(This is the second installment of a three-part essay. The first part is here.) Big Engines that Couldn't Although Hoover's Reconstruction Finance Corporation (RFC) was "more largely a banker's loan bank than anything else" (Ebersole 1933, 477), financial institutions were never the only firms eligible for its support. Railroads were an important exception from the start, though they were so mainly because financial institutions, commercial banks, and insurance companies especially, were railroads' main investors. Thanks to New York and other state regulatory authorities' inclusion of many rai ..read more

(In writing this series, I allowed myself to skip over some topics. But now that I'm turning the series into a book, to be published by the University of Chicago Press, I have to close those gaps. The most important gap by far concerns the Reconstruction Finance Corporation. Although the RFC was originally established by Herbert Hoover, the Roosevelt administration not only allowed it to survive but turned it into the largest and most powerful of all New Deal agencies. Hence a three-part essay, of which this is the first installment.) Hoover's New Deal There are few more successful examples in ..read more

What finally brought the Great Depression to an end? We've seen that, whatever it was, it took place not during the 30s but sometime between then and the end of World War II, when a remarkable postwar revival occurred instead of the renewed depression many feared. We've also seen that, while postwar fiscal and monetary policies weren't austere to the point of preventing that revival, they alone can't explain it, because they can't explain the reawakening of private business investment from its decade-and-a-half-long slumber. Animal Spirits To get to the bottom of that reawakening, we must firs ..read more

After an interruption due mostly to my move to Spain, I'm pleased to be back in the saddle again, wrapping up my series on the New Deal. I ended a previous installment of this series by observing that, despite many dire forecasts, the U.S. economy avoided a severe, post-World War II depression, and "appeared to do so with very little help from the federal government." In particular, while the federal government drastically reduced its military expenditures as soon as the war ended, it didn't make up for that reduction with any corresponding increase in public works or other peacetime spending ..read more

After an interruption due mostly to my move to Spain, I'm pleased to be back in the saddle again, wrapping up my series on the New Deal. I ended a previous installment of this series by observing that, despite many dire forecasts, the U.S. economy avoided a severe, post-World War II depression, and "appeared to do so with very little help from the federal government." In particular, while the federal government drastically reduced its military expenditures as soon as the war ended, it didn't make up for that reduction with any corresponding increase in public works or other peacetime spending ..read more

My last post argued that, despite what Diamond and Dybvig's famous theory suggests, bank runs have seldom proven fatal to otherwise sound banks. Instead, when people run on a bank, it's usually because it's already in hot water. In response to that post, a Twitter correspondent wondered whether the Panic of 1907—the proximate cause of the reform efforts culminating in the Fed's establishment—was an exception to my claim, and therefore evidence of the inherent vulnerability of fractional reserve banking. The gist of my two-tweet reply was that it wasn't. But since 560 characters hardly allowed ..read more

The 2022 Nobel Prize in Economics is to be shared by Ben S. Bernanke, Douglas W. Diamond, and Philip H. Dybvig, “for research on banks and financial crises.” Diamond and Dybvig are best known for their 1983 article, “Bank Runs, Deposit Insurance, and Liquidity,” in which they claim to have shown that purely voluntary bank deposit contracts cannot achieve the optimal degree of risk sharing in a world of uncertain consumption timing, but that the optimal outcome is attainable with tax-backed deposit insurance. They conclude that “government deposit insurance can improve on the best allocations t ..read more

On October 10th, Douglas Diamond and Philip Dybvig won the Sveriges Riksbank Prize in Economic Sciences, sharing it with Ben Bernanke "for research on banks and financial crises.” According to the prize committee, Diamond and Dybvig's research showed how the combination of borrowing short and lending long exposes even sound banks to runs, since the merest rumor  of a run can become "a self-fulfilling prophecy." "These dangerous dynamics," the committee wrote, "can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks." Exactly one m ..read more

By the start of 1948, there could no longer be any doubt: the Great Depression wasn't coming back. Instead of collapsing at war's end, as many feared it would, combined government and private spending (as measured by nominal Gross Domestic Product) hardly budged between 1945 and 1946, and started climbing again thereafter. Consequently, as we've seen, the unemployment rate ended up being as low as it had been in the latter 1920s; and the consumer price level, far from falling again as many feared it would, rose at alarming rates once controls were lifted, settling down by the end of the decade ..read more

In a recent Bloomberg column, former New York Fed President Bill Dudley echoes a conventional Fed narrative, contrasting Fed interest rate cycles under two supposedly distinct Chairmen. “Powell will need to find a way to persuade [markets] that he has no intention of behaving like Arthur Burns (the Fed chair who relented prematurely in the 1970s),” writes Dudley, “lest he later be forced to act like Paul Volcker—who had to correct Burns’s mistake by putting the economy through two recessions.” In this familiar parable, Arthur Burns (Fed Chairman from Jan 21, 1970 to March 8, 1978) is depicted ..read more