Crisis and Credit Allocation: The Effect of Ideology on Monetary Policy during the Great Depression and the Great Recession

26 Pages Posted: 29 Dec 2020

See all articles by James Caton

James Caton

North Dakota State University - Department of Agribusiness and Applied Economics; American Institute for Economic Research; North Dakota State University - NDSU Center for the Study of Public Choice and Private Enterprise

Date Written: November 13, 2020

Abstract

Both during the Great Depression and the Great Recession, monetary policy deviated from its normal course whereby the central bank would aim to provide credit to solvent institutions while allowing insolvent institutions to fail. In both cases, monetary policy was shaped by ideology that eschewed inflationary policy as remedy for economic contraction. During the Great Depression, the Federal Reserve Board of Governors, led by Adolph Miller engaged in a policy of "direct pressure" that denied credit to banks that had supported speculative investment. This was part of a more general program of monetary tightening implemented by the Board in the early years of the Great Depression. During the Great Recession, Federal Reserve Chairman Ben Bernanke engaged in a program of credit allocation, using deposit accounts at the Federal Reserve to sterilize the inflationary effects of expansion, a policy practically inscrutable to the public. Both policies were the result of beliefs that a general provision of liquidity is not an appropriate or efficacious means to correct an economic downturn. Both Miller and Bernanke left their mark on Federal Reserve policy by increasing the level of support provided by the Federal Reserve to the U.S. Treasury.

Keywords: Monetary Theory, Great Depression, Central Banking, Credit

JEL Classification: E42, E51, E52, E62

Suggested Citation

Caton, James, Crisis and Credit Allocation: The Effect of Ideology on Monetary Policy during the Great Depression and the Great Recession (November 13, 2020). AIER Sound Money Project Working Paper No. 2021-02, Available at SSRN: https://ssrn.com/abstract=3698282 or http://dx.doi.org/10.2139/ssrn.3698282

James Caton (Contact Author)

North Dakota State University - Department of Agribusiness and Applied Economics ( email )

Fargo, ND 58105
United States

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

North Dakota State University - NDSU Center for the Study of Public Choice and Private Enterprise

811 2nd Ave N.
Fargo, ND 58102
United States

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