Toro
Diamond Member
And yet the capitalism YOU want to practice brought US the first GOP great depression,
dumbto3 has learned 110 times that Hoover and FDR were liberals yet still blames Depression on GOP while experts agree it was caused by mistaken monetary policy. You can't be dumber
than dumbto3.
WHAT ROLE DID THE FED PLAY IN CAUSING THE GREAT DEPRESSION?
A favorite conservative argument is that the Federal Reserve Board caused the Great Depression by contracting the money supply.
This is a complete myth. According to the Federal Reserve's own records, at no time did the Fed pull money out of the system. Although it's true that the money supply contracted 31 percent between 1929 and 1933, this was not because of the Fed. Rather, the contraction was caused by three dramatic runs on banks, which would close 10,000 banks by 1933. So many failures were significant, because bank deposits formed 92 percent of all the money in circulation.
To see why the Federal Reserve did not cause this contraction, recall that the Fed has at least two methods of increasing the money supply. By far the most common and important method is buying U.S. debt from commercial banks, in the form of U.S. securities. The lesser way is to cut the prime interest rate that the Fed charges commercial banks.
Between October 1929 and February 1930, the Fed actually pumped significant money into the economy. It made major purchases of U.S. securities, and cut interest rates from 6 to 4 percent.
After this sudden infusion of money, however, the Fed made only very modest purchases of securities. It cut the discount rate only twice between March 1930 and September 1931. In the final months of 1931 it briefly raised the rate twice, but then cut it again in 1932. The modest security purchases counterbalanced the brief raises in rates and resulted in no significant change in the amount of money available to the public. However, this period of inaction by the Fed is the target of much criticism, as we shall see.
In 1932, the Fed overcame its idleness and once again made large purchases of U.S. securities.
The Run on Banks
So what caused a 31-percent contraction in the money supply? Pretty clearly, the public run on banks. The first banking panic occurred in late 1930; the second in the spring of 1931, and the third in March 1933. When it was over, 10,000 banks had gone out of business, with well over $2 billion in deposits lost.
WHAT ROLE DID THE FED PLAY IN CAUSING THE GREAT DEPRESSION
lol
Friedman and Ben Bernanke disagree.
The next episode studied by Friedman and Schwartz, another tightening, occurred in September 1931, following the sterling crisis. In that month, a wave of speculative attacks on the pound forced Great Britain to leave the gold standard. Anticipating that the United States might be the next to leave gold, speculators turned their attention from the pound to the dollar. Central banks and private investors converted a substantial quantity of dollar assets to gold in September and October of 1931. The resulting outflow of gold reserves (an "external drain") also put pressure on the U.S. banking system (an "internal drain"), as foreigners liquidated dollar deposits and domestic depositors withdrew cash in anticipation of additional bank failures. Conventional and long-established central banking practice would have mandated responses to both the external and internal drains, but the Federal Reserve--by this point having forsworn any responsibility for the U.S. banking system, as I will discuss later--decided to respond only to the external drain. As Friedman and Schwarz wrote, "The Federal Reserve System reacted vigorously and promptly to the external drain. . . . On October 9 [1931], the Reserve Bank of New York raised its rediscount rate to 2-1/2 per cent, and on October 16, to 3-1/2 per cent--the sharpest rise within so brief a period in the whole history of the System, before or since (p. 317)." This action stemmed the outflow of gold but contributed to what Friedman and Schwartz called a "spectacular" increase in bank failures and bank runs, with 522 commercial banks closing their doors in October alone. The policy tightening and the ongoing collapse of the banking system caused the money supply to fall precipitously, and the declines in output and prices became even more virulent. ...
FRB Speech Bernanke -- On Milton Friedman s ninetieth birthday -- November 8 2002
IOW, Fed policy accelerated the bank run which decreased the money supply.
SURE they did, by NOT doing anything they did that? You mean Uncle Miltie WANTED the fed to use actions of the federal reserve? lol
Friedman and Schwartz claimed that the fall in the money supply turned what might have been an ordinary recession into a catastrophic depression, itself an arguable point. But even if we grant that point for the sake of argument, one has to ask whether the Federal Reserve, which after all did increase the monetary base, can be said to have caused the fall in the overall money supply. At least initially, Friedman and Schwartz didn't say that. What they said instead was that the Fed could have prevented the fall in the money supply, in particular by riding to the rescue of the failing banks during the crisis of 1930–1931. If the Fed had rushed to lend money to banks in trouble, the wave of bank failures might have been prevented, which in turn might have avoided both the public's decision to hold cash rather than bank deposits, and the preference of the surviving banks for stashing deposits in their vaults rather than lending the funds out. And this, in turn, might have staved off the worst of the Depression.
An analogy may be helpful here. Suppose that a flu epidemic breaks out, and later analysis suggests that appropriate action by the Centers for Disease Control could have contained the epidemic. It would be fair to blame government officials for failing to take appropriate action. But it would be quite a stretch to say that the government caused the epidemic, or to use the CDC's failure as a demonstration of the superiority of free markets over big government.
Yet many economists, and even more lay readers, have taken Friedman and Schwartz's account to mean that the Federal Reserve actually caused the Great Depression—that the Depression is in some sense a demonstration of the evils of an excessively interventionist government. And in later years, as I've said, Friedman's assertions grew cruder, as if to feed this misperception.
..By 1976 Friedman was telling readers of Newsweek that "the elementary truth is that the Great Depression was produced by government mismanagement,"
LOL, THEY WANTED MORE ACTION BY GOV'T? SERIOUSLY???
Economist s View Monetary Policy and the Great Depression
What Friedman said - and Bernanke agreed and extrapolated upon - was that monetary policy, including the Fed increasing interest rates in 1931, turned what was otherwise a nasty recession into The Great Depression.
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.
FRB Speech Bernanke -- On Milton Friedman s ninetieth birthday -- November 8 2002