The New Deal and Recovery, Part 5: The Banking Crisis

George SelginToday, when we speak of ways to fight recessions, two options inevitably take pride of place: expansionary Fed policy (meaning lower interest rates or more asset purchases or both) and expansionary fiscal policy (more government spending or lower taxes or both).But if you ' ve been keeping up withthis series, you ' ll know that, although the U.S. economy rebounded between March 1933 and early 1937, neither expansionaryfiscal policy norFed actions of the sort we count on today deserve much credit for that rebound. Instead, the Treasury and the Fed played only bit parts, while the spotlight shone on FDR and his virtuoso gambol with gold.FDR ' s handling of gold helped the U.S. economy recover from the Great Depression in part by getting the precious metal to flow into it, countering the persistent effects of a previous gold drain. That drain led to a nationwide banking crisis that brought the U.S. economy to its knees just before FDR took office. Before I can explain how, and to what extent, FDR ' s gold policies contributed to the recovery, we must step back in time to consider the causes of the banking crisis, including the part gold played in it.A Weak Banking SystemTo understand how the world ' s largest economy ended up shutting-down its entire banking system, one must first be aware of a long-standing defect of that system and of how it led, first to the proliferation of small and under-diversified banks, and then to as many bank failures.That crucial defect,...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs