No one engaging in this discussion has yet mentioned what is perhaps the 
most relevant institutional factor contributing to the banking collapse and 
the resulting (accompanying?) collapse in income - the United States and 
many other countries were on the gold standard.  That the gold standard was 
at the center of the monetary difficulties is now well accepted.  In the 
February 1995 JMCB, Ben Bernanke discusses the issue with clarity, noting 
that the severity of the depression across countries was directly related 
to their continued adherence to gold.  Countries that left the standard 
earlier fared much better than the U.S. 
 
Judging whether monetary policy is loose or tight must be done in the 
context of the gold standard.  On gold, central banks cannot control the 
quantity of their money supplies, since M is endogenous.  However, central 
banks can control the composition of their own portfolios through credit 
policies.  That the Federal Reserve attempted to stanch an outflow of gold 
with tighter credit early in the depression era is clear. 
 
Some 128 years before the difficulties of 1929-30 started the U.S. on a 
downward spiral, Henry Thornton argued that the duty of a central bank was 
to protect the stability of the banking system.  Thornton advised meeting 
internal drains (of coin into hoards) by expanding the Bank of England's 
note issue.  An external drain was to be met by tightening credit - but not 
too tight.  And if the banking system began to fail, Thornton advised an 
expansive policy.  If that meant temporarily suspending convertibility, so 
be it. 
 
In the context of Thornton's analysis, the Fed's policy was undeniably too 
tight.  As Steve Horwitz has noted, central banks should take current 
economic conditions into account when formulating policy. 
 
--Neil Skaggs 
 
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--- 
Neil T. Skaggs 
Department of Economics 
Illinois State University 
Campus Box 4200 
Normal, IL 61790-4200 
(309) 438-7204