THE 1930 BANK CRISIS March 21, 2008Posted by wmmbb in Social Environment.
The nature of things, I suppose, is that we are likely for fall for general assumptions, which sometimes turn out to be incorrect, and we desire simple explanations we can understand. Take the example of the Stock Market Crash of 1929, which I had believed had started the Great Depression. I knew that Milton Friedman had studied the flow of money, but I did not know what Paul Krugman lucidly points out in The New York Times:
We chose to forget what happened in the 1930s — and having refused to learn from history, we’re repeating it.
Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.
This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.
Paul Krugman then goes on to describe how banks must balance the competing needs of borrowers and lenders, and how over time in the search for greater returns they ways and means of lifting restrictions on lending. So, it would seem, the economy requires regulation to work or else the tendency if for it to degenerate, as we see now in the US, into “catastrophic failure”.
The lesson I draw from this example is to be cautious about ideologies as guides to behavior without careful consideration of foreseeable effects. A principle that could be equally applied to my ideology as well as others.