History Repeats, With Depressing Results

For a man who is supposed to be an expert on the Great Depression, Ben Bernanke appears well on his way to repeating the same mistakes made then. I don't claim to possess the professor's credentials, but clearly he and I have drawn very different lessons from that debacle.

If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further.

It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash-the final week of October-and in that brief period added almost $300 million to the reserves of the nation's banks.

During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks.[From Rothbard's America's Great Depression, Chapter 8.]

Why was this program of spending the taxpayers money undertaken?

"This enormous expansion was generated to prevent liquidation on the stock market..." (ibid)

That sounds familiar. Stock market down 2,000 points in a week or so. Bernanke announces plan. Stock market rallies (for a few hours).

By mid-November, the great stock break was over, and the market, falsely stimulated by artificial credit, began to move upward again. Standard and Poor's stock price monthly averages, which had climbed from 56 in mid-1921 to 238 in September 1929-more than quadrupling-fell to 160 in November, a one-third drop in the course of two months. By the end of the year, stock prices had risen by several points.

The stock market emergency over, bank reserves declined to their pre-crash levels. In two weeks-from November 13, when stock prices hit bottom, to November 27-member bank reserves declined by about $275 millions, or to almost exactly the level existing just before the crash.

The decline did not come in securities, which increased in the Federal Reserve portfolio from $293 million on October 30 to $326 million a month later-a rise of $33 million. Discounts fell by about $80 million, and acceptances by another $80 million, while money in circulation embarked on its seasonal increase, rising by $70 million. Thus, from the end of October to the end of November, controlled reserves were reduced by $111 million (including miscellaneous factors not itemized here); uncontrolled reserves, which were more important, fell by $165 million. (ibid) [emphasis added]

The long-term result?

Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state. (ibid)

Time for Chairman Bernanke to go back to school.