Eighty years later, it “sounds pretty heartless, and it was,” Mr. Bernanke said. Millions of people were thrown out of work and tossed from their homes and farms into the streets.
Some conservatives have propounded a similar philosophy, saying the Fed should not have prevented banks and Wall Street firms from failing in 2008, and the government should not have tried to stop the downward spiral in financial markets and housing that — even with government intervention — resulted in the loss of more than one-third of the value of those assets.
Following such advice as the economy imploded in the 1930s, the Fed raised interest rates rather than easing them to try to revive growth. It cited the need in 1929 to prick a stock market bubble — which it ended with notable success and tragic consequences. As unemployment was soaring in the early 1930s, the Fed raised interest rates again to defend the dollar and its link to the gold standard against raids by speculators.
“That was the wrong thing to do,” Mr. Bernanke said, because it sent the economy plummeting further and drove up unemployment.
Meanwhile, the Fed neglected its primary mission by allowing a massive run on the banking system that destroyed thousands of banks and took the life savings and deposits of millions of Americans, further impoverishing them as they endured widespread unemployment, hunger and homelessness.
Recurring bank panics
“Financial panics in the U.S. were a very big problem” even before the Depression, Mr. Bernanke said, noting six major bank panics between 1873 and 1913, including more than 500 banks that failed in the 1893 crisis. Yet the Fed, which was founded in 1914 to prevent such panics, failed to act in the 1930s.
While Congress made mistakes during the Depression as well, including trying to balance the budget under President Franklin D. Roosevelt when the economy was still fragile in the middle of the decade, Mr. Bernanke said it took an act of Congress to ease some of the devastation wreaked by the Fed.
Roosevelt called for, and Congress enacted, laws in 1933 and 1934 dropping the gold standard and creating deposit insurance, measures that were successful at reviving the economy at least for a while and stopping the run on banks, he said.
“They were essentially offsetting problems that the Fed created or exacerbated by not fulfilling its responsibilities,” he said.
In condemning the Fed’s actions during the 1930s, Mr. Bernanke strikes at the heart of his critics who say he has been too lenient with loose money policies that threaten to set off a revival of inflation. Mr. Bernanke has held interest rates at record low levels since 2008 and is promising to continue to do so through 2014 in an unprecedented effort to nurture a faster recovery.
Gold standard rejected
Although Mr. Bernanke said he sympathizes with gold-standard supporters’ “desire to maintain the value of the dollar” and keep inflation low, he added that a return to the gold standard wouldn’t work and would hurt the economy more.
“It would be very expensive” because the government would have to buy more and more gold and store it in vaults at the Federal Reserve and Fort Knox, where it would sit idly as backing for the currency, he said. “The simple fact is, there’s not enough gold to meet global needs” in a $50 trillion global economy.