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Home Publications Blogs Beat the Press The Washington Post and National Public Radio Think that Central Banks Performed Perfectly in the Great Depression

The Washington Post and National Public Radio Think that Central Banks Performed Perfectly in the Great Depression

Thursday, 15 July 2010 04:56

Economists across the political spectrum believe that the Federal Reserve Board and other central banks failed miserably in the Great Depression, failing to respond quickly to the financial collapse in the U.S. and elsewhere. In addition, they extended the downturn by refusing to pursue aggressive monetary policy that would have countered the deflationary trends in the world economy.

While the media are not actively discussing the history of the Great Depression, the deference in current reporting to central banks certainly implies that they would not have reported any criticisms of the central banks' behavior in the Great Depression. For example, the Washington Post today reported on concerns expressed by the IMF and others over a wave of refinancing that will be necessary in the next few years. Central banks, like the Fed and the European Central Bank (ECB), could provide the money needed to support this refinancing.

While this would involve pumping trillions of dollars into the world economy, there is little basis for concern about inflation given the enormous excess capacity in nearly every sector and every country. Tens of trillions of private sector wealth has disappeared with the collapse of the housing bubble in the United States and elsewhere, so even very aggressive monetary policies would only replace a fraction of the paper wealth that existed a few years ago.

In a similar vein, NPR ran a piece on the economic crisis in Spain and never once mentioned the possibility that overly-restrictive policy by the ECB was a factor in the country's double-digit unemployment rate. Whatever other problems Spain has, it certainly would be in better shape if the euro region had a 3-4 percent inflation rate rather than the near zero rate that has resulted from current ECB policy.

Central banks often make mistakes. They made horrendous mistakes in the 30s that led to enormous suffering. This downturn was the result of their failure to recognize housing bubbles and to take steps to counter them. If an economic reporter is unable to recognize the fallibility of central banks then they should be in a different line of work.


Comments (5)Add Comment
Subjects of the Central Banks
written by Scott ffolliott, July 15, 2010 7:19
Giving up sovereignty to Central Banks leaves us subjects of the Central Banks and very much poorer as well.
written by skeptonomist, July 15, 2010 8:22
Let's face it; central bankers usually make "mistakes". Some are honest mistakes, some are attempts to protect themselves from the consequences of killing what seems to be a boom, and some are actions to protect or benefit their natural colleagues in the banking and financial industries. Also, those who think that monetary policy is the ultimate economic tool or that it should be the first recourse in case of problems have the bad habit of attributing past failures of monetary policy and the Fed to the "mistakes" of previous chairmen rather than the defects and limitations of monetary policy itself. Although the Fed is supposed to be "independent" to protect it from political influence, selection of a chairman and other appointees is a highly political affair, and in practice this independence leads to a lack of accountability, not just in a political sense but in the reactions of the media which tend to glorify the chairman as the paternal leader.

Central banks are not institutions which should be entrusted with the economic control of countries - or the world. There is no reason to continue to trust the "wisdom" of the small group of powerful bankers who originated the Fed in 1915. They were not the Founding Fathers.
you can bank on it
written by frankenduf, July 15, 2010 12:10
indeed skeptonomist- i think it is a general tenet of propaganda that businessmen have a better understanding of the world and therefore are more qualified to govern- one of the staunch proponents of this sham was john jay, who said "the people that own the country ought to govern it"
written by izzatzo, July 15, 2010 12:13
Dear Milton Friedman,

We were wondering if some reporters could conduct a channeling session with you in our next mainstream media seance. It's about the Great Depression and how you explained the central bank caused it by sharply reducing the money supply.

Since you left us, a new paradigm has taken over that wants to do the same thing again, so we were hoping you could explain how austerity really works to avoid depressions, instead of causing another one.


The Chicago Crowd-Outers
written by diesel, July 15, 2010 7:08
And, frankenduf, if government were no more than a business, Jay may have had a point. To the people who believe that "the business of America is business" the proposition that business leaders and bankers should rule appears self evident. But government is also, or primarily, about legislating how we interact once we step out of our front doors onto the sidewalk--public people with private rights and social obligations interacting in the public space. And, as Plato observed, when a person thinks that because they are good at carpentry or banking they are therefore good at governance or the administration of justice, they are guilty of a cardinal intellectual error. Of course, if a person imagines that they live in a faith-based universe they could care less about making intellectual errors.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.