The Course of The Great Depression Essay -- Great Depression American

The Course of The Great Depression The October 1987 collapse in stock prices conjured visions of 1929 and the Great Depression. Focus on this period is natural because the 32 percent decline in stock values between the market closes of October 13 and 19, 1987, was of the magnitude of--indeed, it actually exceeded--the October 1929 debacle. Focus on this period is also appropriate because, despite all that has been learned since to help assure economic stability, we cannot be completely confident that history will not repeat itself. Consequently, this first section reviews events of the Depression era. The stock market Crash of October 1929 is frequently credited with triggering the Depression. The decline was severe and extended; from their peak in September 1929, stock prices declined by 87 percent to their trough in 1932. The performance of the economy over this period was equally disheartening. Real economic activity declined by about one-third between 1929 and 1933; unemployment climbed to 25 percent of the labor force; prices in the aggregate dropped by more than 25 percent; the money supply contracted by over 30 percent; and close to 10,000 banks suspended operations. Given this performance, it is not surprising that many consider these years the worst economic trauma in the nation's history. Policy makers did not stand idly by as the financial markets and the economy unraveled. There are questions, though, about the appropriateness and magnitude of their responses. Monetary policy, determined and conducted then, as now, by the Federal Reserve, became restrictive early in 1928, as Federal Reserve officials grew increasingly concerned about the rapid pace of credit expansion, some of which was fueling stock market speculation. This policy stance essentially was maintained until the stock market Crash. While there has been much criticism of Federal Reserve policy in the Depression, its initial reaction to the October 1929 drop in stock values appears fully appropriate. Between October 1929 and February 1930, the discount rate was reduced from 6 to 4 percent. The money supply jumped in the immediate aftermath of the Crash, as commercial banks in New York made loans to securities brokers and dealers in volume. Such funding satisfied the heightened liquidity demands of nonfinancial corporations and others that had been financing broker-dealers... ...tivity was under way prior to the market debacle of October 1929. In contrast, the cyclical expansion in business that followed the recession of 1981-1982 remains intact today. Moreover, examination of the Depression years can help us to identify policies that minimize the risk of a slowdown in economic activity and to avoid the major errors of the past. In this regard, the principal recommendations that emerge from our admittedly subjective review of history are: -- maintain our commitment to the stability of the banking system through judicious use of the federal safety net of deposit insurance and the discount window; -- support normal credit extension by banks and, more generally, smoothly functioning financial institutions and markets through stable and credible macroeconomic policies; -- provide adequate growth in the money supply consistent with prevailing economic circumstances worldwide; and -- promote open markets for the international trade of goods and services. Such a list of policy recommendations may seem unremarkable, in part because the lessons of the past already have been taken to heart. Achievement, however, is likely to prove a challenge.