ensures a grounded, fact-based narrative, it also limits the book’s ability to contribute meaningfully to ongoing debates about what is right economic policy during stable or unstable times. Or in other words, why the 2008 policies worked at that time but may or may not again in a different context.

The rest of the review is the reviewers’ own musings. One key takeaway is the importance of deflation risks in modern, capital market-dependent economies. 2008 proved how liquidity infusions, while necessary to stave off deflationary spirals, often lead to inflated asset prices and widening inequality. In unstable times, societies reliant on financial market stability to prevent the worst economic spirals must stabilize capital markets and drive asset price growth, even knowing such policies’ unequal benefits for those who do not need and/or deserve them.

The economic world may need new constructs or theories around these dynamics. Societies where markets are a large part of financial systems, unlike the role of banks and their lending in previous eras of indebtments, work on different rules. Liquidity infusions have a way of flowing first to asset markets, inflating their levels before any long-term spillovers into consumer prices and cost of living.

The temporal aspects, and as a result, a policymaker’s choice while facing a volatile situation, are important. Under-pressure monetary or fiscal decision-makers are unlikely to worry about the long-term cost of living or inequality issues, as we witnessed in 2008. The fiscal support also becomes less about digging holes and more about subsidies and regulations that help reduce the cost of capital and risk premia for the proverbial can-kicking.

There has to be a diminishing efficacy of such crisis solutions over time. Policymakers relied heavily on a type of monetary and fiscal intervention in 2008, but these same measures may be less effective in future crises, especially different levels of public debt-to-GDP ratios now, as well as markets’ ability to anticipate what was a surprise before.

And then there are long-term consequences of monetary expansions on costs of living, which are definitely not trivial, as we know by now. Political, social, and moral issues of inequality are the other topics.

Overall, here is a book that explores the parallels and divergences between two seismic economic crises, particularly because of the impact of the former on the decisions during the latter. While it succeeds in providing a detailed account of the events, causes, and aftermath of these episodes, it falls short of delivering the kind of incisive analysis or broader lessons one might expect from a work of economic history. The historical details and biographical snippets are informative but overshadow the broader analytical framework.

[Jim · Rating 4 out of 5]

This was the best book I’ve read for a definitive history of the Great Recession. It seemed like a long read, with lot of details, names, and events mentioned briefly. The author does a good job of telling each key episode very succinctly but with just enough detail. The book covered events and key players in both the US and Europe for both the Great Depression and Great Recession. That is a lot of ground to cover in one book. The book highlights what was learned from the Great Depression and applied well and not so well in the Great Recession. It also highlights the failures of policy makers in both the Depression and Great Recession. There are a lot of economists telling stories about the causes of the Great Recession, but I think this book represents the mainstream, non-ideological understanding of how it developed.

[Richard Mancuso · Rating 4 out of 5]

This is a fascinating account of two financial crises and how the outcome of each diverged due to policy responses. The book describes the lead up to the crash of 1929, and gives a parallel account of the lead up to the 2008 financial crisis. Policy responses to the former crisis, constrained by the gold standard and understanding of monetary policy at the time, caused a descent into depression that spread worldwide. These are contrasted to the policy responses in 2008-2009, where quantitative easing and extraordinary fiscal measures were used to cushion the damage caused by banking sector collapses. The author very effectively contrasts the two experiences by alternating back and forth in time. It’s an engaging read, and sheds light on the many similarities and key differences between the two crises.

[Leyi Luo · Rating 4 out of 5]

I decided to read this book because my friend happened to be reading it, but I found it quite dense for someone without a strong background in economics, like me. Still, it provided a thorough historical and analytical framework that helped me appreciate the fragility of modern economies.

Perhaps the most striking takeaway I gained is that the world has long abandoned the gold standard, which means our currencies are, in a sense, intangible constructs—floating towers built on collective trust. The book also reinforced how the U.S. dollar is likely to remain the dominant global currency for a long time to come. Meanwhile, the euro serves as a reminder that a unified currency does not guarantee peace or economic stability.

This book is a challenging yet illuminating read for anyone interested in understanding the mechanics and consequences of the world's financial crises.

[Tim Salmutter · Rating 5 out of 5]

Fantastic insights into both the Great Recession and the Great Depression. Eichengreen highlights the surprising amount of similarities between these two economic catastrophes, and explains how policy makers used lessons learned from the late 1920s and 1930s to avoid another Great Depression. He also argues that policy makers could have done even more in the 2000s by using forceful and inventive monetary policy quicker, and by using fiscal policy to a greater extent, neglecting increases in sovereign debt. Both these conclusions can certainly be debated, of course.
Eichengreens writing is very readable and entertaining. The wealth of information contained in this book makes for a potential rereading.

[Terry Tucker · Rating 4 out of 5]

Hall of Mirrors The Great Depression, the Great Recession, and the Uses—and Misuses—of History

This is an important historical contribution that compares the Great Depression of 1929 with the Global Financial Meltdown of 2008. The author dissects the trends for each, provides extensive historical context, and then provides crucial comparative analysis of the decision making process with a comparison of the consequences - all within historical context.

In the authors words: " This is a book about financial crises. It is about the events that bring them about. It is about why governments and markets respond as they do. And it is about the consequences.

The parallel of politics, social sentiment and level of complacency are quite vivid. The decisions based on greed by big banks and corporations read as if they are contemporary events. And when compared to 2008, the same sentiments of greed and abuse had not changed. Although the aristocratic hierarchies in place in 1929 no longer exist, in reality they do, and they live within the careerist political actors and political parties platforms and agenda of today. The same special interest groups - under different names now - support or undermine policy based on their interpretations of Nationalism, Liberalism, or Progressive.

Above all, in 2008, there was the naïve belief that policy had tamed the cycle. Crucial questions about the 2008 meltdown still remain unanswered. Is it too much to ask or expect an analyst to make these kind of predictions? What good is the data if the analysts can't decipher it, or more importantly, who is making the decisions and are subject matter experts really important?

And from the Queen of England, the most critical and basic question. Why didn't we see it coming?

The Great Depression was first and foremost a banking and financial crisis, but memories of that experience did not sufficiently inform and invigorate policy for officials to prevent another banking and financial crisis.

Because the events of 2008 so conspicuously resembled the 1930s, that earlier episode provided an obvious lens through which to view them. The tendency to view the crisis from the perspective of the 1930s was all the greater for the fact that key policy makers, from Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System, to Christina Romer, head of President Barack Obama’s Council of Economic Advisors, had studied that history in their earlier academic incarnations.

After the failure of Lehman Brothers pushed the global financial system to the brink, they asserted that no additional systemically significant financial institution would be allowed to fail and then delivered on that promise.

2008, heeding the lessons of this earlier episode, policy makers vowed to do better. If the failure of their predecessors to cut interest rates and flood financial markets with liquidity had consigned the world to deflation and depression, then they would respond this time with expansionary monetary and financial policies. If the failure of their predecessors to stem banking panics had precipitated a financial collapse, then they would deal decisively with the banks. If efforts to balance budgets had worsened the earlier slump, then they would apply fiscal stimulus. If the collapse of international cooperation had aggravated the world’s problems, then they would use personal contacts and multilateral institutions to ensure that policy was adequately coordinated this time.

As a result of this very different response, unemployment in the United States peaked at 10 percent in 2010. Though this was still disturbingly high, it was far below the catastrophic 25 percent scaled in the Great Depression. Failed banks numbered in the hundreds, not the thousands. Financial dislocations were widespread, but the complete and utter collapse of financial markets seen in the 1930s was successfully averted. And what was true of the United States was true also of other countries.

Every unhappy country is unhappy in its own way, and there were varying degrees of economic unhappiness starting in 2008. But, a few ill-starred European countries notwithstanding, that unhappiness did not rise to the level of the 1930s. Because policy was better, the decline in output and employment, the social dislocations, and the pain and suffering were less.

Or so it is said. Unfortunately, this happy narrative is too easy. It is hard to square with the failure to anticipate the risks.

Queen Elizabeth II famously posed the question on a visit to the London School of Economics in 2008: “Why did no one see it coming?” she asked the assembled experts. Six months later a group of eminent economists sent the queen a letter apologizing for their “failure of collective imagination.”

It is not as if parallels were lacking.

The so called subject matter experts, the Fed, the Treasury, and the too big to fail banks completely misunderstood the shadow banking system when they allowed Lehman to collapse, and they believed that there would no longer be the kind of bank runs typical of the 1929 crash. But Lehman didn't have individual depositors like a regular Bank and the naivete was arrogance.

Money market mutual funds held Lehman’s short-term notes. When Lehman failed, those money funds suffered runs by frightened shareholders. This in turn precipitated runs by large investors on the money funds’ investment-bank parents. And this then led to the collapse of already teetering securitization markets.

Lastly, they were never penalized for accepting a level of risk on mortgage backed loans that they should have never bundled in the first place.

[Tamil Selvam · Rating 5 out of 5]

This book compares the great depression of the 1930s and the recession of 2008s with the events, policies preceding it and responses of governments, central banks to overcome it....
It also analyses how the gold standard was abandoned after the 1930s but European countries could not abandon the euro even under their domestic political pressure during 2008s...
Overall understood the roles of fiscal and monetary policies to overcome the crisis....

[Michelle · Rating 5 out of 5]

A tough read but thoroughly riveting. Very well-written and thoughtfully structured. More than once, I wished for a workbook and a class to accompany this book and imagined the author, also a professor, must be excellent in the classroom as well.

[Daniel · Rating 3 out of 5]

Good book with comparisons between these two economic crises. Sometimes not so fluid. For the people interested in the Great Recession I recommend Adam Tooze's "Crashed: how a decade of financial crises changed the world". It's an analysis more grounded in political economy

[Shane Hill · Rating 4 out of 5]

A very fair read about the economic history behind the Great Depression and the Great Recession! Some very interesting anecdotes!

[Katie · Rating 2 out of 5]

Very long (did not read comprehensively), lots of economic terms (but has endnotes if you want to understand better). Written in a light tone and more aimed at economists than historians.

[eden bray · Rating 4 out of 5]

can’t lie had to skim some of this BUT very interesting analysis

[Mark · Rating 5 out of 5]

I really enjoy Eichengreen's economic histories. This volume lightly covers the Great Depression, but then goes on to show how that history impacted the Fed response to the Great Financial Crisis.

[William · Rating 4 out of 5]

Eichengreen has done it again! Another well-researched and well-written book on economics.

He must have several graduate student assistants sorting out minute bits of history (and they do a great job of it)!

In his previous book on European economic development I learned that Charles de Gaulle came to power in France after what looked very similar to a coup d'etat--an interesting fact which gets little play in modern history. In this book we learn that the US Vice President charged with renegotiating German reparation payments after WWII was both a Nobel prize winner and the composer of a number one musical hit!

Both "factoids" are ancillary to the central themes of the books but are indicative of the depth of the research that has been done here.

This volume is likely to be a classic in economic history. It is an interesting companion to John Kenneth Gailbraith's The Great Crash 1929 (but does not make mention of Gailbraith's wonderful use of the terminology "bezzle".

Eichengreen pulls no punches in being critical of government responses to the crises--particularly the chaotic and ill-concieved European responses--but he does tone the criticism down a bit in the last couple of chapters as he acknowledges the inevitable human failures that almost always occur when acting on fuzzy "real-time" data.

It is hard for me to categorize Eichengreen's political views from reading this book. He borrows from the left and the right without falling into the formulaic "traps" of either competing ideology. Instead he seems to let the facts and data speak for themselves and follows a logical path rather than following some shallow and superficial ideology.

A classic read!

[Matthew · Rating 5 out of 5]

Just finished this. Great book. It gave me a better understanding of the causes of both crises, the consequences of policy makes actions and what they could have done better. He offers a very convincing argument. One complaint is that I wished he succinctly summarized his view of the causes of the GD. The narrative flips back and forth between GD and GR, America and Europe, and he talks about other explanations that arent so persuasive. The consequence is that keeping track everything concerning his views on the GD gets a bit difficult.

I would definitely recommend it. It was a very interesting and entertaining read.

The group of people that definitely came off the worst are European politicians and technocrats. Blithering idiots since pretty much every choice they made was a bad one. The award for the biggest blithering idiot definitely goes to Brian Cowen, the former leader of the Irish government, who in September 2008 agreed to insure every financial asset in Ireland's banks up to 100k Euro. Not just deposits, every asset. This was apparently decided while playing golf when one of the leaders of an Irish bank. The only problem with this is that Irish banks had a higher gdp than Ireland and those banks went quickly bust, resulting in every Irishman having to shill out 14.5k Euro to cover that idiotic guaranty. It would have been FAR less if no such guaranty were made. I am honestly surprised that the Irish people didn't break into his house, drag him outside and murder him in the streets.

[John Haskell · Rating 5 out of 5]

"The path of the salt-water economist is beset on all sides by the inequities of the selfish and the tyranny of evil men. Blessed is he, who in the name of charity and good will, shepherds the weak through the valley of darkness. For he is truly his brother's keeper and the finder of lost children."

Barry Eichengreen's "Hall of Mirrors" is an excellent overview of the Great Depression, the 2008-09 Global Financial Crisis and the policy failures that both brought those crises about and then made both of them more intractable and harder to solve.

Five years ago Liaquat Ahamed's "Lords of Finance" received a great deal of undeserved praise for a simple narrative of what the central bankers did to deepen the Great Depression; by stubbornly failing to ever lay out alternative policies or explain what was wrong with the bankers' actions, Ahamed's book failed. Eichengreen not only takes advantage of 5 years of perspective to contrast the two crises; he also explains clearly why the decisions taken were wrong, what should have been done instead, and the political pressures which in many cases brought about the wrong decisions.

[Ronan Lyons · Rating 5 out of 5]

Economic history can often be thought of as a luxury, something to worry about only once the important stuff is taken care of. Eichengreen's central point in this excellent book is that, even if academics ignore history, when a shock comes along, politicians and policymakers will use history as a lens to understand the present and justify their decisions. Therefore it is incumbent on social scientists to understand past events such as the Great Depression, which - as Eichengreen illustrates so well in this book - has so many parallels with the more recent 'Great Recession'. Two other useful themes in the book are (1) that the wrong lessons can be drawn and (2) that much more time needs to be spent on spotting trouble brewing, rather than just responding to major crises. An excellent and well researched history of two defining economic crises.

[Martin · Rating 5 out of 5]

Must read on both the Great Depression and the Great Recession

I have read several books on both the Great Depression and the Great Recession and this counts as one of the best for both and certainly the best for making comparisons, of which, as the author explains there are many. The book is written in a clear and easily accessible style. I particularly enjoyed the author's description of how his research on the Great Recession changed his view on the Great Depression (greater understanding for the policy uncertainty the decision makers were under). In classic Eichengreen style, the author asks whether an explanation also work in another time period or another country, which helps refine the argument. I learned a lot of new things in this book and I am looking forward to re-reading it soon.

[Rich McAllister · Rating 4 out of 5]

I read this because Brad DeLong had listed it in his posted syllabus for a UCB economics history course and it sounded interest. Eichengreen covers the Great Depression of the 1920s/'30s and the Great Recession of 2008+. I have read quite a bit about both, but Hall of Mirrors taught me things I had not known. The general structure of the book is to develop the two stories in parallel, with particular attention to how the experiences and lessons learned from the Depression informed and improved (or not!) the responses of governments and central banks to the Recession. Also informative to me was the attention paid to what non-US (mainly European and Japanese) economies and regulators were doing in the run up to and through the Depression. All the Depression histories I'd read before were almost entirely US-centric (of course they talk about Keynes, how could one not.)

[JG · Rating 4 out of 5]

Great book.

Eichengreen really masters the economic history and does a great job explaining in detail the Great Depression and the Great Recession and the events that lead to them. But that's not even the best part of the book.

The best part is that he interweaves both events back and forth showing how past events shape our future actions and how present events give us a better understanding of past actions. In other words, it is not just the past which influences our reactions, but also that present situations bring new light and evidence about past events that we thought were not important or even wrong.

In the final chapter he tries to give some recommendations and advice based on a better understanding about the past and the present.

[Wally Muchow · Rating 4 out of 5]

A very illuminating examination of the circumstances, causes and efforts to resolve the great recession and the depression. It is a deeply researched look at the world circumstances and what worked and what didn't. The most important conclusion is that lessons were learned in the depression and those lessons applied tot eh recession that just occurred is the reason it did not become a depression. But that in itself is a problem because the fact that the economic structure was not badly damaged it was not possible to introduce more than modest reform

[Gerald Kinro · Rating 3 out of 5]

Certainly a lot of information thrown at the reader, requiring careful, slow reading. Eichengreen gives his take as he compares the Great Depression with the Great Recession of 2008. There are lessons learned that were not applied and the response to the Great Recession was with tools or methods that were old and belonged in the era of the Depression.

For something as complex as the economy, how do we get our variables right? I would have like the book better if it had graphics and comparative timelines to illustrate the major events and responses.

[Anne · Rating 4 out of 5]

A well written story of the parallels between the Great Depression and the Great Recession. But beyond the historical comparisons and what lessons were learned and what ones were forgotten, it was interesting to see that some activities that we bemoan today have been with us forever (the revolving door between Wall Street and Congress, derivative trading, lobbying) while others are new (the size of shadow banking). Fascinating, but I'm a bit of an economics geek...

[Andreas · Rating 4 out of 5]

A great book, thoroughly enjoyed it. Of course, as both an economist and a historian it would have been strange if this book didn't fulfil my expectations. I learned a lot about the Great Depression, but also a lot about the Great Recession, especially the part before the Lehman Brothers collapse.

[Albert W Tu · Rating 2 out of 5]

British historian writing American HIstory. Stylistically, his writing would suggest an outsider's impartiality that is not the case. Great historical research is annoyingly undermined by frequently unsupported critical remarks.