Q: So if I want to understand what happened during the Great Depression – and even what the Obama administration is trying to do now – do I have to start by reading John Maynard Keynes’s General Theory of Employment, Interest and Money?
You’re better off reading Milton Friedman and Anna Jacobson Schwartz’s A Monetary History of the United States, which I think is a better account. Keynes was more contemporary, so maybe had not as much perspective.
This is the argument that the Federal Reserve caused the Great Depression, prompting Ben Bernanke’s famous apology to the authors. So why does this book need to be read, in your view?
I think it appropriately looks at the monetary financial situation that is at the core of the Great Depression crisis and also the current situation. So they focus on the role of the monetary authority and the banking panics, and you can fit into that the legislative changes – particularly under Franklin Roosevelt – some of which helped the situation. I think the most important of those was the introduction of deposit insurance in 1934, with the Federal Deposit Insurance Corporation. The FDIC has really worked in preventing banking panics since that time in the US. I think a lot of the solutions these days involve extending that concept beyond the commercial banks that were at the heart of the financial system in the 1930s, but of course the system has been much broadened since then.