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The Great Depression was a time of great suffering for many Americans during the 1930s. It began in 1929 during the great crash of the stock market. This followed a period of unprecedented wealth and spending, where regular people purchased stocks and other financial assets, and institutions took out large loans to expand their businesses and pay for expenses. The public was assured that the good times would last forever, not seeing the impending doom around the corner. When the bust finally came, people cashed in their stock options and rushed to the banks to retract their savings to receive hard currency. This started a "run" on banks, in which everyone tried to take out their money all at once, exceeding the actual amount of money the banks kept at the time. This led to a collapse of the financial system which didn't completely recover until the great war.

One good thing that came out of this period was the Federal Reserve, a central bank which was created in 1913 in response to a series of financial panics. Its roles and responsibilities expanded after the Depression. However, there were previous institutions that operated similarly to the Federal Reserve, called the First and Second bank of the United States. They were the central banks of their day, with their essential functions being to regulate the public credit issued by private banking institutions through the fiscal duties it performed for the U.S. Treasury, and to establish a sound and stable national currency. This was until the Age of Jackson, in which President Andrew Jackson refused to renew the charter necessary for its existence. Fortunately, there lies an easy solution to this issue. An attempted assassination of the president took place on January 30, 1835, in which he survived. In this world, the assassination took place, preventing Jackson's democrats from rising to power and allowing the Whig party to dominate the political system. As they were supportive of the bank, it was able to renew its charter and survive. However, the bank was deeply unpopular with the American people, who saw it as made up of a few rich men who were corrupt and took advantage of the common man. It is only a matter of time before another man comes along and tries the same thing, putting the bank in jeopardy.

With the bank surviving into the 20th century, what steps could it have taken to prevent the Great Depression of the 1930s from happening?

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    $\begingroup$ The Banks of the United States, both the First and the Second, were not central banks. They did not behave like central banks, they did not have the powers normally associated with central banks, they did not have the goals of central banks. They were created for the purpose of controlling the public debt of the United States, and, in the process, enriching a handful of very wealthy American and European investors. The Bank of the United States did not, and could not, regulate private credit. What exactly could it do avoid the Great Depression which the USA could not do without it? $\endgroup$
    – AlexP
    Commented Jan 16, 2022 at 23:55

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Question presupposes several things, which are on the face incorrect:

  1. Fact that FED was a good thing coming out of the depression. In fact, it can be convincingly argued that it was the FED that enabled the unprecedented credit expansion, that led to a bubble of 1920s and then subsequent crash of 1929:

The spectacular crash of 1929 followed five years of reckless credit expansion by the Federal Reserve System under the Coolidge administration. In 1924, after a sharp decline in business, the Reserve banks suddenly created some 500 million in new credit, which led to a bank credit expansion of over 4 billion in less than one year. (The Great Depression - Hans F. Sennholz)

  1. FED had a stabilizing effect on banking system and limited number of bank runs. It may actually be true that the number of bank runs fell, after FED has been established, but the fact that they happened in the first place was directly due to the financial regulations at the time, forbidding banks cooperating across state lines. Had this not had been the case, the banks that experienced runs could be capitalized by other banks of the group. Anyway, this point is largely moot after FDR introduced FDIC.

There has been a veritable revolution in the attitude of the nation's economists, as well as the public, toward our banking system. Ever since 1933, it was a stem dogma—a virtual article of faith—among economic textbooks, financial writers, and all establishment economists from Keynesians to Milton Friedman, that our commercial banking system was super-safe. Because of the wise establishment of the Federal Deposit Insurance Corporation in 1933, that dread scourge—the bank run—was a thing of the reactionary past. Depositors are now safe because the FDIC "insures," that is, guarantees, all bank deposits. Those of us who kept warning that the banking system was inherently unsound and even insolvent were considered nuts and crackpots, not in tune with the new dispensation. (Bank Crisis - Murray N. Rothbard.)

  1. That the crash happened in 1929 and USA didn't recover until 1945 (or 1941, depending on the demagogue arguing the point). The undisputable fact was that this crash would (and actually was coming to an end anyway, albeit much more anemically) by the end of 1930, had it not been for the ill-considered and largely unnecessary Hoover interventions. In 1932 the crisis was basically over and economy was on the way to healthy recovery, when FDR instituted his New Deal, which doubled-, tripled- and then quadrupled-down on Hoover's policies. It was in fact FDR who caused the Great Depression, and it did not end until the end of 1945, when again (on which below) US Government didn't try to help the economy and it recovered in no time, paving way to the great economy of the 1950s.

However, when Franklin Delano Roosevelt assumed the presidency, he, too, fought the economy all the way. In his first 100 days, he swung hard at the profit order. Instead of clearing away the prosperity barriers erected by his predecessor, he built new ones of his own. He struck in every known way at the integrity of the US dollar through quantitative increases and qualitative deterioration. He seized the people's gold holdings and subsequently devalued the dollar by 40 percent. (The Great Depression - Hans F. Sennholz)

This last conclusion—that the abandonment of FDR’s policies “coincided” with the recovery of the 1940s is very well documented by another author who is also ignored by Cole and Ohanian, Robert Higgs. In “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War” (Independent Review, Spring 1997), Higgs showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from 98.4 billion in 1945 to 33 billion in 1948, that brought forth the economic recovery. Private-sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in eighteen years (The Hoover-Roosevelt Depression - Mark Thornton, Joseph T. Salerno

The example of how NOT to recover economy would be the said FDR's New Deal, but example on HOW TO DO IT is the recession of 1919-1920, when US economy, in terms of key indicators, went into crisis worse than Great Depression, and yet US GOvernment elected to do nothing, effectively ending the crisis in less than 18 months (The Forgotten Depression of 1920 - Thomas E. Woods, Jr.)

So, by my recounting, the surest way to avoid the Great Depression would be to pull the plug on FED before 1924. No Central Bank (private [FED included] or state-owned) ever had a positive effect on any state's economy ever. And there's very damning evidence that ties central bank with inflation, economic troubles and endless misery of the poorest all around the globe - Bank of England, for example, and Banque Royale in France of John Law fame for another example.. )

By the same token, since the Second B.U.S was proposed with old and new arguments that

that without a national bank the government would have great difficulty raising money during a war or national emergency and that only the government could provide a sound national "circulating medium." They added two new arguments. A government bank could pressure the state banks to resume specie payments and curtail their excessive note issues" (The Feds Before the Fed - H.A. Scott Trask),

the outcome of the actions of it would not be any different than the FED's ones were, because:

As if to confirm the fears of its opponents, the federal bank entered into a collusive agreement with the private banks of the Atlantic cities. The banks would agree to resume paying specie on February 20, 1817, on the dual condition that the branch banks would not require of them the payment of balances in hard money and would issue currency and make discounts to compensate for the modest curtailments being made by the city banks. Both groups seemed to think that a nominal resumption coupled with the partial substitution of national bank notes for state ones would restore public confidence in the currency and cure the evil of depreciation.

In the words of Condy Raguet, then a hard-money Pennsylvania state senator, "the directors of the new bank fancied that if they could only persuade the city banks to call that a sound currency which was in reality an unsound one, the evil of depreciation would be cured." In other words, they thought the state of the currency was all about psychology, not economic law. (The Feds Before the Fed - H.A. Scott Trask)

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  • $\begingroup$ This could come off as a bit political (but I'm not disagreeing). You might want to add some references. $\endgroup$
    – DWKraus
    Commented Jan 17, 2022 at 20:31
  • $\begingroup$ @DWKraus - It's a tragedy when asking for sources is political. But I'm not bothered - it's called science. Though I would point out that all I wrote is not an obscure field of economic science... I should not, honestly, have to do it... ;-) $\endgroup$
    – AcePL
    Commented Jan 18, 2022 at 9:35
  • $\begingroup$ Well, hey, it IS science, so you at least have sources to cite! $\endgroup$
    – DWKraus
    Commented Jan 18, 2022 at 11:59
  • $\begingroup$ @DWKraus - as long as I don't have to cite sources when debating logic, I'm good. Though I had an answer once where I was thinking I will need to source the 2+2=4 statement... Literally... Wasn't looking forward to explaining numbers theory... $\endgroup$
    – AcePL
    Commented Jan 18, 2022 at 15:47
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Move to a fiat currency at any time before the depression.

The widespread practice of tying a currency to precious metals contributed to the great depression. It also made it difficult for countries, including the USA to magically increase the money supply, which they've done in every market crash since.

Would they have done this - probably not? The banks weren't Federal Reserve lite. They couldn't force people to accept their money. "Greenbacks" were invented during the Civil War and had to compete with banknotes issued by state and local banks.

They could also hoard gold and use it to buy failing banks and keep them in business

What they might have actually considered doing is hoarding gold. That's something governments have done before. They'd essentially be the FDIC, and when a bank fails they'd just show up and buy it, then give everyone their deposits.

EDIT

The Bank of the United States was just that - the bank where the government deposited and withdrew money. By most accounts, it was government cronyism.

Part of the reason the Great Depression is famous is because of all the government programs put in place like the FDIC to make sure it never happened again. That's why the answer is 2 of the things the U.S. did to solve the depression

  1. Get off the gold standard so the government could arbitrarily increase the money supply.

  2. Insure the deposits of most Americans so banks could re-open and start lending again.

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  • $\begingroup$ The (Second) Bank of the United States was not a branch of the government. It was a privileged private financial institution, in which the goverment held only a minority stake. The point being that while the investors in the Bank were indeed very rich, they were nowhere rich enough to hoard enough gold... $\endgroup$
    – AlexP
    Commented Jan 17, 2022 at 9:14
  • $\begingroup$ The tying of currency to precious metals wasn't really serious contributor to the Great depression. Yes, it had some role, and much more so in UK than in US, but it was largely due to the government MOVING BACK to so-called "gold standard", and not introducing it. Especially in UK because there the move back didn't take into account 10 years or so of credit expansion and tried to go back to standard IN OLD PRICES, which collapsed the system. Also, in 1932 FDR introduced ban on owning investment gold by private actors, so this point is largely moot, as well. $\endgroup$
    – AcePL
    Commented Jan 17, 2022 at 10:28
  • $\begingroup$ ...and going back to the original thought in the answer: even if the increase in money supply would be the cure to the depression, it is but just one method. If we have "gold-backed" currency, the other way is to free prices-including wages-which obviously was not possible. As for Greenbacks - your argument is incorrect, because Congress made laws making it legal tender in certain operations, distorting the monetary system rather extremely... And Last-the 2 things you listed went into effect in 1932-33 and Depression raged for quite some time after that... $\endgroup$
    – AcePL
    Commented Apr 29, 2022 at 13:14
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This question presumes that a Great Depression can be prevented.

There are multiple factors that cause any depression, but they interact in a chaotic manner that precludes full control. In most cases, financial efforts to prevent a depression generally delay and make the depression worse. (That effect has been known since biblical times. See Amos 6:3.) You can find multiple arguments whether any specific financial effort, the Fed, Government spending, etc., had which effect but the fact is that such a chaotic system can't be controlled. It can only be influenced, and the effect of such influence can never be predicted.

A depression is not just a financial breakdown. It is also a social breakdown. A financial problem in New York City exposed the breakdown between city and rural and between the social classes in our country. Our rural economy had been suffering for years before the 1929 crash. A stock market crash exposed how much of our middle-class wealth was based on vapor. (Any parallels to today should be taken with concern.) An attitude of "every person for themselves" made the financial problem far worse.

In most cases, it is not the banking system that can reduce, modify, or prevent a depression. It is the justice system that can do it. It is our justice system that helps to knit society together so that it can withstand hard knocks. A good justice system will prevent the rich from being successful in their attempts to bribe police, judges, and politicians. We also need a free press that can expose the attempts to give tax money and tax breaks to special interests. Tax breaks and special interests emotionally divide our country and help to destroy us. (Indeed, it was the lavish tax breaks that broke up the Assyrian Empire and allowed it to be conquered.) When we stand together as American citizens, we can withstand all sorts of stock market crashes or other financial problems.

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  • $\begingroup$ The argument that economic factors act in chaotic manner is incorrect. That would imply that economic actors don't know what they're doing all the time, which is ridiculous. In fact, economic market acts in very well defined way and by limited set of rules. However, you're entirely correct when asserting that there is a very definite chaotic element in that system. But this element is government intervention - badly timed, badly designed and never kept for a short a time as it was advertised. $\endgroup$
    – AcePL
    Commented Jan 18, 2022 at 9:55
  • $\begingroup$ I use "chaotic" instead of "random" because in a chaotic system, rational actions seem to work for a while until they don't. Factors that make economics chaotic include weather, foreign investors and foreign government actions, as well as population opinions and beliefs that change money flow in unpredicted ways. $\endgroup$
    – David R
    Commented Jan 18, 2022 at 15:13
  • $\begingroup$ Ah, I see. Yes, chaos theory has it's fingers everywhere and economics is, if anything, more susceptible than other disciplines. Economy is human interactions, basically, and once I heard that if enough people would go to horoscopes to divine next week's state of the markets, everyone would study astrology. I agree wit h your premise with caveat that this influence is by definition limited, because almost any random factor can be predicted (that is: astute entrepeneur is prepared for a wide range of them, so he accounts for the possibility of some, and not guess the probability of any). $\endgroup$
    – AcePL
    Commented Apr 29, 2022 at 12:59
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This question boils down to

X'ing caused Y, how do I prevent Y?

For which a proper answer is

Don't X

So

This followed a period of unprecedented wealth and spending, where regular people purchased stocks and other financial assets, and institutions took out large loans to expand their businesses and pay for expenses.

Don't allow people nor institutions to take large loans to expand their businesses, at least not how they did it in the 1920's (and 2000's, remember 2008). If a bank is going to hand out a loan it should require a reasonable collateral. If a manager allows someone to take a very large loan without a collateral, have that manager hanged by noon on a very busy public place. The economical growth of the nation will slow down but it will become sustainable.

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