The sidebar of this Washington Post article contains several quotations going back a few years, by the new Federal Reserve Chairman, Ben Bernanke. At the bottom, he's quoted from November 2002 (back when he was on the Fed's Board of Governors) as saying something rather interesting, while commenting on A Monetary History of the United States, by Milton Friedman and Anna Schwartz. He referred to their conclusion that the stock market crash of 1929 was caused by the nation's monetary mechanisms gone wrong and responded:


So "we" (the Federal Reserve System) "did it." This seems to cut against the conventional wisdom most of us were taught in school, which is that the Crash was a failure of capitalism itself, or of unregulated markets.

1. Was the Crash a result, not of lack of government management, but of government mismanagement of the economy, as Bernanke's comments imply?

2. Are schools giving students the wrong impression of the causes of the Crash and Depression?

1. Was the Crash a result, not of lack of government management, but of government mismanagement of the economy, as Bernanke's comments imply?

Absolutlely not- it was 100% the cause of unregulated capitialism- 0 principle loans, insider trading, all kinds of ethical wrong doing (or is today, was darn near acceptable practice then) and Calvin Coolidge and Hoover's unwillingness to regulate runaway corporate abuses.

It is a simple explanation to a very complex meltdown- but those are the main points.



2. Are schools giving students the wrong impression of the causes of the Crash and Depression?

Yes, they are not explaning how bad things can get when you let corporations run the country- and we have nearly come full circle.

Well, as someone who just completed high school, I can tell you that the exact opposite is the case. I heard more about coporate wrong-doing in my Depression education than about the idiocy of Coolidge and Hoover. As far as I'm concerned we are getting the right impression of the causes of the Depression, and if anything, not enough blame is being placed on Hoover and Coolidge.

CP

1. Was the Crash a result, not of lack of government management, but of government mismanagement of the economy, as Bernanke's comments imply?

It depends on what school of economists one decides to believe. I know from a banking class I took while working for one of the nationals that the US banking system was in hot water before the crash, and the Fed Reserve was invented to bolster up a sick situation. Before the Fed, each bank issued its own notes. That must have been a mess as banks failed and notes became worthless. The Fed was invented to bring stability.

The Great Depression was world-wide too. Something other than the Fed was at work, like drought and maybe a glut of labor. I think this is similar to other Big Events in history: Nobody will ever know for sure. A lot of the analysis is speculation from assumptions. For example, did the Fed do right or wrong before the dot-com bust? Who knows? Who will ever know?

2. Are schools giving students the wrong impression of the causes of the Crash and Depression?

Maybe. I got the impression that easy unsecured credit (margin) impacted the crash as calls were sent out for the dough that nobody had. But that could have been the result of something else. Why were the calls made? I guess people were panicking.

Look at how the markets react to every little thing in the world. Panic must have been core to the whole episode.

So panic and easy credit were blamed, but what were the causes of panic and easy credit? I don't think it's reasonable to blame the Fed.

What the Fed does with overnight interest rates impacts the economy. That's pretty weird. The change only has an effect on overnight borrowing by member banks, which are a small part of the whole enchilada. The Fed doesn't control domestic or international markets. It doesn't control other money institutions like savings & loan. It has very little to do with mortgages, which are much more tightly coupled with the bond market (learned that from an interview with a mortgage broker).

It does tightly control member banks though. Disaster recovery has to be exercised. Check processing has to be done with black box encryption on both ends of dedicated phone lines. Member bank employes cannot take customer information home with them on disk. And each account has to be insured up to a hundred grand.

There are other things like controlling redlining, which is a way to discriminate against poor neighborhoods. Well, that's up to debate, isn't it. Good business or racial discrimination?

Anyway, unless one is in college and majoring in economics, the impressions left from GD lessons have to be oversimplified.

What caused the GD? Explain in 100 words or less. That's what gets taught in schools. But if the student is truly interested, there are plenty of books on this available from public libraries.

But I would imagine it also discouraged overreliance on banknotes, which would have put a check on inflationary tendencies. Do we know how much use of notes went up (if at all) after the Fed was created in 1913?

1. Was the Crash a result, not of lack of government management, but of government mismanagement of the economy, as Bernanke's comments imply?
Combination of inadequate oversight and mis management. The Crash was transformed into the the Great Depression by serious gov't mismanagement, way excessive tightening of the money supply, the breakdown of the international financial system (you can blame the French for that one), the flurry of protectionist measures that countries threw up which tanked international trade.

2. Are schools giving students the wrong impression of the causes of the Crash and Depression?
Yes, mostly, in large part because high schools simply don't give anywhere near a complete perspective. On the other hand, they certainly give the wrong impression of the causes. The Depression was lengthened by the New Deal.

I don't have any information on that. What the Fed did do was to establish metrics for the money supplies, M0, M1, M2. Maybe the reason I can't find any information about money supplies before the Fed is that nobody was keeping track.

The GD involved deflation, where the value of the dollar rose due to the difficulty in getting one's paws on money. Inflation and deflation aren't dependent on what the money medium is. We can get deflation again, even though M0 is primarily electronic signals and magnetic fluxes. Supposedly there's paper to coincide with the data, but I can see that going away too.

Money is a strange animal. It involves mutual belief that such a thing exists. Even when gold and silver were bases of money, agreement had to be made as to value. Silver was devalued in the 19th century and that sent Colorado mining into a tailspin. Gold has recently come back strong, so I imagine Colorado gold mining will benefit. Gold mining is still going on between Victor and Cripple Creek.

Today we seem to be more in danger of deflation than inflation as wages stagnate and shrink, jobs become scarcer and people's life styles degenerate. The upside is that the rich will continue to get richer, unless the money is only on paper (investments). Bank failures would hit M1 and M2 hard, and so money, whatever represents it, becomes scarce: deflation. And so those Fed Reserve notes would be in high demand.

But the thing that's changing everything is the global economy. Take a look at a globe. Doesn't the US seem pretty small compared to the rest of it? That's the way I'm seeing the Fed these days. Its influence is waning.

That should make some people happy. I'm not all that thrilled.

The 1920s was a conservative political decade after two decades of progressivism. The progressives created a variety of regulatory bodies. The 1920s Republicans were more classic fiscal conservatives and did not fully agree with the mission of these regulatory bodies. As Calvin Coolidge said, "The business of America is business." (paraphrased or luckily verbatim)

the real version

As a result of their philosophy they were very friendly with big business and felt that pro-industry people were the best to run the bodies created to regulate them. As many warning signs came for an impending collapse, the Federal reserve made some key mistakes that acted exactly contrary to what they are in place for. The body is supposed to level off the peaks and troughs of our economic cycles.



link





1. Was the Crash a result, not of lack of government management, but of government mismanagement of the economy, as Bernanke's comments imply?

The Crash was a result of a variety of factors. But government regulation that was in place acted about as well as FEMA did in the face of Katrina/Rita.

2. Are schools giving students the wrong impression of the causes of the Crash and Depression?

The history of this is there and in text books. Every text book I have used for the past ten years points out federal economic policies as a contributing or exacerbating cause of the depths of the depression. It was a bad economic cycle worsened by increasing money during a boom and panicking and limiting money when it was so needed to revive the economy after the crash.

I can see saying that it wouldn't make much of a difference when comparing paper with electrons, but it should make a considerable difference when comparing paper with specie. And since paper prior to 1913 probably would have been considered not too reliable, it should be reasonable to think that specie was more heavily relied on.



I'm kinda scratching my head reading this, because this person's answer to his initial question is not supported by the sentences that follow. Going by the data he presents, it looks like the Fed is greatly responsible for what happened.


But did FEMA actually make things worse than if there was no FEMA at all? That's where the analogy to the Fed seems to break down.

My perception is that the economy collapsed because of deflation. There were tons of people still stuck in the old-world farm towns that had no more skills than being a hand on a farm or a manual labor worker in a factory.

But technology, tractors, factory automation, etc. made productivity soar while eliminating workers. So the amount of goods produced far exceded the amount of people that could pay for them. So the US was a land of plenty with few who could afford it. 25% unemployment, soup kitchens, etc. etc. That caused the deflation. A viscious cycle where the more prices decreased due to productivity and job cuts, the less DEMAND there was for the product.

So what you saw with the stock market was sky rocketing values as productivity increased and then a complete collapse as people realized companies could not sustain their profits as they eliminated consumers.

You see the same thing today as companies move operations to CHina but expect the same laid off worker to buy those products. SOmething has to give.

I don't know if money supply would have made a difference at that point. I think gov't spending really, really helped as it employed more people. Really what the coutnry needed was time for people to move into cities and learn new trades. The fact that the idiots in power towed the business line really hurt the coutnry more.

The projects that built highways and damns, and WW2 helped considerably to alleviate the jam we were in. They also helped to create new jobs like mass manufacturing jobs.

I'm not saying you are right or wrong, but a bold statement like this literally cries out for corroborating evidence. Where is yours?

I'm just trying to clarify, are you talking about the causes of the crash, or the causes of the depression following the crash? Because this would be the first I've ever heard of unemployment reaching 25% before the crash. Do you have a cite for this?

Eeyore's cite indicates an inflationary trend before the crash (it said the Fed inflated the money supply "by about 60% during the 1920's."). At a time when paper money was redeemable in hard metal, that was a very ill-advised policy, because the tie to specie meant that any serious deviation of the value of the paper money from its metallic base would put the economy at risk for a violent correction.

25% unemployment was a result of the unskilled labor force. I didn't mean it as a timeline item.



Here you go.

Here it is...
Myths about the Great Depression
This refers to the disastrous monetary policies initiated by the Hoover Administration and continued by Roosevelt.

Regarding Fed policy, free market
economists who differ on the extent
of the Fed’s monetary expansion
of the early and mid-‘20s are
of one view about what happened
next: The central bank presided
over a dramatic contraction of the
money supply that began late in the
decade. The federal government’s
responses to the resulting recession
took a bad situation and made it
far, far worse.

The following was a cornerstone of the New Deal
Perhaps the most radical aspect
of the New Deal was the National
Industrial Recovery Act, passed
in June 1933, which created a
massive new bureaucracy called
the National Recovery Administration.
Under the NRA, most
manufacturing industries were
suddenly forced into governmentmandated
cartels. Codes that
regulated prices and terms of sale
briefly transformed much of the
American economy into a fasciststyle
arrangement, while the NRA
was financed by new taxes on the
very industries it controlled. Some
economists have estimated that
the NRA boosted the cost of doing
business by an average of 40 percent
— not something a depressed
economy needed for recovery.

The economic impact of the NRA
was immediate and powerful. In
the five months leading up to the
act’s passage, signs of recovery
were evident: factory employment
and payrolls had increased by 23
and 35 percent, respectively. Then
came the NRA, shortening hours
of work, raising wages arbitrarily,
and imposing other new costs on
enterprise. In the six months after
the law took effect, industrial
production dropped 25 percent.
Benjamin M. Anderson writes,
“NRA was not a revival measure.
It was an antirevival measure. ...
Through the whole of the NRA period
industrial production did not
rise as high as it had been in July
1933, before NRA came in.”

There's a lot more, and both the Hoover Administration and Roosevelt Administrations are excoriated.

I think different economists have different ideas as to what constitutes inflation and deflation (some say inflation is defined as an increase in the money supply, regardless of what the economic growth rate is). But no matter how you slice it, no matter what terms you want to use, increasing the paper money supply by a substantial amount over the course of the decade, at a time when it was tied to a fixed or even decreasing supply of precious metals, is not good economic strategy. It'll inevitably make the economy much more fragile and unresilient to even the slightest financial disruption. The Fed was basically using paper money to set up one big house of cards.