Federal Reserve Caused the Great Depression by its tight-money
Bernanke is particularly interested
in the economic and political causes of the Great Depression, on which he has published
numerous academic journal articles. Before Bernanke's work, the dominant monetarist theory
of the Great Depression was Milton Friedman's view
that it had been largely caused by the Federal Reserve's having reduced the money supply. In a speech on Milton
Friedman's ninetieth birthday (November 8, 2002), Bernanke 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 [Schwartz, Friedman's coauthor]: Regarding the Great
Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
that the financial disruptions of 1930–33 reduced the efficiency of the credit allocation process; and that the resulting
higher cost and reduced availability of credit acted to depress aggregate demand, identifying an effect he called the financial accelerator. When faced with a mild
downturn, banks are likely to significantly cut back lending and other risky ventures. This further hurts the economy, creating
a vicious cycle and
potentially turning a mild recession into a major depression. Economist Brad DeLong, who had previously advocated
his own theory for the Great Depression, notes that the current financial crisis has
increased the pertinence of Bernanke's theory.http://en.wikipedia.org/wiki/Ben_Bernanke
This would have been done with the approval and
encouragement of including Hoover and other economists.
Bernanke emphasized that Congress gave the Fed responsibility for preserving price stability (among
other objectives), which implies avoiding deflation as well as inflation. He stated that deflation is always reversible under
a fiat money system. Where currency is under a monopoly of issuance, or where there is a
regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability
to alter the money supply and thus influence the interest rate (to achieve monetary policy goals). Bernanke asserted that the Fed "has sufficient policy instruments to
ensure that any deflation that might occur would be both mild and brief".
To combat deflation, Bernanke provided a prescription for the Federal Reserve to prevent it. He identified
seven specific measures that the Fed can use to prevent deflation.
1) Increase the money supply (M1 and M2).
"The US government has a technology, called a printing press, that allows it to produce as
many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate
higher spending and, hence, positive inflation."
2) Ensure liquidity makes its way into the financial system through a variety of measures.
"The U.S. government is not going to print money and distribute it willy-nilly ..."although
there are policies that approximate this behavior."
3) Lower interest rates – all the way down to 0 per cent.
Bernanke observed that people have traditionally thought that, when the funds rate hits zero, the
Federal Reserve will have run out of ammunition. However, by imposing yields paid by long-term Treasury Bonds,
"a central bank should always be able to generate inflation, even when the short-term nominal
interest rate is zero ...[this] more direct method, which I personally prefer, would be for the Fed to announce ceilings for
yields on all longer-maturity Treasury debt."
He noted that Fed had successfully engaged in "bond-price pegging" following the Second World War.
4) Control the yield on corporate bonds and other privately issued securities. Although the Federal Reserve can't legally buy these securities (thereby determining the yields); it can, however, simulate
the necessary authority by lending dollars to banks at a fixed term of 0 per cent, taking back from the banks corporate bonds
5) Depreciate the U.S. dollar. Referring to U.S Monetary Policy in the 1930s under Franklin Roosevelt, he states that:
"This devaluation and the rapid increase in money supply ... ended the U.S. deflation remarkably
6) Execute a de facto depreciation by buying foreign currencies on a massive scale.
The Fed has the authority to buy foreign government debt ... [t]his class of assets offers
huge scope for Fed operations because the quantity of foreign assets eligible for purchase by the Fed is several times the
stock of U.S. government debt."
7) Buy industries throughout the U.S. economy with "newly created money". In essence, the Federal
Reserve acquires equity stakes in banks and financial institutions. In this "private-asset option," the Treasury could issue
trillions in debt and the Fed would acquire it, still using newly created money.