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The Federal Reserve

128shot

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Isn't that what caused the great depression is fed reserve spending?



More recently, it has been the prevailing belief among economists that the stock market crash of 1929 was not the primary cause of the Great Depression, pointing to telltale signs of an imminent economic disaster in various statistics leading up to the Depression as well as the downturn in Europe which was already in progress. Today the most widely accepted theory is the one advanced by Peter Temin: the Great Depression was caused by catastrophically poor monetary policy pursued by the United States Federal Reserve during the years leading to the Great Depression. The policy of contracting the money supply was an attempt to restrain inflation, which exacerbated the actual problem in the economy, which was deflation.

from: http://en.wikipedia.org/wiki/Great_Depression#Causes_of_the_Great_Depression


So, why are they still around if they are a root in the problem of this great catastrophy?
 

Ether

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128shot said:
Isn't that what caused the great depression is fed reserve spending?






from: http://en.wikipedia.org/wiki/Great_Depression#Causes_of_the_Great_Depression


So, why are they still around if they are a root in the problem of this great catastrophy?
There are of course many different theories advanced to explain the Great Depression. Most analysts accept that the stock market crash was a symptom rather than a cause. The wikipedia entry is correct in that it targets the Federal Reserve as the prime culprit, but it falters when it criticizes the specific monetary policy the Fed pursued rather than the whole concept of "monetary policy" itself. Deflation and recession are merely corrective processes which attempt to wipe away the malinvestments and overvaluations that the central bank's credit expansion created. Continuing to inflate (which is what the anti-deflationist historians are implicitly suggesting) would only make the inevitable crisis even harsher.

The idea that deflation and credit contraction caused the Great Depression was conceived by eminent economists such as Friedman and Schwartz. They based their theory on flimsy empirical evidence rather than logical reasoning. For a refutation of the alleged statistical correlation between deflation and depression in that time period, see the following research paper.

The Federal Reserve is still firmly in control for a couple reasons:

1) The intricate process by which the Fed inflates credit and lowers the rate of interest is too complex for the average voter to understand. If all Greenspan did was pull the lever on the printing press, then I imagine the central bank wouldn't last very long. There's a reason why the Fed doesn't flat out create money out of thin air - to avoid public outrage. They therefore undertake more complicated measures to disguise their true actions.

2) Failures in economic thought. There are too many people in America who believe that the scarcity of capital can be eliminated by expanding credit and lowering the rate of time preference. They forget that the real source of economic growth is net-investment, not an inflated money supply. Until these failures in mainstream economics are corrected, the Federal Reserve will continue to exist.

There are other reasons, such as special interest groups, but I think these are the primary problems.

One last note - in this thread we are discussing the cause of the recession that hit America in 1929. The Great Depression is a different topic and has different causes. No recession should ever last that long - even after the dramatically unrealistic boom in the 1920's, the crisis should have dissipated after two or three years. The prolonging of the recession - and the sharp downturn in the economy in the 1937-38 period - was a failure not of monetary policymakers, but the federal government.
 

oldreliable67

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The prolonging of the recession - and the sharp downturn in the economy in the 1937-38 period - was a failure not of monetary policymakers, but the federal government.
Good point. But -- and this has been debated long and hard -- the misguided (IMO) policies of the Fed early on, in 1929 and for a while following, put in place conditions which made the economy much more vulnerable to fiscal policy mistakes. There was plenty of blame to go around.
 

Ether

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oldreliable67 said:
Good point. But -- and this has been debated long and hard -- the misguided (IMO) policies of the Fed early on, in 1929 and for a while following, put in place conditions which made the economy much more vulnerable to fiscal policy mistakes. There was plenty of blame to go around.
The Federal Reserve created the artificial boom and is therefore responsible for the dramatic bust in 1929. I don't deny that. However, the Great Depression itself was solely the result of federal government policies.
 

oldreliable67

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the Great Depression itself was solely the result of federal government policies.
Arguable. And has been ad nauseum by many folks certainly brighter then I and probably more-qualified than either of us. We can trot out all the old arguments and supporting stats if you want, but frankly, I would just as soon leave it that good arguments can and have been made for both points of view. Instead, I'm going out for a :drink !
 

Ether

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oldreliable67 said:
Arguable. And has been ad nauseum by many folks certainly brighter then I and probably more-qualified than either of us. We can trot out all the old arguments and supporting stats if you want, but frankly, I would just as soon leave it that good arguments can and have been made for both points of view. Instead, I'm going out for a :drink !
Sorry, I don't really post on a debate forum with the intention of agreeing to disagree. Perhaps it's just my combative nature ;)

I'm perfectly content to discuss this issue, maybe you have arguments which I have not heard. You were pointing the finger at the Fed earlier, perhaps you are trying to say that monetary policy was the primary cause of the prolonged nature of the Depression (not the busts in 1929 and 1938, which we both agree were triggered by the Fed)?
 
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oldreliable67

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perhaps you are trying to say that monetary policy was the primary cause of the prolonged nature of the Depression (not the busts in 1929 and 1938, which we both agree were triggered by the Fed)?
Nah, I'm saying that I'm just not in the mood to get into this again just now! There were so many really good papers written on the subject in the 50s, 60s and even into the early 70s and it was such a popular subject of debate and analysis that frankly, I just about OD'ed on it! Yeah, I've been doing this stuff for a long time! And to do the subject justice, I would have to go dig out some of my old papers - and after having moved around a bit since then, I have no clue where they are right now!

It is a great subject, and you sound like you might be a lot like I was: especially interested in the history of economic thought, etc. Good stuff.

What sticks in my mind just now is the frequency and intensity of debate during the period as to the appropriate policy prescriptions. The leading contender was, of course, Lord Keynes. Others desperately wanted a more 'classical' approach. Say's Law was still pretty big and widely debated.

Tell you what, the more I type here, the more the juices are getting to flowing again -- I'll scrounge around a bit tonite and see what I find and maybe post up something on the morrow. Howwzzatt?
 

Ether

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oldreliable67 said:
Nah, I'm saying that I'm just not in the mood to get into this again just now! There were so many really good papers written on the subject in the 50s, 60s and even into the early 70s and it was such a popular subject of debate and analysis that frankly, I just about OD'ed on it! Yeah, I've been doing this stuff for a long time! And to do the subject justice, I would have to go dig out some of my old papers - and after having moved around a bit since then, I have no clue where they are right now!

It is a great subject, and you sound like you might be a lot like I was: especially interested in the history of economic thought, etc. Good stuff.

What sticks in my mind just now is the frequency and intensity of debate during the period as to the appropriate policy prescriptions. The leading contender was, of course, Lord Keynes. Others desperately wanted a more 'classical' approach. Say's Law was still pretty big and widely debated.

Tell you what, the more I type here, the more the juices are getting to flowing again -- I'll scrounge around a bit tonite and see what I find and maybe post up something on the morrow. Howwzzatt?
Actually, I'm not that interested in historical figures and statistics. I find them quite boring. But you quoted one of my statements and said it was "arguable". I have no problem with that, except I anticipated you would demonstrate why it was arguable by, uh, making some arguments against it. I also don't see much use in citing papers from the 50's, 60's or 70's, when Keynesianism was still overwhelmingly popular and when the most eminent economists included people like Paul Samuelson, who consistently asserted that the Soviet economy would overtake the US and that the citizens of the Third Reich enjoyed economic freedom. There have been plenty of studies in recent years which take a critical look at the Great Depression.

You don't have to dig out all your old papers. If you're familiar with this debate then you can give me a synopsis of your explanation for the Great Depression.
 

oldreliable67

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But you quoted one of my statements and said it was "arguable".
Oh, jeez, now I see that I completely misunderstood your reaction to my 'arguable' comment because I did not make clear the intent of the 'arguable' comment! My bad! - as my kids would say. By 'arguable' I simply meant that your position (quote: "the Great Depression itself was solely the result of federal government policies") is one that had been the subject of long and voluminuous debate over many years. I wrote two or three papers on the subject many, many years ago.

To repeat and expand on a bit of what I posted earlier, what sticks in my mind just now is the frequency and intensity of debate during the period as to the appropriate policy prescriptions. The leading contender was, of course, Lord Keynes. Others desperately wanted a more 'classical' approach. Say's Law was still pretty big and widely debated.

In the late 60s and early 70s, as econometrics became more and more the norm for economic analysis and exposition, we all turned to a much more rigorous statistical examination of the stats coming out of the Washington number mills (Commerce mainly). And instead of having to laboriously enter multitudinous time series data on IBM punch cards and begging for time on somebodys batch system, we were more and more able to retrieve them electronically and even construct models using what were then revolutionary time-sharing systems (Data Resources, Inc., founded by Otto Eckstein was a pioneer). No more carrying around boxes of IBM cards! Stored programs! Stored data! All stuff that we now take very much for granted.

Oh, well, enough reminiscing. Your not really interested in that, and I don't blame you!

Without referring to earlier papers for specifics, I recall that my general conclusion was that early (as in immediately following 1929 crash) monetary policy errors on the part of the Fed persisted for several years after 1929, even though the economy eventually began to recover albeit weakly. But before the monetary policy errors were fully recognized and corrected (remember, it was believed then, as now, that monetary policy worked with a rather long lag), fiscal policy mistakes put incomes on a downward trajectory once again, right into what we now call the Great Depression. Lots of 'money matters' vs 'money does not matter' debates in the academic journals of the era. Friedman & Schwartz, James Miegs, the St. Louis Fed and the University of Chicago et al.

IIRC, afterwards, there was some belief in economic circles that 'classical' economics had now been fully discredited and Keynes was all the rage.

And thats what I meant by 'arguable'.
 

Iriemon

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Specifically, what "poor monetary policy" of the Fed was it that is contended to have caused the great depression?
 

oldreliable67

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Iriemon,

Take a look at the numbers and see if the Fed didn't dramatically contract the money supply starting soon after the Market Crash in '29, thereby exacerbating the credit crunch. IIRC, the Fed started contracting the money supply just at a time when that they should have increased it substantially. In hindsight, that, I think, came to be regarded as a serious policy error.

I'm not going to go look it up -- I'll rely on my memory and your investigative skills. If my memory is wrong, I'll eat some metaphorical crow and chalk it up to old age and the many years since reviewing the topic! Ok, ok, I know, its the chicken way out! Guilty!
 

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Ah, serendipity! Just after posting the above comment, I was perusing some of new Fed Chairman Bernanke's speeches and papers, and what did I find but his 2004 comments (when he was still on the Board) concerning the Great Depression! I'll cut n paste a couple that illustrate the points that I made earlier. Note his comments that, for quite a long time, there was considerable disagreement among economists as to the causes of the depression...

"During the Depression years and for many decades afterward, economists disagreed sharply on the sources of the economic and financial collapse of the 1930s. In contrast, during the past twenty years or so economic historians have come to a broad consensus about the causes of the Depression."
...
"Deflation, like inflation, tends to be closely linked to changes in the national money supply, defined as the sum of currency and bank deposits outstanding, and such was the case in the Depression. Like real output and prices, the U.S. money supply fell about one-third between 1929 and 1933, rising in subsequent years as output and prices rose."
...
"While the fact that money, prices, and output all declined rapidly in the early years of the Depression is undeniable, the interpretation of that fact has been the subject of much controversy. Indeed, historically, much of the debate on the causes of the Great Depression has centered on the role of monetary factors, including both monetary policy and other influences on the national money supply, such as the condition of the banking system. Views have changed over time. During the Depression itself, and in several decades following, most economists argued that monetary factors were not an important cause of the Depression."
...
"To support their view that monetary forces caused the Great Depression, Friedman and Schwartz revisited the historical record and identified a series of errors--errors of both commission and omission--made by the Federal Reserve in the late 1920s and early 1930s. According to Friedman and Schwartz, each of these policy mistakes led to an undesirable tightening of monetary policy, as reflected in sharp declines in the money supply. Drawing on their historical evidence about the effects of money on the economy, Friedman and Schwartz argued that the declines in the money stock generated by Fed actions--or inactions--could account for the drops in prices and output that subsequently occurred."

Its nice to be in such good company. And to know that the brain is not completely fried! The entire text is at...
http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
 

Iriemon

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oldreliable67 said:
Ah, serendipity! ...
Its nice to be in such good company. And to know that the brain is not completely fried! The entire text is at...
http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
Brain not fried at all, IMO.

Thanks for the info. I thought some were arguing that the Fed caused the start of the great depression, not simply contributed to prolonging it. I'm not saying I think it did or didn't; but to those who argue the Fed caused the great depression, I wanted to know exactly what the Fed did that lead to that proposition.

It is hard to believe (today) that the Fed would decide to restrict the money supply during a recession. Some like Ether (if I understand him) have argued that the Fed should not try to intervene at all, but certainly, it seems to me that restricting the money available is the wrong thing to do in a depression. If anything, the money supply should be (moderately) eased to offset the effects of the depression, and even if only in the short term, make money more easy and cheap to borrow.
 

oldreliable67

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And speaking of Ether, he/she wrote:

The idea that deflation and credit contraction caused the Great Depression was conceived by eminent economists such as Friedman and Schwartz. They based their theory on flimsy empirical evidence rather than logical reasoning...For a refutation of the alleged statistical correlation between deflation and depression in that time period,
But from the paper cited by Ether to support the above assertion:

Deflation and depression do seem to have been linked during the 1930s. [
So, is it just me or does there seem to be a logical disconnect between Ether's assertion about the conclusions he touts versus the actual conclusions?

Now, I must admit that I read only the abstract; I didn't spend the $5 necessary to read the entire paper. Am I missing something, or is there explanatory material in the text that mitigates the above statement taken from the abstract?

Perhaps if Ether is still following this thread, he/she could clear up this apparent disconnect?
 

Iriemon

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oldreliable67 said:
And speaking of Ether, he/she wrote:

But from the paper cited by Ether to support the above assertion:

So, is it just me or does there seem to be a logical disconnect between Ether's assertion about the conclusions he touts versus the actual conclusions?

Now, I must admit that I read only the abstract; I didn't spend the $5 necessary to read the entire paper. Am I missing something, or is there explanatory material in the text that mitigates the above statement taken from the abstract?

Perhaps if Ether is still following this thread, he/she could clear up this apparent disconnect?
Ether and I went a number of rounds discussing the effect of monetary policy on the economy in this thread:

http://debatepolitics.com/showpost.php?p=86113&postcount=14

IMO his positions are for the most part well reasoned and thoughtful, I don't agree with some of his conclusions however. I thought it was interesting stuff, if you like esoteria of macroeconomic monetary policy.
 
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