Mary Schweitzer writes: 
 
>You need to add two elements to the story to be able to explain 
>the role of the Fed in contributing to the length and duration 
>of the fall of the economy from 1929-1933. 
>     First, focusing on the money stock (however defined) is not 
>as useful as focusing on the fall in prices.  Prices fell by 
>one-third in four years.  THAT'S A LOT. 
 
But isn't the whole point that the fall in prices was caused (at least 
to a large extent) by the fall in the money stock, precisely what the 
Fed was intended to prevent? 
 
>     Second, bank failures were intensely regional.  Disasters in 
>some places, no big deal in others.  The structural disruption 
>was thus very uneven, but the overall impact of having some 
>areas fall apart completely while others were stable turned out 
>to be disruptive to the whole nation.  There have been some 
>good studies comparing the Canadian system, which was more 
>stable through all this, to the American system and its idiotic 
>unitary banking laws.  The troubled regions were isolated, and 
 
Absolutely.  The typical profile of a failed bank was that it was a 
small unit bank operating in a predominantly agricultural area.  The 
problem in agriculture was the fall in prices during the 20s, which 
some have argued are linked to the distortions in farm policy caused 
by the massive intervention in those markets in WWI.  The Canadian 
banks survived this period, despite being at least as "rural" because 
they were able to branch nationwide.  Many Canadian branches closed, 
but only one bank failed. 
 
>     First-person accounts, BTW, really stress the disruption in 
>individual's lives of having a nearby S & L fail.  And I am 
>personally fascinated by the stories of scrip being used by 
>local governments and the utility companies in Phiadelphia and 
>New Jersey, and other areas. 
 
The first person accounts of the pre-Fed panics are also fascinating. 
You also see wide use of scrip and other currency substitutes during 
those panics.  However, it was the fact that people had to resort to 
such devices (however nice they were as second-best solutions) that 
contributed to the calls for reform that created the Fed.  Again, 
a situation that necessitated the use of scrip was precisely the kind 
of situtation that was not supposed to happen with the creation of the 
Fed. 
 
BTW, there were calls to reform the unit banking laws in the early 
1910s as a way to prevent failures like those that had plagued the NBS. 
These proposals were generally supported by professional economists and 
larger banks.  However, they were opposed by small bankers who saw the 
anti-branching laws as a way to ensure them above normal profits and 
prevent them from being bought out by the large urban banks.  Thus 
the interests of one group of business owners prevented reforms which 
could have at least soften one of the harshest aspects of the GD. 
 
Steven Horwitz 
Eggleston Associate Professor of Economics 
St. Lawrence University 
Canton, NY 13617 
TEL (315) 379-5731 
FAX (315) 379-5819 
EMAIL [log in to unmask]