h squared said:
Steven L. Sheffield said:
Quoted message said:Speaking of public radio (albeit PRI, not NPR), there was a fascinating
story about the Great Crash of 1929 on Marketplace today:
hey thanks!
it's interesting that i had always heard (not that i ever paid close
attention though) that the federal reserve was to partly to blame for
the continuation of the depression, but i recently learned that it was
required by law to protect the gold standard:
"In fact, the Federal Reserve faced conflicting demands to end the
depression and to protect the gold standard. The first required easier
credit, the second tighter credit. The gold standard handcuffed
governments around the world.
After Britain went off gold, for instance, the Federal Reserve raised
interest rates sharply to stem gold outflows. The discount rate went
from 1.5 to 3.5 percent, which, considering the condition of the
economy, was a huge increase. The best evidence that the gold standard
fostered the depression is that once countries abandoned it, their
economies usually began growing again. This happened in Germany,
Britain, and, after Roosevelt left gold in March and April 1933, the
United States.
Although self-defeating, the defense of gold was a product of law as
well as custom. The Federal Reserve had to ensure that every dollar of
paper money was backed by at least forty cents of gold. Once Congress
ended the obligation to exchange gold for currency, the Fed was largely
liberated from worrying about gold. This may have been the most
important part of the New Deal's economic program. The economy did
improve. Between 1933 and 1937, the unemployment rate dropped from 25 to
14 percent before a new recession pushed it back up to 19 percent in
1938. The 1937-38 recession is widely blamed on the Federal Reserve's
mistaken decision to raise bank reserve requirements in August 1936 and
early 1937. (Reserves are funds that banks keep as vault cash or as
deposits at the Federal Reserve.) "
http://www.econlib.org/library/Enc/GreatDepression.html
Ah, yes that article -- I had been trying to remember where I had read it
before. You're getting good, very good. I noted this section too:
"To view the Great Depression as the last gasp of the gold standard—as economic
historians Barry Eichengreen and Peter Temin suggest—bridges the gap between two
popular explanations. The best-known, advanced by economists Milton Friedman and
Anna Schwartz in A Monetary History of the United States, 1867-1960, blames the
Federal Reserve for permitting two-fifths of the nation's banks to fail between
1929 and 1933 (or 10,797 of the 25,568 banks in 1929). Since deposits were not
insured then, the bank failures wiped out savings and shrank the money supply.
From 1929 to 1933 the money supply dropped by one-third, choking off credit and
making it impossible for many individuals and businesses to spend or invest.
Friedman and Schwartz argue that it was this drop in the money supply that
strangled the economy. They consider the depression mainly an American affair
that spread abroad.
In contrast, economist Charles Kindleberger, in The World in Depression,
1929-1939, sees the depression as a global event caused by a lack of world
economic leadership. According to Kindleberger, Britain provided leadership
before World War I. It fostered global trade by keeping its markets open,
promoted expansion by making overseas investments, and prevented financial
crises with emergency loans. After World War II the United States played this
role. But between the wars no country did, and the depression fed on itself,
Kindleberger argues. No country did enough to halt banking crises, and the
entire industrial world adopted protectionist measures in attempts to curtail
imports. In 1930, for example, President Herbert Hoover signed the Smoot-Hawley
tariff, raising tariffs on dutiable items by 52 percent. The protectionism put
an extra brake on world trade just when countries should have been promoting it.
With the passage of time, both the Friedman-Schwartz and Kindleberger views seem
correct. Inept monetary policy explains the depression's severity, as Friedman
and Schwartz argue. But because the gold standard caused many governments to
make similar errors, the effects were worldwide, as Kindleberger contends."
