An alternative to ?A public choice theory of the Great Contraction?

Abstract

In the October 1988 edition of this journal Anderson, Shughart and Tollison (1988: 4) argued that "restrictive monetary policy of the Fed in the 1929-1933 period was ... rational, self-interested behavior." They contend that what Friedman and Schwartz wrongly interpreted as inept monetary policy was actually the calculated campaign of a bureaucracy bent on consolidating its power base. They imply that the Federal Reserve Board of Governors, in order to purge nonmember banks, purposely disregarded policy options that would have greatly reduced bank failures, increased the money supply, and hastened economic recovery. Anderson et al. (hereafter AST their regressions a meaningless mathematical exercise; and their public choice interpretation of Fed intentions, a mirage. Although the percentage of commercial banks belonging to the Fed steadily increased during the Great Contraction, AS&T's 5 to 1 failure rate ratio is seriously misleading. It is based upon a severely limited historical context and misinterpretations of both hazard rates and rates of change.