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]