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Money, Gold, and the Great Depression. I am pleased to be able to present the H. Parker Willis Lecture in Ben bernanke depression thesis Policy here at Washington and Lee University. As you may know, Willis was an important figure in the early history of my current employer, the Federal Reserve System. While he was a professor at Washington and Lee, Willis advised Senator Carter Glass of Virginia, one of the key legislators involved in the founding of the Federal Reserve, ben bernanke depression thesis.
Willis also served on the National Monetary Commission, which recommended the creation of the Federal Reserve, and he went on to become the research director at the Federal Reserve from to At the Federal Reserve, Willis pushed for the development of new and better economic statistics, facing the resistance of those who took the view that too many facts only confuse the issue.
Willis was also the first editor of the Federal Reserve Bulletinthe official publication of the Fed, which in Willis's time as well as today provides a wealth of economic statistics. As an illustration of the intellectual atmosphere in Washington at the time he served, Willis reported that when the first copy of the Bulletin was presented to the Secretary of the Treasury, the esteemed Secretary replied, "This Government ain't going into the newspaper business.
Like Parker Willis, I was a professor myself before coming to the Federal Reserve Board. One topic of particular interest to me as a ben bernanke depression thesis was the performance of the Federal Reserve in its early days, particularly the part played by the young U. central bank in the Great Depression of the s. Let me offer two caveats before I begin: First, as I mentioned, H.
Parker Willis resigned from the Fed into take a post at Columbia University; thus, he is not implicated in any of the mistakes that the Federal Ben bernanke depression thesis made in the late s and early s. Second, the views I will express today are my own and are not necessarily those of my colleagues in the Federal Reserve System.
The number of people with personal memory of the Great Depression is fast shrinking with the years, and to most of us the Depression is conveyed by grainy, black-and-white images of men in hats and long coats standing in bread lines. However, although the Depression was long ago--October this year will mark the seventy-fifth anniversary of the famous stock market crash--its influence is still very much with us.
In particular, the experience of the Depression helped forge a consensus that the government bears the important responsibility of trying to stabilize the economy and the financial system, as well as of assisting people affected by economic downturns. Dozens of our most important government agencies and programs, ranging from social security to assist the elderly and disabled to federal deposit insurance to eliminate banking panics to the Securities and Exchange Commission to regulate financial activities were created in the s, each a legacy of the Depression.
The impact that the experience of the Depression has had on views about the role of the government in the economy is easily understood when we recall the sheer magnitude of that economic downturn. During the major contraction phase of the Depression, between andreal output in the United States fell nearly 30 percent. During the same period, ben bernanke depression thesis, according to retrospective studies, the unemployment rate rose from about 3 percent to nearly 25 percent, and many of those lucky enough to have a job were able to work only part-time.
For comparison, between andin what was perhaps the ben bernanke depression thesis severe U. recession of the World War II era, real output fell 3. Other features of the decline included a sharp deflation--prices fell at a rate of nearly ben bernanke depression thesis percent per year during the early s--as well as a plummeting stock market, widespread bank failures, and a rash of defaults and bankruptcies by businesses and households.
The economy improved after Franklin D. Roosevelt's inauguration in Marchbut unemployment remained in the double digits for the rest of the decade, full recovery arriving only with the advent of World War II.
Moreover, as I will discuss later, the Depression was international in scope, affecting most countries around the world not only the United States. What caused the Depression? This question is a difficult one, but answering it is important if we are to draw the right lessons from the experience for economic policy, ben bernanke depression thesis.
Solving the puzzle of the Depression is also crucial to the field of economics itself because of the light the solution would shed on our basic understanding of how the economy works. During the Depression years and for many decades afterward, economists disagreed sharply on the sources of the economic and financial collapse of the s. In contrast, during the past twenty years or so economic historians have come to a broad consensus about the causes of the Depression.
A widening of the geographic focus of Depression research deserves much of the credit for this breakthrough. Before the s, research on the causes of the Depression had considered primarily the experience of the United States. This attention to the U. case was appropriate to some degree, as the U. economy was then, as it is today, the world's largest; the decline in output and employment in the United States during the s was especially severe; and many economists have argued that, to an important extent, the worldwide Depression began in the United States, spreading from here to other countries Romer, However, in much the same way that a medical researcher cannot reliably infer the causes of an illness by studying one patient, diagnosing the causes of the Depression is easier when we have more patients in this case, more national economies to study, ben bernanke depression thesis.
To explain the current consensus on the causes of the Depression, I will first describe the debate as it existed beforeben bernanke depression thesis, and then ben bernanke depression thesis how the recent focus on international aspects of the Depression and the comparative analysis of the experiences of different countries have helped ben bernanke depression thesis resolve that debate.
I have already mentioned the sharp deflation of the price level that occurred during the contraction phase of the Depression, by far the most severe episode of deflation experienced in the United States before or since. 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, ben bernanke depression thesis. Like real output and prices, the U.
money supply fell about one-third between andrising 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, ben bernanke depression thesis, 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.
For example, many observers pointed to the fact that nominal interest rates were close to zero during much of the Depression, concluding that monetary policy had been about as easy as possible yet had produced no tangible benefits to the economy. The attempt to use monetary policy to extricate an economy from a deep depression was often compared to "pushing on a string, ben bernanke depression thesis.
During the first decades after the Depression, most economists looked to developments on the real side of the economy for explanations, rather than to monetary factors. Some argued, for example, that overinvestment and overbuilding had taken place during the ebullient s, leading to a crash when the returns on those investments proved to be less than expected, ben bernanke depression thesis.
Another once-popular theory was that a chronic problem of "under-consumption"--the inability of households to purchase enough goods and services to utilize the economy's productive capacity--had precipitated the slump. However, inMilton Friedman and Anna J. Schwartz transformed the debate about the Great Depression, ben bernanke depression thesis. That year saw the publication of their now-classic book, A Monetary History of the United States, The Monetary Historythe name by which the book is instantly recognized by any macroeconomist, examined in great detail the relationship between changes in the national money stock--whether determined by conscious policy or by more impersonal forces such as changes in the banking system--and changes in national income and prices.
The broader objective of the book was to understand how monetary forces had influenced the U. economy over a nearly a century. In the process of pursuing this general objective, however, Friedman and Schwartz offered important new evidence and arguments about the role of monetary factors in the Great Depression. In contradiction to the prevalent view of the time, that money and monetary policy played at most a purely passive role in the Depression, Friedman and Schwartz argued that "the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces" Friedman and Schwartz,p.
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 s and early s.
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 ben bernanke depression thesis declines in the money stock generated ben bernanke depression thesis Fed actions--or inactions--could account for the drops in prices and output that subsequently occurred.
Friedman and Schwartz emphasized at least four major errors by U. monetary policymakers. The Fed's first grave mistake, in their view, was the tightening of monetary policy ben bernanke depression thesis began in the spring of and continued until the stock market crash of October see Hamilton,or Bernanke, a, for further discussion. This tightening of monetary policy in did not seem particularly justified by the macroeconomic environment: The economy was only just emerging from a recession, commodity prices were declining sharply, and there was little hint of inflation, ben bernanke depression thesis.
Why then did the Federal Reserve raise interest rates in ? The principal reason was the Fed's ongoing concern about speculation on Wall Street. Fed policymakers drew a sharp distinction between "productive" that is, good and "speculative" bad uses of credit, and they were concerned that bank lending to brokers and investors was fueling a speculative wave in the stock market. When the Fed's attempts to persuade banks not to lend for speculative purposes proved ineffective, ben bernanke depression thesis, Fed officials decided to dissuade lending directly by raising the policy interest rate.
The market crash of October showed, if anyone doubted it, that a concerted effort by the Fed can bring down stock prices. But the cost of this "victory" was very high. According to Friedman and Schwartz, the Fed's tight-money policies led to the onset of a recession in Augustaccording to the official dating by the National Bureau of Economic Research. The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October.
In other words, the market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it. Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in The second monetary policy action identified by Friedman and Schwartz occurred in September and October of At the time, as I will discuss in more detail later, the United States and the great majority of other nations were on the gold standard, a system in which the value of each currency is expressed in terms of ounces of gold.
Under the gold standard, central banks stood ready to maintain the fixed values of their currencies by offering to trade gold for money at the legally determined rate of exchange. The fact that, under the gold ben bernanke depression thesis, the value of each currency was fixed in terms of gold implied that the rate of exchange ben bernanke depression thesis any two currencies within the gold standard system was likewise fixed.
As with any system of fixed exchange rates, the gold standard was subject to speculative attack if investors doubted the ability of a country to maintain the value of its currency at the legally specified parity. In Septemberfollowing a period of financial upheaval in Europe that created concerns about British investments on the Continent, speculators attacked the British pound, presenting pounds to the Bank of England and demanding gold in return, ben bernanke depression thesis.
Faced with the heavy demands of speculators for gold and a widespread loss of confidence in the pound, the Bank of England quickly depleted its gold reserves. Unable to continue supporting the pound at its official value, Great Britain was forced to ben bernanke depression thesis the gold standard, allowing the pound to float freely, its value determined by market forces. With the collapse of the pound, speculators turned their attention to the U. dollar, which given the economic difficulties the United States was experiencing in the fall of looked ben bernanke depression thesis many to be the next currency in line for devaluation.
Central banks as well as private investors converted a substantial quantity of dollar assets ben bernanke depression thesis gold in September ben bernanke depression thesis October ofreducing the Federal Reserve's gold reserves, ben bernanke depression thesis.
The speculative attack on the dollar also helped to create a panic in the U. banking system. Fearing ben bernanke depression thesis devaluation of the dollar, many foreign and domestic depositors withdrew their funds from U.
banks in order to convert them into gold or other assets. The worsening economic situation also made depositors increasingly distrustful of banks as a place to keep their savings. During this period, deposit insurance was virtually nonexistent, so that the failure of a bank might cause depositors to lose all or most of their savings. Thus, depositors who feared that a bank might fail rushed to withdraw their funds.
Banking panics, if severe enough, could become self-confirming prophecies. During the s, thousands of U. banks experienced runs by depositors and subsequently failed.
Chairman Bernanke's College Lecture Series: The Federal Reserve and the Financial Crisis, Part 1
, time: 1:12:42FRB: Speech, Bernanke--Money, Gold, and the Great Depression --March 2,
Dec 16, · BERNANKE’S SCHOLARSHIP AND THE GREAT RECESSION. Bernanke’s relied on the lessons from the Depression as he formulated his response to the financial crisis that precipitated the Great Recession of Nov 08, · Bernanke, Ben, "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, , Bernanke, Ben, "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit, and Banking, , Bernanke, Ben, and Kevin Carey, "Nominal Wage Stickiness and Aggregate Supply in the Great Depression Ben Bernanke Great Depression Thesis An essay can be written in 1 hour, just say the word. Also, you'll be glad to know that more than 35% of orders are done /10()
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