Sunday, June 08, 2008

The Anatomy of Crisis

I've finished reading Milton Friedman's Free To Choose and have started Amity Shlaes history of the Great Depression, The Forgotten Man. In the 3rd chapter of Free To Choose, Friedman detailed the monetary policies that led to the cataclysm that was the Great Depression:

The popular view is that the depression started on Black Thursday, October 24, 1929, when the New York stock market collapsed...The stock market crash was important, but it was not the beginning of the depression. [Benjamin] Strong (former head of the Federal Reserve Bank of New York) was dead, and the Board wanted to establish its leadership. It moved rapidly to impose its discipline of New York...thereafter the System acted very differently than it had during earlier economic recessions in the 1920s. Instead of actively expanding the money supply by more than the usual amount to offset the contraction, the System allowed the quantity of money to decline slowly throughout 1930...But the worst was yet to come...the character of the recession changed drastically when a series of bank failures in the Middle West and South undermined confidence in banks and led to widespread attempts to convert deposits into currency...The final episode in this sorry tale was the banking panic of 1933, once again initiated by a series of bank failures...At the peak of business in mid-1929, nearly 25,00 commercial banks were in operation in the United States. By early 1933 the number had shrunk to 18,000. When the banking holiday was ended by President Roosevelt ten days after it began, fewer than 12,000 banks were permitted to open, and only 3,000 additional banks were later permitted to do so. All in all, therefore, roughly 10,000 out of 25,000 banks disappeared during those four yours--through failure, merger, or liquidation. The total stock of money showed an equally drastic decline. For every $3 of deposits and currency in the hands of the public in 1929, less than $2 remained in 933--a monetary collapse without precedent.

Whereas Friedman concerns himself primarily with the stock market and monetary collapse fostered by the actions of the Federal Reserve Board, Shlaes tells a much more thorough story of the men and the political groping, fumbling and blind experimentation that prolonged and worsened the depression. She starts the book off with the tragic suicide of a 13 year old boy on a November evening, not long after the day that had come to be known as Black Tuesday, and lists an appalling set of economic and demographic statistics; then surprises the reader with the following:

The story sounds familiar. It is something like the descriptions we hear of the Great Crash of 1929. But in fact these events took place in the autumn of 1937. This was a depression with the Depression. It was occurring five years after Franklin Roosevelt was first elected, and four and a half years after Roosevelt introduced the New Deal. It was taking place eight years after President Herbert Hoover first made his own rescue plans following the 1929 stock market crash.

With all the jabberwocky being spouted by politicians and pundits these days about the economy, it would do us all some good to gain a bit of historical perspective about the US economy and learn the government actions that caused or contributed to the Depression--especially since many of those same actions are now being proposed by a new generation of statesmen.

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