FREE TO CHOOSE CHAPTER 3 THE ANATOMY OF CRISIS

I. INTRODUCTION The depression was a catastrophe Dollar income was cut in half by 1933 Total output declined by 1/3 Unemployment reached 25% The depression changed ideas Capitalism was unstable More gov’t control was needed “money does not matter” Depression was caused by gov’t failure, specifically monetary policy

I. INTRODUCTION Identify the parallels between the Great Depression and the Economic Crisis of 2008.

II. THE ORIGIN OF THE FEDERAL RESERVE SYSTEM Federal Reserve Act Created to temper bank runs- to be lender of last resort Fed failed to act appropriately during early Depression so FDIC was passed in 1934 How are reserves increased when the Fed buys bonds?

III. THE EARLY YEARS OF THE RESERVE SYSTEM US and Fed became monetary leaders after WWI Fed was very effective throughout the 1920s under Benjamin Strong Strong’s death in 1928 created a power vacuum

IV. THE ONSET OF DEPRESSION August 1929 was actual beginning of Depression, not 10/24/29 with crash Fed allowed monetary contraction throughout 1930

Debate and Passage of Smoot-Hawley

V. BANKING CRISIS 12/11/1930- failure of the Bank of the United States The name plus the size (the largest bank to ever fail) severely deteriorated confidence The bank was almost saved but prejudices prevented the merger arrangement The failure had far-reaching consequences 352 banks failed in Dec 1930 alone Fed’s actions were hesitant and small Stats: peak ,000 banks; ,000 banks

V. BANKING CRISIS Discuss the psychological effects of the Bank of the United States failure. What is government failure?

VI. FACTS AND INTERPRETATION Monetary collapse was both a cause and effect of economic collapse US gold stock rose from Aug 1929 to Aug 1931 indicating the depression originated in the US “In one respect the System has remained completely consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability.” Discuss the Fed’s role in creating and solving the Economic Crisis of 2008.

VI. FACTS AND INTERPRETATION Robert Lekachman: “I think something is seriously wrong with a beautiful system which develops this big, clumsy, aggressive government, huge corporations, with more influence over their markets than is desirable from the standpoint of free competitive theory, trade unions, which at least according to some opinions, have a similarly malignant influence on their markets. There must be something radically flawed with the capitalist system which allows these institutional developments.” What is radically flawed with the capitalist system?

VI. FACTS AND INTERPRETATION Is there such a thing as “intelligent government intervention”? Has government policy promoted stability or instability? Does capitalism develop big clumsy government, big corporations, and trade unions? Does big capital cause big labor which causes big government?