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Digiron [165]
2 years ago
11

Explain how the business cycle should have helped the recession of 1929 end and why it did not?

History
1 answer:
mash [69]2 years ago
4 0
In 2002, Ben Bernanke, then 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, like other economic historians, characterized the Great Depression as a disaster because of its length, depth, and consequences. The Depression lasted a decade, beginning in 1929 and ending during World War II. Industrial production plummeted. Unemployment soared. Families suffered. Marriage rates fell. The contraction began in the United States and spread around the globe. The Depression was the longest and deepest downturn in the history of the United States and the modern industrial economy.

The Great Depression began in August 1929, when the economic expansion of the Roaring Twenties came to an end. A series of financial crises punctuated the contraction. These crises included a stock market 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 hit bottom in March 1933, when the commercial banking system collapsed and President Roosevelt declared a national banking holiday.1 Sweeping reforms of the financial system accompanied the economic recovery, which was interrupted by a double-dip recession in 1937. Return to full output and employment occurred during the Second World War.

To understand Bernanke’s statement, one needs to know what he meant by “we,” “did it,” and “won’t do it again.”

By “we,” Bernanke meant the leaders of the Federal Reserve System. 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 as the Open Market Investment Committee, to institutionalize cooperation. When these efforts yielded consensus, monetary policy could be swift and effective. But when the governors disagreed, districts could and sometimes did pursue independent and occasionally contradictory courses of action.

The governors disagreed on many issues, because at the time and for decades thereafter, experts disagreed about the best course of action and even about the correct conceptual framework for determining optimal policy. Information about the economy became available with long and variable lags. Experts within the Federal Reserve, in the business community, and among policymakers in Washington, DC, had different perceptions of events and advocated different solutions to problems. 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.

By “did it,” Bernanke meant that the leaders of the Federal Reserve implemented policies that they thought were in the public interest. Unintentionally, some of their decisions hurt the economy. Other policies that would have helped were not adopted.

An example of the former is the Fed’s decision to raise interest rates in 1928 and 1929. The Fed did this in an attempt to limit speculation in securities markets. This action slowed economic activity in the United States. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe. 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 market crash of 1929 and the financial crises of 1931 through 1933.

An example of the latter is the Fed’s failure to act as 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.
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