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

History and Economics
Macroeconomics - Economic growth - Monetary Policy
Review by: 
Ugo Panizza (The Graduate Institute, Geneva)
Barry Eichengreen
Oxford University Press
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Until recently there was Keynes and other four must-read books for students of international macroeconomics. Barry Eichengreen had written two of them (Globalizing Capital and Golden Fetters; the other two are Kindleberger’s Manias, Panics and Crashes and Ahamed’s Lords of Finance).

There are now five must-reads, and guess who wrote the fifth? Eichengreen’s Hall of Mirrors recounts the parallel histories of the great depression that started in 1929 and the great recession injected by the collapse of Lehman Brothers in 2008.

The book is named after the Hall of Mirrors (Grande Galerie or Galerie des Glaces, in French) gallery in Versailles. This is where William I was declared German emperor at the end of the Franco-Prussian war (1870-71) and where Germany and the Allied Powers signed the Treaty of Versailles that ended World War I on 28 June 1919.

Eichengreen writes very well, a rare virtue among economists and the book shows that scholarly work doesn’t need to be boring. I loved the anecdotes, the vivid descriptions of the main players, and Eichengreen’s ability to continuously draw parallels between the two crises.

In his calm tone, Eichengreen does not pull any punches. Consider, for instance, the following: “...had Benjamin Strong, the über competent governor of the Federal Reserve Bank of New York, not passed away in 1928, or Jean-Claude Trichet [who increased interest rates in the middle of the crises, NDR] not became president of the European Central Bank…, the conduct of monetary policy might have been different. Specifically, it might have been better.” I also liked, and I agree with, his criticism of modern macroeconomics.

The book disagrees with the commonly held view that central bankers learned everything that they needed to learn from the great depression, and that they “won’t do it again,” as declared by Ben Bernanke in November 2002. Eichengreen gives the Fed an A (maybe an A-) for its aggressive monetary policy in the post-Lehman period. But, after drawing parallels with the failure of Union Guardian Trust of Michigan in 1933, he suggests that the Treasury and the Fed should not have allowed Lehman Brothers to go under. The Trichet-led European Central Bank gets an F. It took more than 6 years and a new president for the ECB to engage into a full-blown QE program (QE was announced by Mario Draghi on January 22, 2015). Fiscal policy in the US also gets a low grade (even lower in Europe) for the premature turn towards austerity of 2010. Eichengreen is also critical of the regulatory response to the crisis that, if anything, led to even larger and riskier banks.

This is a fantastic book. I would have loved to read more about Europe, where the policy mistakes where one order of magnitude larger than in the US, but one tends to get greedy with good stuff.