“The Fed SHRUNK the money supply by 30% in the few years following the stock market crash. It caused rather than prevented bank failures.”
As Milton Friedman pointed out, the Fed did this to correct an earlier mistake. From 1913 to 1926 or so, the Fed increased the money supply by a factor of 3 — they thought they were being careful, but their calculations did not take into account that people were starting to use checking accounts (which were not in their calculations). The only reason that prices didn’t rise was that productivity increased by the same amount due to the implementation of the factory system.
So what? Well, the US was part of the world gold standard, where the amount of money in circulation was dictated by the amount of gold in their vaults. So the Fed began to reduce the money supply to correct their earlier mistake. Unfortunately, it takes a while for inflated money to work its way through the economy, so the stock market kept rising. When Europeans sent money to invest in the ever rising US stock market, eventually they had to send gold to balance the accounts; and thus they had to reduce THEIR money supply, limiting loans, and that caused their businesses to go into recession. By the gold standard rules, the US was supposed to lower interest rates and increase their money supply (then people would send money back to europe, and hence gold), but the Fed didn’t do this because they were secretly correcting their previous mistake. So Europe went into the depression 2 years before the US did, but that too was caused by the Fed.
They kept reducing the money supply through 1936, while Hoover and Roosevelt were doing everything they could think of to restart the economy.
On the other hand, the Fed may have caused things, but it was Hoover and Roosevelt who instituted wage/price controls and other regulations that reduced rather than increasing business activity, thus making things worse.
I think it was Bernanke who recently admitted that the Fed caused the Depression, but then he added that they are smarter now ( ?!?!?!?!).
“On the other hand, the Fed may have caused things, but it was Hoover and Roosevelt who instituted wage/price controls and other regulations that reduced rather than increasing business activity, thus making things worse.”
Most of the actions taken by the Fed and government after the stock market crash served to worsen matters. Maybe some of the make work programs did provide some people with an income, but that fed the mentality of government as provider in later years.
But it’s strange that the Fed’s action are not more widely discussed. Maybe this information is only now being accepted and making its way into the economic discussions. But I get very tired of the Smoot-Hawley card being played over and over. It was a minor, exacerbating factor, after the major causes of the GD were well under way.
McCain has even learned to say “Smoot-Hawley.”
“They kept reducing the money supply through 1936, while Hoover and Roosevelt were doing everything they could think of to restart the economy.”
It’s strange that a simple remark that came down from some older relatives to me so accurately described the Great Depression. They said” “Nobody had any money.” And they hit the nail on the head, whether or not they understood the technical reasons why nobody had any money.