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 --------------------------------------------------------------------------- --- Neil T. Skaggs Department of Economics Illinois State University Campus Box 4200 Normal, IL 61790-4200 (309) 438-7204