FREE TO CHOOSECHAPTER 3

THE ANATOMY OF CRISIS

I. INTRODUCTION

The depression was a catastrophe• Dollar income was cut in half by 1933• Total output declined by 1/3• Unemployment reached 25%

The depression changed ideas• Capitalism was unstable• More gov’t control was needed• “money does not matter”

Depression was caused by gov’t failure, specifically monetary policy

RGDP

$500

$600

$700

$800

$900

$1,000

1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

Yea

r 20

00 $

Bill

ions

Money Supply

25

30

35

40

45

50

1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

In B

illi

on

s

I. INTRODUCTION

Identify the parallels between the Great Depression and the Economic Crisis of 2008.

II. THE ORIGIN OF THE FEDERAL RESERVE SYSTEM 1913- Federal Reserve Act Created to temper bank runs- to be lender of

last resort Fed failed to act appropriately during early

Depression so FDIC was passed in 1934 How are reserves increased when the Fed

buys bonds?

III. THE EARLY YEARS OF THE RESERVE SYSTEM US and Fed became monetary leaders after

WWI Fed was very effective throughout the 1920s

under Benjamin Strong Strong’s death in 1928 created a power

vacuum

IV. THE ONSET OF DEPRESSION

August 1929 was actual beginning of Depression, not 10/24/29 with crash

Fed allowed monetary contraction throughout 1930

Dow Jones Industrial Average

150

200

250

300

350

400

Dow Jones Industrial Average

150

200

250

300

350

Sep-

29

Oct

-29

Nov

-29

Dec

-29

Jan-

30

Feb-

30

Mar

-30

Apr-3

0

May

-30

Jun-

30

Jul-3

0

Aug-

30

Sep-

30

Oct

-30

Nov

-30

Dec

-30

Debate and Passage of Smoot-Hawley

V. BANKING CRISIS

12/11/1930- failure of the Bank of the United States The name plus the size (the largest bank to ever fail)

severely deteriorated confidence The bank was almost saved but prejudices prevented

the merger arrangement The failure had far-reaching consequences 352 banks failed in Dec 1930 alone Fed’s actions were hesitant and small Stats: peak 1929- 25,000 banks; 1933- 18,000 banks

V. BANKING CRISIS

Discuss the psychological effects of the Bank of the United States failure.

What is government failure?

VI. FACTS AND INTERPRETATION Monetary collapse was both a cause and effect of

economic collapse US gold stock rose from Aug 1929 to Aug 1931

indicating the depression originated in the US “In one respect the System has remained completely

consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability.”

Discuss the Fed’s role in creating and solving the Economic Crisis of 2008.

VI. FACTS AND INTERPRETATION Robert Lekachman: “I think something is seriously

wrong with a beautiful system which develops this big, clumsy, aggressive government, huge corporations, with more influence over their markets than is desirable from the standpoint of free competitive theory, trade unions, which at least according to some opinions, have a similarly malignant influence on their markets. There must be something radically flawed with the capitalist system which allows these institutional developments.”

What is radically flawed with the capitalist system?

VI. FACTS AND INTERPRETATION Is there such a thing as “intelligent government

intervention”? Has government policy promoted stability or

instability? Does capitalism develop big clumsy government, big

corporations, and trade unions? Does big capital cause big labor which causes big

government?