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A Country That Doesn’t Understand its Own History is .

A country that doesn’t understand its own history is not well equipped to deal with its future. The Great Depression was not a failure of the old order. It was the failure of the new order that had just begun.

The Federal Reserve is the most powerful institution of a new order that believed in the efficacy of government and its ability to do good. The same Federal Reserve caused the Great Depression when its wise men made a series of cumulative mistakes that contracted the money supply by one-third and wiped out purchasing power in an unprecedented fashion.

Economists could not at first explain the Depression because they were unaware of the dramatic shrinkage in the quantity of money. It was not until Friedman and Schwartz dug into the facts that the culpability of the Federal Reserve became known. Moreover, most economists found this culpability to be unwelcome information. In the 1960s economists were uniformly Keynesian in outlook. They were emotionally supportive of government intervention, and their human capital was invested in policies that rested on their belief in the effectiveness of government action. Although they could not refute the evidence, they did not warmly endorse the revelation that the Fed had caused the Great Depression.

So the great disconnect remains between the history books and the success of capitalism. By the mid-twentieth century, no country thought it could succeed with capitalism. By the beginning of the twenty-first century, no country thinks it can succeed without it.

Mistakes play a dramatic role in history. The Fed’s mistakes led to others even more serious — the New Deal and the massive delegation of legislative authority that breached the separation of powers. Here, then, is the history of those terrible mistakes, offered in the hope that it will challenge historians to abandon their ideologies, return to their craft, and give us a history that will better guide our future.

The economics of the Great Depression

In one of the great paradoxes of human history, a federal regulatory institution — created for the purpose of stabilizing the banking system and, thereby, the overall economy by functioning as a lender of last resort — caused the worst depression in our history. President Woodrow Wilson promised that the Federal Reserve Act of 1913 would provide the economy with a “Supreme Court of Finance” that would ensure the liquidity for economic growth and prosperity. Instead, the Federal Reserve collapsed purchasing power and forced 25 percent of the workforce into unemployment. The inattention and incompetence that caused this disaster are so great as to warrant, in the words of economist Clark Warburton, “a charge of lack of adherence to the intent of the law.”

http://www.hoover.org/publications/policy-review/article/6214

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Good article.

Thanks for posting.