U.S. Federal Reserve and money supply
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Old 01-12-2008, 02:42 AM   #1
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U.S. Federal Reserve and money supply
Monetarists, including Milton Friedman and Benjamin Bernanke, argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policy making by the American Federal Reserve System and continuous crisis in the banking system.[4] By not acting, the Federal Reserve allowed the money supply to shrink by one-third from 1930 to 1931. Friedman argued[5] the downward turn in the economy starting with the stock market crash would have been just another recession. The problem was that some large, public bank failures, particularly the Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. He claimed if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did and the money supply would not have fallen to the extent and at the speed that it did.[6] With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch, which was owned and controlled by Wall Street bankers[citation needed]. The Federal Reserve, by design, is not controlled by the President or the U.S. Treasury; it is primarily controlled by member banks and the chairman of the Federal Reserve.[7]

One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit that the Federal Reserve could issue was limited due to laws which required partial gold backing of that credit. By the late 1920's the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes. Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. Several years into the Great Depression the private ownership of gold was declared illegal and reduced the pressure on Federal Reserve gold.


http://en.wikipedia.org/wiki/Great_Depression

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Old 01-12-2008, 05:01 PM   #2
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Economists Murray Rothbard and Friedrich Hayek blame the interventionist policies of the Herbert Hoover administration for magnifying the duration, breadth, and intensity of the Great Depression. Rothbard explains the Austrian theory of the business cycle, which holds that government manipulation of the money supply sets the stage for the familiar "boom-bust" phases of the modern market. He then details the inflationary policies of the Federal Reserve from 1921 to 1929 as evidence that the depression was essentially caused not by speculation, but by government interference in the market.

On Nov. 8, 2002, this evidence was corroborated by remarks made by Ben Bernanke, Alan Greenspan's right hand at the time, at the occasion of Milton Friedman's 90th birthday

For your reading pleasure, "America's Great Depression" written by Murray Rothbard.

More corroboration by Comptroller General David M. Walker.


Buy gold, vote with paper.

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Old 01-13-2008, 01:01 PM   #3
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Gold has certainly been on a tear lately. Whether it's another speculative bubble or a long-term trend is debatable.

With respect to interventionist policies, it does seem likely that we'll see some new "initiatives" soon to help delay the (more apparent symptoms of the) crisis. We can't have people freaking out about the economy in an election year, now can we? Rather than just accepting the market corrections, which would be painful but relatively short-lived, I'm thinking the "fixes" they try to put in are likely just to drag things out and prolong the downward spiral, ala Japan from the 80's until now.

Sorry for the economic pessimism.

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Old 01-13-2008, 02:16 PM   #4
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Quote:
Originally Posted by Quasi View Post
Gold has certainly been on a tear lately. Whether it's another speculative bubble or a long-term trend is debatable.
$900 an ounce for the first time in history this week. Gold stays strong, as it should, while the fiat dollar crashes.

Quote:
With respect to interventionist policies, it does seem likely that we'll see some new "initiatives" soon to help delay the (more apparent symptoms of the) crisis. We can't have people freaking out about the economy in an election year, now can we? Rather than just accepting the market corrections, which would be painful but relatively short-lived, I'm thinking the "fixes" they try to put in are likely just to drag things out and prolong the downward spiral, ala Japan from the 80's until now.

Sorry for the economic pessimism.
I don't think it pessimism but realism.
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Old 01-13-2008, 04:48 PM   #5
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$900 an ounce for the first time in history this week. Gold stays strong, as it should, while the fiat dollar crashes.
Sounds like it's time to pull a couple of crowns out of my mouth.
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Old 01-13-2008, 08:48 PM   #6
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Originally Posted by matt g View Post
Sounds like it's time to pull a couple of crowns out of my mouth.
ouch
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