Analysis of Government's Role in the Great Depression

That nine out of 10 of them would say, "Well, of course the Great Depression

was a failure of private business.

It was due to an overextension, over-speculation in the 1920s,

or it was due to an excessive concentration of wealth in

the hands of the wealthy at the expense of the poor in the 1920s,

or it was due to speculative investment abroad or whatnot, but it

was a failure of private business and government had to step in

in order to rescue private business from its own failure."

Nothing could be farther from the truth.

The Great Depression was produced, in my opinion,

and I may say this is a not, not a random opinion.

I will be glad to refer you to a several hundred-page book in which it is

documented.

I won't tell you who the author is.

Mr. Eccles did that.

It was produced... The Great Depression was produced by a

failure of government, by a failure of monetary policy.

It was produced by a failure of the Federal Reserve System

to act in accordance with the intentions of those who established it.

It was produced by a failure of the Federal Reserve System

despite

the presence of knowledge on the part of many of the people in the

system about the right course of action.

It's interesting to speculate for a moment about why this myth is so

widespread.

The answer is really very simple in this case.

Private enterprise has no press agents.

The free market has no press agents.

The government has a great many press agents.

The Federal Reserve has a great many press agents, and the

Federal Reserve, of course, would never admit, never

proclaim that it produced the Great Depression.

On the contrary,

and again, I don't mean to be criticizing

individuals.

We're talking about the way institutions operate.

You and I are the same as all the rest of us. We're all the same.

The hardest thing in the world is for anybody to admit

that he made a mistake.

If any one of us makes a mistake, we can always find somebody else to blame,

and if you read,

as I have for my sins had to read, the

annual reports of the Federal Reserve System over a 50-year period,

there's only one element of humor that lightens that task,

and that is

the cyclical

fluctuation in the powers of the Federal Reserve.

In a good year when things are good, when the economy is booming, you

will read that the Federal Reserve, by its wise policy,

by its efficacious management of money, has produced

this fine situation.

However, let things get bad

and all of a sudden the tone of the annual report is different.

Then you discover that despite the best efforts of the

Federal Reserve,

outside forces combine to produce

difficulties.

Even at the depth of the Depression in 1933

when

in the spring of that year

the Federal Reserve System, which had been established in order to

prevent banking panics and keep banks from closing, when the

Federal Reserve System itself closed its doors

and you had a banking holiday for seven days,

and when

over the previous three years a third of the banks of this country

closed their doors and went broke because, in my opinion,

of the poor policy followed by the Federal Reserve System,

even in 1933 if you read the annual report you will discover how

much worse things would've been if the Federal Reserve hadn't behaved so

well.

Now as I say, I don't blame the members of the Federal

Reserve for that.

Any one of us would do the same thing.

We have to find somebody to blame,

but as an objective scholar

I can tell you what the facts are.

The facts were

that from 1929 to 1933

the total quantity of money in the United States,

the amount of currency, the amount of bank deposits,

what Mr. Eccles referred to as M2, that total amount of money

declined by one-third.

The total number of banks went down by one-third, and why did

the quantity of money decline?

It declined because the Federal Reserve System failed to prevent the decline.

The Federal Reserve System could have prevented the decline at all times.

There never was a moment during that period when the Federal Reserve did

not have the power to prevent the decline in the quantity of money.

If it had prevented the decline in the quantity of money,

you might still have had

a recession, but it would've been a garden variety

recession.

It would've been over in the middle of 1930 or early in '31 at

the latest. It would not have been the major

catastrophe, not

only for this country but throughout the rest of the world.

The,

uh... Moreover, this is not only hindsight.

At all times

the people at the Federal Reserve Bank of New York

and at a number of other banks were pleading with the Federal Reserve

Board in Washington to do the right thing.

At all times there were people in Congress who

were arguing that the

Federal Reserve System should take a different course.

At all times

there were outside commentators.

One of the Canadian banks was particularly pressured, but there

were other

commentators who were pointing out the disastrous

effects on the American economy of the restrictive policies that the

Federal Reserve System was following and which was causing, was permitting

and facilitating a whole series of bank runs.

So the Great Depression was not produced by a failure of business.

On the contrary,

it was produced by a failure of government and a failure of

government in an area

in which responsibility had been assigned to government since the founding of this

country. The Constitution of the United States,

it gives Congress the power to coin money and set the

value thereof, and it was in the management of this fundamental

function of government that government failed

and produced the Great Depression.

We have learned from that failure.

The Federal Reserve will not fail in the same way again.

This time it will fail in a different way.

This time it has been failing not by producing a great

depression but by producing an inflation

because just as

you will hear the story that it was business that was responsible for the

Depression, so you will today hear the story

that it is

labor and management that are responsible for inflation.

It is the same kind of a myth. Inflation is made in one

place and one place only, Washington, D.C.