Monetary Policy

Warnings of the Great Depression in 'The Business Week'


Unemployed men queue outside a New York soup kitchen in 1930

Photograph by Universal History Archive/Getty Images

Unemployed men queue outside a New York soup kitchen in 1930

Bloomberg Businessweek has an illustrious history stretching back to September 1929, when it was launched just one month before the stock market crash that helped usher in the Great Depression. A new study uses quotations from early issues of the magazine—then called The Business Week—to sort out competing explanations for the causes of America’s worst economic cataclysm.A replica of the first issue of 'The Business Week'A replica of the first issue of 'The Business Week'

As detailed in the new research, the editors of The Business Week understood that the Federal Reserve was making a huge mistake by keeping money too tight. Editorials from 1930 and 1931 had headlines like “No Wampum” and “More Juice, Please.”

Here is an excerpt from one impassioned plea for easier money issued on Aug. 6, 1930: “[T]he Federal Reserve system, instead of continuing a helpful release of credit to counteract the creeping paralysis of deflation, has done nothing.”

And this, from Sept. 9, 1931, refers to signs of economic weakness: “They are symptoms of … a sudden, mysterious, universal shrinkage and shortage of the money and credit medium by which everything is exchanged and the supply of which rests solely in the hands of the world’s banking institutions.”

The new study focusing on The Business Week is by the wife-and-husband team of Christina and David Romer, who are economists at the University of California, Berkeley. Christina Romer served as the first chair of President Barack Obama’s Council of Economic Advisers. The Romers’ research was published in January as a National Bureau of Economic Research working paper entitled “The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression.”

The Romers’ reason for poring over old copies of our predecessor magazine takes a bit of explanation. Their goal was to understand if Milton Friedman and Anna Schwartz were correct in essentially blaming the Federal Reserve for the Depression, which they did in their magisterial 1963 work, A Monetary History of the United States.

One hurdle for Friedman’s followers is to explain why tight money could have been a problem if interest rates were falling through much of the period in question. Friedmanistas typically respond that even though nominal rates were low, the real cost of money was prohibitively high because prices were falling. Even a super-low interest rate is unaffordable if you expect your wages to fall (as a worker) or the prices of your products to fall (as a business).

O.K., say the Romers in their paper, but what if the expected deflation back then were the result of forces beyond the Federal Reserve’s control, such as sudden drops in output caused by non-monetary factors? If so, then the Fed of the 1930s would be off the hook.

That’s where The Business Week comes in. By citing unsigned editorials in the magazine, the Romers demonstrate that the expectations of deflation among well-informed observers were indeed driven by the Fed’s monetary contraction, not outside factors. This appears to show that the Fed really was to blame and that Friedman and Schwartz were correct. “If this result holds up in other narrative sources, it would provide important confirmation of the monetary explanation of the Depression,” the Romers write.

“The deflationists are in the saddle,” The Business Week editors wrote in October 1930. “Our idle gold hoard piles up without increasing the means of payment by credit expansion because of paralysis of banking policy, thus prolonging price deflation,” they wrote on the cover of the magazine the following spring.

Too bad the Fed—and other central banks—didn’t listen.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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