Gadsden Post: Remaking the Mistakes of the Great Depression | Bruce Krasting

Ben Bernanke has said many times that Marriner Eccles, the head of the Federal Reserve in 1936/37 made a mistake by tightening credit (raising reserve requirements). Bernanke blames Eccles’s actions for the 50% stock market collapse in 1937 and the second leg of the depression that followed.

Bernanke’s interpretation of Eccles’s actions is widely held by historians. It was FDR who first (conveniently) blamed the Fed. I think that Bernanke is also (conveniently) blaming Eccles. He is using history's interpretation to support his position that monetary policy must be set on MAX for the next three years. He has said that he will not make the same mistake that poor old Eccles made.

Eccles was in a bind. His job at the Fed was to maintain relative stability of prices and the stock of money. In the years prior to 1937 money flowed into the USA from Europe. This "flight capital" fled to the USA in the form of gold shipments. The money came because the holders of wealth were anticipating a major war. With gold reserves rising, so did the supply of money. M1 increased 55%, and money in demand accounts rose 71% from 1933 to 1936. More troubling were rising inflationary pressures. In the first six-months of 1936, wages rose by 11%. Wages in the critical steel industry rose by 33%. These conditions would scare any reasonable Central Banker.

The Fed itself answered the historical question of whether the Fed’s actions in 1936-37 was responsible for the 1937-38 double dip. In a research paper, (PDF Link) St. Louis Fed researcher Charles Calomiris concluded:

We find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier.