Lessons Learned from the Great Depression
In this video, Great Depression expert David Wheelock of the St. Louis Fed discusses the economic lessons the Federal Reserve learned as a result the Great Depression and how these influenced the Fed’s response to the Great Recession.
David Wheelock discusses the Great Depression as part of a workshop at the St. Louis Fed. This is Part 9 of that presentation.
David Wheelock: So, to summarize, the Great Depression: Worst macro crisis of the 20th century, maybe all-time for the U.S.
Huge declines in the U.S. economy in many dimensions. Banking crises. And (the) money stock contracted, which many people believe is an important cause of the Great Depression, can be squarely laid at the feet of the Federal Reserve for failing to respond to the financial crisis that occurred and the banking failures and the whole reason it was set up in the first place, which was to stabilize the financial system. And then again, the recovery began once the money supply began to recover.
Could it happen again? It could certainly could. We’ve had a severe financial crisis, we had a severe recession. There’s no immunity to that. The lesson for the Fed is that price stability is of paramount importance for monetary policy. The Fed should neither allow deflation, nor should it allow inflation like we had in the 1970s because either... both deflation and inflation are harmful for the overall health of the economy. So, price stability must be the paramount objective of monetary policy.
In addition, the Fed or any central bank must respond aggressively to financial crises by providing the liquidity that’s demanded to restore confidence in the financial system and to maintain the payment system. I think the Fed did a good job of doing that in 2007 to 2009. Some of my colleagues and many people on the outside are critical of the policies enacted or pursued by Chairman Bernanke and the Fed. I’m not one of them. I think the Fed did a — I had nothing to do with it so I’m not patting myself on the back — but I think the Fed did the right job, by and large, in providing a lot of liquidity and programs to end the financial crisis in 2007 and 2008. And, in part, or maybe to a great extent, well we know we avoided the deflationary scenario that occurred during the 1930s. We also avoided a second Great Depression.
So, I’m a minute over my time but I apologize for that, but I was interrupted by a question by the lady who already knew it all, so... [audience laughter]
Originally recorded July 11, 2013