hat there was no improvement. Obvert Lucas made a key insight into the difficulties of managing the economy. Looking at post-World War II business Cycles, he argued that if one could choose between smoothing out the cycles completely and increasing the annual economic Growth by 0.1%, the latter would make people better off overall. As we consider the different policy options, it is important to keep this insight in mind as one more trade off that has to be considered. The Federal Reserve Board was created in 1913. Ostensibly, it was to act as the lender of last resort to prevent bank panics like the one that had occurred in 1907. Although some conspiracy minded folks might weave elaborate tales regarding its Creation, the reason is rather straightforward. The big banks simply wanted government protection and bailouts and were more than willing to endure a little government regulation in return. Like the Interstate Commerce Commission before it, the Federal Government would be staffed with people from the industry that it was supposedly a watchdog over and who would most likely feel that what's good for banks are good for America? Throughout the years preceding the Stock Market crash, the Federal Government did just that. The Federal Government set below market interest rates and low reserve requirements that all favored the big banks. The money supplies actual Increased by about 60% during this time. The phrase "buying on margin" entered the American vocabulary at this time as more and more Americans over-extended themselves to take advantage of the soaring stock market. So what went wrong? It was in 1929 that the Federal Government realized that it could not sustain its current policy. When it started to raise Interest rates, the whole house of cards collapsed. The Stock Market crashed and the bank panics began. But what would make this depression worse than all the rest? There was a depression in 1921, but no one remembers that one. W...
