Two Federal Reserve Chairmans say Fed caused great depression
David S:
The cause of the great depression is something we've discussed before on this forum. But recently I came across this article in which Fed chairman Ben Bernanke admits that the Fed was to blame.
Post Gazette.com Business News
http://www.post-gazette.com/pg/05341/618606.stm
... In "A Monetary History of the United States, 1867-1960," Milton Friedman and Anna Jacobson Schwartz argued that the Depression was far from inevitable, but brought about by an "inept" Federal Reserve. First, they said, the Fed foolishly raised interest rates in 1928 to end speculation on Wall Street, causing a recession the next year that precipitated the crash. Then, it let thousands of banks fail and the money supply shrink. In part, it thought weak banks should be allowed to fail. It also feared that lower interest rates might lead foreigners to dump dollars, straining the currency's link to gold.
Mr. Bernanke read the book as a graduate student at Massachusetts Institute of Technology in the 1970s. "I was hooked, and I have been a student of monetary economics and economic history ever since," he recalled at a 2002 conference honoring Mr. Friedman's 90th birthday. Mr. Bernanke, by then one of the Fed's seven governors, told Mr. Friedman:. "Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
Bernanke is the second Federal Reserve chairman to blame the Fed for the great depression.
Alan Greenspan also blamed the Fed in this excerpt from his 1966 paper "Gold and Economic Freedom"
http://www.lewrockwell.com/north/north204.html
"When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's."
MODU:
It was an angle we discussed once during my MBA program. There are a select few tools which the Fed has their disposal to sway the economy, but understanding of all the variables involved with the current and future market conditions need to be understood before action was to be made. In this case, there were national and international economic conditions at work which the Fed didn't take into account, so some of their policy moves did create a condition where the market was negatively impacted. However, I don't blame the Fed for the great depression. I think all the variables were right for a perfect storm, and a young Fed wasn't up for the challenge.
bullmoose88:
Was there any threat of severe inflation in the roaring 20s?
I'd guess maybe, but if not, why the hell did the Fed feel the need to cool things down?
opebo:
So the headline is - Federal Reserve Chairmen are extremely right-wing persons.
Not exactly news.
MaC:
Keynes has long been debunked opebo, accept it.
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