Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit
Kubik, Paul J., Journal of Economic Issues
Scholarly debate over the role played by the Federal Reserve System in the Great Depression has been extensive. Concern has focused, to a large extent, on the causal role played by monetary variables in the economic contraction.(1) Within a second, distinct tradition, attention has been devoted to the thought underlying Federal Reserve System (hereafter FRS) actions during the downturn.(2) Of paramount importance to the latter discussion is the question of why FRS officials chose not to adopt a more active, interventionist policy stance during the early years of the contraction. As Epstein and Ferguson note,
for two long years [1930-31] the Fed maintained [a] posture of Jovian indifference . . . On occasion the New York Fed promoted very modest increases in liquidity; discount rates were lowered and flurries of open market purchases occurred, but nothing more [Epstein and Ferguson 1984, 958].
The failure of the FRS to act decisively in the early years of the depression has been attributed to various factors. The inaction of the Fed is traced by Friedman and Schwartz to "the shift of power within the System [from the Federal Reserve Bank of New York to the F.R. Board] and the lack of understanding and experience of the individuals to whom the power shifted" [Friedman and Schwartz 1963, 411]. Had FRS officials simply followed the guidelines established during the recessions of 1923-24 and 1926-27, they contend, the collapse of the 1930s could have been avoided. This argument has been persuasively challenged, however, by work that has attempted to place FRS thinking within "the economic, financial, political and intellectual environments of the period" [Chandler 1971, 93]. Prominent within this tradition is the view that the actions undertaken by the FRS during the recessions of the 1920s and the relative inaction of the early 1930s are explained by well-reasoned contemporary concerns over the reestablishment and maintenance of the international gold standard [Wicker 1966]. This article follows in the latter tradition, presenting the argument that valuable insights into FRS behavior can be gained from an examination of the relationship between interwar attitudes regarding consumption, saving and consumer credit and Federal Reserve policy during the early years of the Great Depression.
During the interwar years, dramatic changes occurred in household spending and credit patterns. The development of a wide array of new consumer durable items, e.g., the radio, the automobile, and various household electrical appliances, was matched by the development and diffusion of innovative credit devices and selling techniques, including, most prominently, installment financing.(3) These highly visible developments generated expressions of concern from all elements of American society.(4) One source of disquiet was the belief that the rapid expansion of installment credit during the 1920s had "loaded the masses with debts and obligations," fueling an excessive expansion of consumption spending, and thereby contributed to the severity of the interwar economic boom and collapse [Chapman 1936, 307]. This view, coupled with the observation that a dramatic decline in consumption spending played a significant role in the Great Depression - one prominent explanation suggests that a reduction in autonomous consumption expenditure was the causal factor in the economic collapse of the period-justifies an examination of FRS attitudes toward consumption and consumer credit.(5)
Evidence drawn from the minutes of the Federal Reserve Board, Open Market Investment Committee, and Open Market Policy Conference meetings of 1922-33 and the personal papers of a number of prominent Federal Reserve officials will be used to show that the attitudes of these individuals paralleled those of their contemporaries. These attitudes help explain why central bank officials expressed the view that a period of debt and asset liquidation was crucial to ensuring the long-term health of the U. …