- Person
- Ben Bernanke
- Lived
- b. 1953
- Field
- Economics
- From
- American
The story
Between January 1930 and March 1933, American industrial production fell by 46 per cent and unemployment rose to 25 per cent, and the crisis spread around the world. Before Ben Bernanke's work, the leading explanation of the Great Depression was Milton Friedman and Anna Schwartz's view that the Federal Reserve had let the money supply shrink. Bernanke agreed that a shortage of money probably contributed, but he doubted it could explain why the slump was so deep and lasted so long. He looked at a different part of the story: the private banks and lenders that connect savers with borrowers.
In June 1983 he published "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression" in the American Economic Review. Combining historical sources with statistical analysis, he showed that the downturn that began in 1929 became a banking crisis in 1930, and that the number of banks halved within three years, many brought down by runs. He found that factors linked directly to failing banks accounted for the lion's share of the fall in output.
The reason, he argued, was that banks hold valuable knowledge about their borrowers. When a bank fails, that relationship is cut, and the information cannot simply be passed to another lender. Surviving banks, fearing runs, lent less and kept their money in assets they could sell quickly. The financial disruptions of 1930 to 1933 made the process of allocating credit far less efficient. Loans became more expensive and harder to get, which pushed down spending across the economy, and repairing the banking system took years.
The idea grew into what economists call the financial accelerator: when a downturn hits, banks cut back on lending, which hurts the economy further and can turn a mild recession into a major depression. Before his study, the banking crisis was generally seen as a result of the slump rather than a cause. The economist Brad DeLong later noted that the 2008 financial crisis made Bernanke's theory even more relevant.
The 1983 paper was the main work cited when Bernanke shared the 2022 Nobel Memorial Prize in Economic Sciences, and the committee said its insights had shaped crucial policy during the 2008–2009 crisis.
Why it matters
The financial accelerator gave policymakers a clear reason to keep credit flowing during downturns, a lesson applied directly in the 2008 crisis.
About Ben Bernanke
Economist of the Great Depression who chaired the Federal Reserve through the 2008 financial crisis and shared the 2022 Nobel Prize in Economic Sciences for research on banks and crises.
More about Ben Bernanke
- Ben Bernanke won a Nobel for explaining bank collapsesBen Bernanke shared the 2022 Nobel economics prize for showing how bank runs turned the 1930s downturn into the deep and prolonged Great Depression.
- Ben Bernanke recorded crisis lessons for future leadersBen Bernanke wrote The Courage to Act (2015) and coauthored Firefighting (2019) with Timothy Geithner and Henry Paulson to pass on lessons from the 2008 crisis.
- Ben Bernanke wrote textbooks that taught economics widelyBen Bernanke coauthored two economics textbooks, edited the American Economic Review and is among the 50 most published economists in the world.
Sources
- Ben Bernanke Wikipedia
- The Prize in Economic Sciences 2022: press release NobelPrize.org
- The Prize in Economic Sciences 2022: popular information NobelPrize.org
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.