Great Depression and New Deal Review Answers Chapter 14 Answers
"Regarding the Great Depression, … nosotros did it. Nosotros're very sorry. … Nosotros won't do information technology over again."
—Ben Bernanke, November viii, 2002, in a spoken language given at "A Conference to Honor Milton Friedman … On the Occasion of His 90th Birthday."
In 2002, Ben Bernanke, and so a member of the Federal Reserve Board of Governors, acknowledged publicly what economists have long believed. The Federal Reserve's mistakes contributed to the "worst economic disaster in American history" (Bernanke 2002).
Bernanke, like other economic historians, characterized the Neat Depression equally a disaster because of its length, depth, and consequences. The Depression lasted a decade, first in 1929 and catastrophe during World War II. Industrial product plummeted. Unemployment soared. Families suffered. Marriage rates savage. The contraction began in the United States and spread around the globe. The Low was the longest and deepest downturn in the history of the U.s.a. and the modernistic industrial economic system.
The Great Depression began in Baronial 1929, when the economic expansion of the Roaring Twenties came to an finish. A serial of financial crises punctuated the contraction. These crises included a stock market place crash in 1929, a series of regional banking panics in 1930 and 1931, and a series of national and international financial crises from 1931 through 1933. The downturn hitting bottom in March 1933, when the commercial cyberbanking system collapsed and President Roosevelt alleged a national cyberbanking holiday.oneSweeping reforms of the financial system accompanied the economic recovery, which was interrupted by a double-dip recession in 1937. Return to total output and employment occurred during the Second Globe War.
To understand Bernanke'southward statement, i needs to know what he meant past "we," "did it," and "won't do it again."
By "we," Bernanke meant the leaders of the Federal Reserve Organisation. At the start of the Depression, the Federal Reserve's decision-making structure was decentralized and often ineffective. Each district had a governor who set policies for his district, although some decisions required approval of the Federal Reserve Board in Washington, DC. The Board lacked the authority and tools to act on its own and struggled to coordinate policies across districts. The governors and the Board understood the need for coordination; frequently corresponded concerning important issues; and established procedures and programs, such equally the Open Market place Investment Committee, to institutionalize cooperation. When these efforts yielded consensus, budgetary policy could exist swift and effective. But when the governors disagreed, districts could and sometimes did pursue independent and occasionally contradictory courses of activity.
The governors disagreed on many issues, considering at the fourth dimension and for decades thereafter, experts disagreed about the best course of activity and even about the correct conceptual framework for determining optimal policy. Data about the economy became available with long and variable lags. Experts within the Federal Reserve, in the business customs, and amid policymakers in Washington, DC, had different perceptions of events and advocated unlike solutions to bug. Researchers debated these issues for decades. Consensus emerged gradually. The views in this essay reflect conclusions expressed in the writings of three recent chairmen, Paul Volcker, Alan Greenspan, and Ben Bernanke.
Past "did information technology," Bernanke meant that the leaders of the Federal Reserve implemented policies that they thought were in the public interest. Unintentionally, some of their decisions injure the economic system. Other policies that would accept helped were non adopted.
An example of the quondam is the Fed's decision to enhance involvement rates in 1928 and 1929. The Fed did this in an attempt to limit speculation in securities markets. This action slowed economic action in the Usa. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed's deportment triggered recessions in nations around the world. The Fed repeated this mistake when responding to the international financial crisis in the fall of 1931. This website explores these issues in greater depth in our entries on the stock marketplace crash of 1929 and the financial crises of 1931 through 1933.
An example of the latter is the Fed'south failure to human activity every bit a lender of last resort during the banking panics that began in the fall of 1930 and ended with the banking holiday in the winter of 1933. This website explores this issue in essays on the banking panics of 1930 to 1931, the banking acts of 1932, and the banking holiday of 1933.
I reason that Congress created the Federal Reserve, of course, was to human action as a lender of last resort. Why did the Federal Reserve fail in this fundamental job? The Federal Reserve'southward leaders disagreed about the best response to cyberbanking crises. Some governors subscribed to a doctrine similar to Bagehot'southward dictum, which says that during fiscal panics, fundamental banks should loan funds to solvent financial institutions beset past runs. Other governors subscribed to a doctrine known as real bills. This doctrine indicated that central banks should supply more funds to commercial banks during economic expansions, when individuals and firms demanded boosted credit to finance production and commerce, and less during economic contractions, when demand for credit contracted. The real bills doctrine did not definitively describe what to do during banking panics, but many of its adherents considered panics to exist symptoms of contractions, when primal banking company lending should contract. A few governors subscribed to an extreme version of the existent bills doctrine labeled "liquidationist." This doctrine indicated that during financial panics, fundamental banks should stand aside so that troubled financial institutions would fail. This pruning of weak institutions would accelerate the evolution of a healthier economic system. Herbert Hoover'due south secretary of treasury, Andrew Mellon, who served on the Federal Reserve Board, advocated this arroyo. These intellectual tensions and the Federal Reserve's ineffective controlling structure fabricated it difficult, and at times impossible, for the Fed's leaders to take effective action.
Amid leaders of the Federal Reserve, differences of opinion also existed about whether to aid and how much help to extend to fiscal institutions that did not belong to the Federal Reserve. Some leaders thought aid should only be extended to commercial banks that were members of the Federal Reserve System. Others thought member banks should receive assistance substantial enough to enable them to assist their customers, including financial institutions that did not vest to the Federal Reserve, but the advisability and legality of this pass-through assistance was the subject field of debate. Only a handful of leaders thought the Federal Reserve (or federal government) should straight assist commercial banks (or other fiscal institutions) that did not belong to the Federal Reserve. One abet of widespread direct assistance was Eugene Meyer, governor of the Federal Reserve Lath, who was instrumental in the creation of the Reconstruction Finance Corporation.
These differences of opinion contributed to the Federal Reserve's virtually serious sin of omission: failure to stem the decline in the supply of money. From the fall of 1930 through the wintertime of 1933, the coin supply brutal by near xxx percent. The declining supply of funds reduced average prices past an equivalent amount. This deflation increased debt burdens; distorted economic decision-making; reduced consumption; increased unemployment; and forced banks, firms, and individuals into bankruptcy. The deflation stemmed from the collapse of the banking system, as explained in the essay on the banking panics of 1930 and 1931.
The Federal Reserve could have prevented deflation by preventing the collapse of the banking organisation or by counteracting the collapse with an expansion of the monetary base, only it failed to do so for several reasons. The economic collapse was unforeseen and unprecedented. Determination makers lacked effective mechanisms for determining what went wrong and lacked the dominance to accept deportment sufficient to cure the economy. Some decision makers misinterpreted signals about the state of the economic system, such every bit the nominal interest rate, because of their adherence to the real bills philosophy. Others deemed defending the gold standard by raising interests and reducing the supply of coin and credit to be ameliorate for the economy than aiding ailing banks with the opposite actions.
On several occasions, the Federal Reserve did implement policies that mod budgetary scholars believe could have stemmed the wrinkle. In the spring of 1931, the Federal Reserve began to aggrandize the monetary base of operations, just the expansion was insufficient to commencement the deflationary effects of the banking crises. In the spring of 1932, later Congress provided the Federal Reserve with the necessary dominance, the Federal Reserve expanded the monetary base aggressively. The policy appeared effective initially, but after a few months the Federal Reserve changed form. A series of political and international shocks hit the economy, and the contraction resumed. Overall, the Fed's efforts to end the deflation and resuscitate the financial organization, while well intentioned and based on the all-time available information, appear to have been too little and too late.
The flaws in the Federal Reserve'southward structure became apparent during the initial years of the Corking Depression. Congress responded by reforming the Federal Reserve and the entire financial system. Nether the Hoover administration, congressional reforms culminated in the Reconstruction Finance Corporation Act and the Cyberbanking Act of 1932. Under the Roosevelt assistants, reforms culminated in the Emergency Banking Human activity of 1933, the Banking Act of 1933 (unremarkably called Drinking glass-Steagall), the Gilded Reserve Act of 1934, and the Banking Human action of 1935. This legislation shifted some of the Federal Reserve'southward responsibilities to the Treasury Section and to new federal agencies such every bit the Reconstruction Finance Corporation and Federal Eolith Insurance Corporation. These agencies dominated budgetary and banking policy until the 1950s.
The reforms of the 1930s, '40s, and '50s turned the Federal Reserve into a mod primal bank. The cosmos of the modernistic intellectual framework underlying economical policy took longer and continues today. The Fed's combination of a well-designed central bank and an effective conceptual framework enabled Bernanke to state confidently that "we won't practise it once again."
Bibliography
Bernanke, Ben. Essays on the Great Depression. Princeton: Princeton University Press, 2000.
Bernanke, Ben, "On Milton Friedman's Ninetieth Birthday," Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, Chicago, IL, November 8, 2002.
Chandler, Lester 5. American Budgetary Policy, 1928 to 1941. New York: Harper and Row, 1971.
Chandler, Lester V. American's Greatest Low, 1929-1941. New York: Harper Collins, 1970.
Eichengreen, Barry. "The Origins and Nature of the Great Slump Revisited." Economical History Review 45, no. 2 (May 1992): 213–239.
Friedman, Milton and Anna Schwartz. A Monetary History of the United States: 1867-1960. Princeton: Princeton University Press, 1963.
Kindleberger, Charles P. The World in Depression, 1929-1939: Revised and Enlarged Edition. Berkeley: Academy of California Press, 1986.
Meltzer, Allan. A History of the Federal Reserve: Volume 1, 1913 to 1951. Chicago: University of Chicago Press, 2003.
Romer, Christina D. "The Nation in Low." Journal of Economic Perspectives 7, no. 2 (1993): 19-39.
Temin, Peter. Lessons from the Nifty Depression (Lionel Robbins Lectures). Cambridge: MIT Press, 1989.
Source: https://www.federalreservehistory.org/essays/great-depression
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