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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: drsvelte who wrote (51879)	5/24/2000 3:16:00 AM
From: westes	Respond to of 99985

With all respect to the author of that web site you referenced, his recount of history is largely wrong. On one point he is right: the Fed did very little to actively inject additional money supply into the economy. Keep in mind that they didn't have Milton Friedman or any monetarist theory to fall on either. Friedman thinks the whole depression was caused by a reduction in the money supply, and he no doubt believed that a similar crisis today could be at least severely lessened by actively injecting into money supply. I'm not sure I want to re-run the "experiment" of a concurrent recession and asset bubble crash, just so we can test Milton's hypothesis. He's probably right, but if he is wrong it means 10 years in hell for this country. Regarding the web site you referenced: The Fed did not pursue easy money in 1927 because it wanted to. It chose easy money in 1927 because of pressure from overseas, because their economies were in shambles and they needed to attract capital. But the Fed finally did raise interest rates in Summer of 1929, right when the economic cycle began its downturn. Regarding the Fed decreasing interest rates, I quote from one of the 1929 web sites I found out there in alarmist land: "...on Thursday, 31 October...the Federal Reserve Banks lowered the rediscount rate from six to five per cent. The Reserve Banks also launched vigorous open-market purchases of bonds to ease money rates and liberalize the supply of credit... On all these happy portends the market closed down for Friday, Saturday and Sunday... On Monday...<November 4>...the market started on another ghastly slump" (Galbraith, pp.141-2). "From late November 1929 to mid-April 1930, a period of four and a half months, the market rallied, and it seemed as though it would again move into new high ground. In this period, the economy appeared to gain strength, and by early spring of 1930, the "correction" was considered over. It was thought of as simply one more pause on the road to prosperity. There had been declines of greater magnitude in 1924 and 1926-27, and most observers thought more would come in the future. Few believed the 1929 crash to be the beginning of the worst period of hardship in American history" (Sobel, p.390). "...The Federal Reserve Bank lowered its discount rate so as to make an easy money policy. The rate went to 4.5 percent on November 14, and to 4 percent on January 20, 1930; by mid-March it reached 3.5 percent. The easy monetary policy was instrumental in restoring a measure of confidence and helped lead to the correction of December 1929-April 1930" (Sobel, p.387). It was later known as the Suckers' Rally. "...in April the recovery lost momentum, and in June there was another large drop. Thereafter, with few exceptions the market dropped week by week, month by month, and year by year through June of 1932. The position when it finally halted made the worst level during the crash seem memorable by contrast. On 13 November 1929, it may be recalled, the Times industrials closed at 224. On 8 July 1932, they were 58..." (Galbraith, p.161). "The conventional explanation is that Herbert Hoover, President when Wall Street collapsed and during the period when the crisis turned into the Great Depression, was a laissez-faire ideologue who refused to use public money and government power to refloat the economy. As soon as President Franklin Delano Roosevelt succeeded him, in 1933, and - having no such inhibitions about government intervention - started to apply state planning, the clouds lifted and the nation got back to work. There is no truth in this mythology... neither understood the nature of the Depression, or how to cure it. It is likely that the efforts of both merely served to prolong the crisis... "From the very start...Hoover agreed to take on the business cycle and stamp it flat with all the resources of government... He resumed credit inflation, the Federal Reserve adding almost $300 million to credit in the last week of October 1929 alone... Indeed in most respects what Hoover did would later have been called a "Keynesian solution." He cut taxes heavily... He increased government spending. He deliberately ran up a huge deficit... But that he used government cash to reflate the economy is beyond question... "More major public works were started in Hoover's four years than in any previous thirty. They included the San Francisco Bay Bridge, the Los Angeles Aqueduct, and the Hoover Dam... (Paul Johnson, A History of the American People, pp.617-620). "Herbert Hoover organized the equivalent of an eighty-billion-dollar stimulus package in today's terms during the first two years of the depression... He started putting it together within a month of the stock market crash in 1929" (Davidson & Rees-Mogg, p.163). "During the first four years of the Roosevelt administration, public construction turned down again, sinking to a level below that of the predepression period. The public construction boom under Roosevelt didn't happen until 1936, when spending on public construction soared to almost 40 percent above its 1929 level. This was seven years after the depression began" (Davidson & Rees-Mogg, p.453).