For Americans who have forgotten, or who never knew, how much worse things could get — shantytowns, gnawing hunger and a desperate 1 in 4 people out of work — Federal Reserve Chairman Ben S. Bernanke is providing a reminder.
In a series of four lectures he is delivering at George Washington University this month, the one-time Princeton professor and renowned specialist on the Great Depression is expounding on the horrors of the Depression and how the austerity policies of the central bank at the time made things worse.
Lessons learned from the 1930s debacle led to more enlightened central bank practices in the subsequent decades that nurtured prosperity. But some conservatives say Mr. Bernanke has gone to the other extreme with lenient policies in his drive to nudge a healthier recovery from a stubbornly slow-growing economy.
The first-ever such lectures by a sitting Fed chairman present a subtle pushback against such criticism, spearheaded by Rep. Ron Paul of Texas but endorsed to one degree or another by most of the other Republican presidential candidates. President Obama and most Democrats view Mr. Bernanke as a hero who likely averted a second depression.
The easily understandable lessons, and the videos of the lectures that the Fed is making available to the public on its website, suggest that Mr. Bernanke’s target audience is the generation of young people attending college who grew up in affluence and know little about the Depression, as well as many parents and older folks who seem to have forgotten its bitter lessons.
But there’s no amnesia at the Fed. Mr. Bernanke makes it clear that as long as he is chairman, he will not let the central bank repeat the devastating mistakes that made the Depression so painful for a whole generation of Americans.
“The Great Depression informed the Fed’s actions and decisions in the recent crisis,” he said in his opening remarks, noting the Fed’s multiple missteps during the 1930s in failing to stem the financial panics, bank runs and economic downspiral that created such desperate conditions.
In the years after the great stock crash of 1929, as the Fed stood by, unemployment soared to 25 percent, stocks lost 85 percent of their value, the economy shrank by one-third, prices fell by 10 percent and nearly 10,000 banks collapsed, he said, underscoring the economic devastation with dramatic graphics provided on the Fed’s website. In the truly worldwide collapse of the early 1930s, other countries, especially Germany, had it even worse.
Why the Fed failed
“The Fed failed” to carry out its missions, Mr. Bernanke said. “It did not ease monetary policy for a variety of reasons,” including wanting to stop speculation in the stock currency markets and trying to uphold the gold standard, which dictated the value of the dollar at the time, he said.
“Part of the problem was intellectual,” he added.
At the time, the Fed subscribed to the “liquidationist” philosophy of President Hoover’s administration, which held that too much credit was fueling market bubbles and the economy during the Roaring ‘20s, and the excesses had to be squeezed out through fire sales of highly leveraged assets such as real estate and stocks.
As Mr. Bernanke noted, Hoover administration Treasury Secretary Andrew W. Mellon famously advised the president to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” to rid the economy of too much debt.
Hoover subscribed to Mellon’s theory that a financial panic was not such a bad thing.
“It will purge the rottenness out of the system,” the president said. “People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”