Prof. DeLong.... It has been my understanding for a long time that the Fed essentially ALLOWED America's money supply to contract by 1/3 between 1929 and 1933. But, I was recently confronted by someone who insists that the contraction took place despite a valiant effort by the Fed not to let it happen. I was delighted, in reading your work on the subject, to find text which I believe supports my contention. Unfortunately, I have yet to find anyone else who agrees. Do you know of any other internet resources which support your (and my) claim? Thanks for your help. David Davenport

-- David Davenport (daviddport@earthlink.net), August 03, 1999

Answers

Did the Federal Reserve allow the money supply to decline steeply between 1929 and 1933?

First of all, it is certainly the case that the Fed took a bunch of steps to expand the money supply between 1929 and 1933...

And it is certainly the case that the Fed thought that it was being aggressive, and dangerously so--that it was sailing close to the edge of putting the U.S.'s ability to remain on the gold standard at risk, and to igniting inflation.

In retrospect it seems to have been clearly wrong.

Nevertheless, "allowed" seems to me to carry the wrong nuance. I would prefer something like "Working with an inaccurate model of the economy--blinded by the ideology of the gold standard view of the world--the Federal Reserve was unwilling to take sufficiently strong attempts to stem the decline in the money supply..."

Brad DeLon

-- Brad DeLong (delong@econ.berkeley.edu), August 11, 1999.