Enter Barry Eichengreen, a prolific economic historian at the University of California at Berkeley. The way Eichengreen sees things in his latest book, Hall of Mirrors, the standard story is inadequate: Bernanke failed to act on history’s lessons almost as often as he succeeded. The impressive bouts of interventionism alternated with lulls, and the Fed chairman missed crucial parallels with the interwar period. This, it cannot be stressed enough, is a provocative thesis. In criticizing Bernanke, Eichengreen is singeing a distinguished beard. In doubting the vigor of the Fed, he is disputing one of the few points of consensus in the commentary on the 2008 crisis.
If anyone can get away with this attack, it is Eichengreen. He combines a feel for narrative with a sure grasp of the technical literature on the interwar period, to which he has contributed. He has a record, moreover, of challenging settled views on economic history and toppling them. In Golden Fetters: The Gold Standard and the Great Depression, 1919–1939, the book that did much to establish his reputation, Eichengreen advanced a fresh take on Milton Friedman’s U.S.-centric view of the Depression. By including Europe in his analysis, he drew attention to the role the gold standard played in propagating the disaster. Eichengreen showed that the Fed had kept interest rates too high in order to defend the dollar’s gold parity; and that because exchange rates and therefore interest rates were yoked together under the gold standard, Europe’s central banks mimicked the Fed’s tight policy. Fettered to gold and to each other, the world’s leading economies staggered into the Depression.
In his preface to Golden Fetters, published 23 years ago, Eichengreen confessed, a bit coquettishly, “I like to pretend that these are the final words I will write on the world economy between the wars.” Pretend was right. The crash of 2008 drove Eichengreen to revisit the scene of his first triumph. The result is a double narrative, a rollicking, villain-rich story contrasting then and now: the tale of the interwar economy spliced into an account of the subprime bubble and its aftermath. Both periods feature property speculation in Florida, dimly understood financial innovations, and destabilizing cross-border capital flows whose damage was compounded by fixed exchange rates (the gold standard in the 1930s, the euro in the 2010s). If Bernanke emerges as Eichengreen’s most distinguished whipping boy, he is by no means the only one.
Contrary to popular memory, Eichengreen suggests, the Depression-era Fed deserves at least some sympathy. In the wake of the 1929 crash, the Fed acted immediately to pump liquidity into the markets, saving the banking system from failure. It cut interest rates repeatedly in the first half of 1930, sparking a partial recovery on Wall Street. Confronted with a string of bank runs, which were inevitably common in the era before deposit insurance, the Fed supplied yet more liquidity to fragile banks, staving off a wider crisis. Eugene Meyer, the formidable Fed chairman who later ran the World Bank and bought The Washington Post, drafted the legislation creating the Reconstruction Finance Corporation, the counterpart to the Troubled Asset Relief Program of 2008. When a major Chicago bank, Central Republic, threatened to collapse in June 1932, Meyer used the RFC to mount an unprecedented, $90 million rescue. That was three times the size of all federal loans to the states that year for the relief of the unemployed and homeless.