Reddit reviews The Great Contraction, 1929-1933: New Edition (Princeton Classic Editions)

Both Friedman and Bernanke have good books on this subject.

http://www.amazon.com/Contraction-1929-1933-Princeton-Classic-Editions/dp/0691137943/ref=cm_cr_pr_product_top

http://www.amazon.com/Essays-Great-Depression-Ben-Bernanke/dp/0691118205/ref=sr_1_1?s=books&ie=UTF8&qid=1421083324&sr=1-1&keywords=bernanke+depression

Bernanke and Friedman are in basic agreement on the Federal Reserve being the cause of the depression. Bernanke is famous for having said: "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." I should add that although Friedman is sometimes seen as a free-market hack, his work on monetary theory and the great depression is respected by economists of all political stripes.

Modern central bankers now know to increase the money supply during a recession. This is necessary to prevent deflation because the effective amount of money circulating in the economy is increased by lending. Lending decreases during a recession, so if the central bank does not increase "base money", then the effective amount of money will decrease in the recession. A fall in the money supply can cause problems, particularly for banks if the duration of their assets and liabilities differ (as is almost always the case) (fyi, the duration of and asset or liabilities is basically when it pays out. Mortgages have a long duration because mortgage holders will be baying back their debts over decades. Demand deposits have a short duration -- consumers can withdraw their deposits on a day's notice to take them to another bank or take them home. If the interest rate goes up, then consumers can withdraw their deposits to get a bigger return on them, but banks cannot call their mortgages. Thus, banks are typically hurt when interest rates go up. Furthermore, if enough people start withdrawing their deposits, the bank can run out of cash -- even if their mortgages are good and they'd be able to pay back their depositors if given enough time. This can result in a bank run. If a lot of people withdraw their deposits, then the bank will go bankrupt and the other depositors could be ruined. Thus, lots of depositors may withdraw their deposits in anticipation that others will, causing a bank failure that would not have happened otherwise. Banks failing and being close to failure will reduce the supply of credit to various enterprises, which directly reduces output (this is the link between the "real economy" and the financial economy. In a market economy, the financial sector plays a crucial role in determining to which enterprises capital is allocated. Banks can do a good job identifying where capital is most productive, but during a liquidity crises they will fail to extend this credit -- they know the project is good but they can't give the money without going bankrupt).

At the start of the great depression, the US Federal reserve decreased the money supply rather than increasing it, transforming what would probably have been a sharp but brief recession (as the United States had experience regularly throughout its history) into the great depression. Indeed, the effective money supply decreased by over a third early in the great depression.

There were a couple of reasons for this, but part of it came from a power struggle between the New York Fed and the Washington DC fed. In the 1800's and early 1900's, big financiers like J.P.Morgan played the role of the federal reserve by generously extending financing during contractions to avert catastrophe. After the panic of 1907 (where J.P. Morgan assembled a coalition of other bankers to extend credit to banks during the liquidity crisis), many bankers urged the creation of a government body to play the role that J.P. Morgan had played in the past, thinking something like "we only avoided catastrophe because J.P.Morgan saved the day - what if someone like J.P. Morgan is not around for the next crisis? We need an official body to play this role". This resulted in the Federal reserve board.

The Federal reserve board is a fairly decentralized system. The D.C. fed is responsible for controlling money supply. But the New York Fed has always been better connected with the banks and more proactive in extending credit during liquidity crises. When the federal reserve boards were founded, Benjamin Strong was appointed the first governor of the Federal Reserve Bank of New York, and continued the practice of providing strong support of the banks during liquidity crises (exe. extending emergency credit).

However, the D.C. fed wanted to centralize power, and reflexively opposed the actions of the New York Fed as a means to acquire this power. Benjamin Strong was an effective leader and was able to resist the encroachment of the D.C. fed. Unfortunately, he died in 1928 on the eve of the stock market crash. Thus, when the crash happened, the D.C. fed was able to assert its authority unopposed and prevent the New York Fed from extending credit to distressed banks at the outset of the crises.

In addition, many banks around the world at this time were trying to strengthen their currencies (the dollar is strong if it can buy relatively more euros, for example). One way to accomplish this is to raise interest rates, because money from foreign countries will rush in to buy the higher-interest rate assets, thus bidding up the price of the dollar. If many central banks in different countries do this at once, the result is no change in the strength of the currencies but large increases in the interest rate in all countries. Many countries were caught up in this game of competing for a strong currency, with the US and France at the forefront (France also had a terrible great depression). Unfortunately, the Fed increases interest rates by buying up bonds, so the Fed was actually reducing the money supply at the outset of the great depression, which is the exact opposite of what should be done.

As for other countries, the UK did not tighten monetary policy after the initial recession like the United States did. They had a relatively brief and less severe recession.

Canada also did not tighten monetary policy. In addition, Canada had fewer, larger banks, whereas the United States had an abundance of small banks. Small banks are less diversified and are more likely to go under during a credit crunch. This is why not many (actually, i don't think any) of the banks in Canada went under. But something like a third of all banks in the United States went bankrupt in the early phases of the great depression. The reason the United States had many small banks was because there were regulations preventing banks from growing very large. I can't remember the details of these regulations, but I believe they prevented banks from operating in multiple states.

TLDR
the great depression probably would have been a minor recession except for the fact that a recently founded federal agency led by naive and power-hungry leadership both failed to extend credit to banks during a liquidity crisis (as banking giants like J.P. Morgan had done in the past) and actively reduced the money supply in pursuit of a strong dollar. In addition, regulations limiting the size of banks made the US financial system more vulnerable to financial shocks.

It sounds like I am blaming government and saying that the Fed should not exist. That is not the case. The Fed can be beneficial if it is run correctly, and the current leadership is much more knowledgeable about how the macro economy works than the leadership was in the past. Criticizing bad regulation is not the same as criticizing regulation. In any case, the Great Depression probably would not have happened if either the Fed didn't exist or the Fed had been properly managed.

Because many of us have actually read the counterarguments to Bernanke's claims which were also written by Experts who spent their lives studying Economics, including a major focus on the Depression for most of them:

Nobel Laureate Friedrich August von Hayek

Nobel Laurate Milton Friedman

Economist Murry Rothbard

Economist Lawrence Reed

Rápida não tem, porque não é simples.

https://fee.org/articles/the-great-depression-according-to-milton-friedman/

https://www.amazon.com/Great-Contraction-1929-1933-Princeton-Editions/dp/0691137943

>ensinado nas escolas

Eu sei. Também aprendi isso. E também aprendi que quase tudo que se estuda em História em escola pode-se jogar fora.

I think he wholeheartedly believes it was the contraction of the money supply that caused the Great Depression. I have The Great Contraction 1929-1933 by Friedman and Schwartz, and in the foreword, he praises the work done by Friedman and acknowledges that he wouldn't let something like that happen again.

>It is somewhat disingenuous to say that this means the Fed caused the Great Depression. It is akin to saying that the Fire Dept. burned a house down because they didn't save it in time (or more appropriately used too little water).

False.

If you want to critique what Friedman said you should know what Friedman said, look it up for yourself. Not merely repeat what someone else says who doesn't know/misrepresents what Friedman said (not even if that person is Krugman).

Very briefly, before 1929 the banking system had developed methods to stop strings of bank runs such as caused the money supply to fall, and these worked effectively. Then...

(1) the Fed actively intervened and told the banks "don't use your method anymore, we'll take care of the problem for you from now on."

(2) the Fed acted to create incentives that actually encouraged Fed-system banks to take steps to sink non-Fed system banks as a competitive opportunity. "When they go under it will leave the market to us, we pick up the leavings. We won't go under because the Fed is backing us. So screw them!" The Fed's rules actively drove failures of non-Fed system banks. See: The Bank of the United States.

Then (3) the Fed reneged on the promise it made in #1, after the banks didn't use their own methods that they had used until then to save themselves, relying of the Fed's promise, the Fed didn't act to help them ... and also, after the Fed system banks helped push the non-Fed system banks under for competitive advantage, when the resulting bank runs got back to the Fed system banks the Fed, surprise, didn't protect them. So the runs consumed the Fed-system banks too.

The result of all this was the unprecedented first massive wave of bank runs that triggered the initial collapse in money that drove the rise in deflation and started the Depression. If that triggering wave of bank runs hadn't occurred... (Similar analysis applies to the second wave of runs that drove the Depression deeper, but I'll stop here.)

You'd have gotten all this if you had read Friedman -- but you'll never get it from reading Krugman.

If you want a "Fire Department" analogy it is this....

(1.) A business district has a Volunteer Fire Department that is effective and operated by all the businesses cooperatively for their mutual protection.

(2.) A new Fed Fire Department arrives and says "we'll do the job of protecting you better and cheaper too. So disband your volunteers and rely on us." Makes sense, so the businesses do.

(3.) The Fed Fire Department restricts its protection to only some of the businesses in the district.

(4.) When a number of small fires start, the businesses don't cooperatively act to protect themselves as they always have before, because the Fed Fire Department has promised to do it for them both better and cheaper.

(5.) The businesses protected by the Fed Fire Department don't worry about their non-protected neighbors burning (hey, more profits for them after the competition is gone!) and are even seen spreading accelerants on their neighbors' buildings.

(6.) When the fires burn their way through the competing businesses finally back to those protected by the Fed Fire Department, it announces to them: "Your buildings are constructed of insufficiently fire-resistant materials. This was reckless on your part. If we save you, this will create moral hazard encouraging more such recklessness in the future. To prevent such moral hazard we are going to let you all burn. Your unsound buildings will be liquidated." And an unprecedented conflagration consumes the entire business district.

Is the Fed Fire Department's responsibility for this incineration of the business district really limited to the sense that "they didn't save it in time (or more appropriately used too little water)."?

???

BTW, if you want to read Friedman and Schwartz yourself on this -- rather than rely on third-hand tales (spun by their opponents) -- the chapters of the Monetary History covering the the collapse years of the Depression are now available in a separate paperback volume, The Great Contraction, 1929-1933.

For anyone really interested in understanding the Depression it is a must read. It is literally the starting point for all modern analysis of the Depression.

After you do you'll be free to disagree with Friedman's conclusions -- but you won't be able say Freidman said what Krugman claims he said ("the fire dept just used too little water") because you'll have read what Freidman said yourself and know better.