Great Depression Warning: You are not logged in. Your IP address will be publicly visible if you make any edits. If you log in or create an account, your edits will be attributed to your username, along with other benefits.Anti-spam check. Do not fill this in! ====Monetarist view==== [[File:Great Depression monetary policy.png|thumb|The Great Depression in the U.S. from a monetary view. [[Real gross domestic product]] in 1996-Dollar (blue), [[price index]] (red), [[money supply]] M2 (green) and number of banks (grey). All data adjusted to 1929 = 100%.]] [[File:American union bank.gif|thumb|Crowd at New York's American Union Bank during a [[bank run]] early in the Great Depression]] The monetarist explanation was given by American economists [[Milton Friedman]] and [[Anna J. Schwartz]].<ref>''A Monetary History of the United States, 1857β1960''. Princeton University Press, Princeton, New Jersey, 1963.</ref> They argued that the Great Depression was caused by the banking crisis that caused one-third of all banks to vanish, a reduction of bank shareholder wealth and more importantly [[Contractionary monetary policy|monetary contraction]] of 35%, which they called "The [[Great Contraction]]". This caused a price drop of 33% ([[deflation]]).<ref>Randall E. Parker (2003), [https://books.google.com/books?id=Y-g4AgAAQBAJ&q=%22Pin+the+blame+squarely+on+the+Federal+Reserve%22&pg=PA11 ''Reflections on the Great Depression''] {{Webarchive|url=https://web.archive.org/web/20210818225154/https://books.google.com/books?id=Y-g4AgAAQBAJ&lpg=PR1&pg=PA11#v=snippet&q=%22Pin%20the%20blame%20squarely%20on%20the%20Federal%20Reserve%22 |date=August 18, 2021 }}, Edward Elgar Publishing, {{ISBN|978-1-84376-550-9}}, pp. 11β12</ref> By not lowering interest rates, by not increasing the monetary base and by not injecting liquidity into the banking system to prevent it from crumbling, the Federal Reserve passively watched the transformation of a normal recession into the Great Depression. Friedman and Schwartz argued that the downward turn in the economy, starting with the stock market crash, would merely have been an ordinary recession if the Federal Reserve had taken aggressive action.<ref>{{cite book|last1=Friedman|first1=Milton|url=https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You're%20right%20We%20did%20it%22|title=The Great Contraction, 1929β1933|author2=Anna Jacobson Schwartz|publisher=Princeton University Press|year=2008|isbn=978-0691137940|edition=New|access-date=February 18, 2022|archive-date=January 16, 2020|archive-url=https://web.archive.org/web/20200116121531/https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You%27re%20right%20We%20did%20it%22|url-status=live}}</ref><ref>{{cite book|last=Bernanke|first=Ben|url=https://books.google.com/books?id=c2OSWhLjzJkC&q=Schwartz&pg=PA6|title=Essays on the Great Depression|publisher=Princeton University Press|year=2000|isbn=0-691-01698-4|page=7|access-date=May 24, 2021|archive-date=December 24, 2021|archive-url=https://web.archive.org/web/20211224221348/https://books.google.com/books?id=c2OSWhLjzJkC&q=Schwartz&pg=PA6|url-status=live}}</ref> This view was endorsed in 2002 by [[Federal Reserve Board of Governors|Federal Reserve Governor]] [[Ben Bernanke]] in a speech honoring Friedman and Schwartz with this statement: {{blockquote|Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again.|Ben S. Bernanke<ref>Ben S. Bernanke (8 November 2002), [https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/default.htm "FederalReserve.gov: Remarks by Governor Ben S. Bernanke"] {{Webarchive|url=https://web.archive.org/web/20200324160935/https://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm |date=March 24, 2020 }} Conference to Honor Milton Friedman, University of Chicago</ref><ref name=FriedmanSchwartz>{{cite book|last1=Friedman|first1=Milton|last2=Schwartz|first2=Anna|title=The Great Contraction, 1929β1933|url=https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You're%20right%20We%20did%20it%22|year=2008|publisher=Princeton University Press|page=247|isbn=978-0691137940|edition=New|access-date=February 18, 2022|archive-date=January 16, 2020|archive-url=https://web.archive.org/web/20200116121531/https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You%27re%20right%20We%20did%20it%22|url-status=live}}</ref>}} The Federal Reserve allowed some large public bank failures β particularly that of the [[New York Bank of United States]] β which produced panic and widespread runs on local banks, and the Federal Reserve sat idly by while banks collapsed. Friedman and Schwartz argued that, if the Fed had provided emergency lending to these key banks, or simply bought [[government bond]]s on the [[open market]] to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, and the money supply would not have fallen as far and as fast as it did.<ref>{{cite journal|last=Krugman|first=Paul|date=February 15, 2007|title=Who Was Milton Friedman?|url=https://www.nybooks.com/articles/19857|journal=[[The New York Review of Books]]|volume=54 |issue=2 |archive-url=https://web.archive.org/web/20080410200144/https://www.nybooks.com/articles/19857|archive-date=April 10, 2008|access-date=May 22, 2008}}</ref> With significantly less money to go around, businesses could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the [[Federal Reserve Bank of New York|New York branch]].<ref>{{cite book|author=G. Edward Griffin|url=https://archive.org/details/TheCreatureFromJekyllIslandByG.EdwardGriffin|title=The Creature from Jekyll Island: A Second Look at the Federal Reserve|year=1998|isbn=978-0-912986-39-5|edition=3d|page=[https://archive.org/details/TheCreatureFromJekyllIslandByG.EdwardGriffin/page/n261 503]|publisher=American Media }}</ref> One reason why the Federal Reserve did not act to limit the decline of the money supply was the [[gold standard]]. At that time, the amount of credit the Federal Reserve could issue was limited by the [[Federal Reserve Act]], which required 40% gold backing of Federal Reserve Notes issued. By the late 1920s, the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes.<ref name="text">Frank Freidel (1973), [[iarchive:franklindrooseve04fran|''Franklin D. Roosevelt: Launching the New Deal'']], ch. 19, Little, Brown & Co.</ref> A "promise of gold" is not as good as "gold in the hand", particularly when they only had enough gold to cover 40% of the Federal Reserve Notes outstanding. During the bank panics, a portion of those demand notes was redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. On 5 April 1933, President Roosevelt signed [[Executive Order 6102]] making the private ownership of [[gold certificate]]s, coins and bullion illegal, reducing the pressure on Federal Reserve gold.<ref name="text" /> Summary: Please note that all contributions to Christianpedia may be edited, altered, or removed by other contributors. If you do not want your writing to be edited mercilessly, then do not submit it here. You are also promising us that you wrote this yourself, or copied it from a public domain or similar free resource (see Christianpedia:Copyrights for details). Do not submit copyrighted work without permission! Cancel Editing help (opens in new window) Discuss this page