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Achieving Economic Stability:
Lessons From the Crash of 1929

Federal Reserve Bank of Minneapolis
1987 Annual Report

CONTENTS
President's Message / 1
Achieving Economic Stability:
Lessons From the Crash of 1929 / 3
Statem ent of Condition / 19
Earnings and Expenses / 20
Directors / 21
Officers / 22







President's Message

Th e stock m arket crash of O cto b er 1987 w as a forceful rem inder
of th e fragility and vulnerability of th e financial system . M ore­
over, it raised th e sp ecter of 1929 and th e G reat D epression,
and as a result prom pted a reassessm en t of prevailing econom ic
circu m stances and policies. The essay in this A nnual Report,
"A chievin g Econom ic Stability: L essons From th e Crash of 1929,"
con tribu tes to this reassessm en t.
Th e preponderance of th e essay is devoted to alternative
explanations of th e D epression and th e policy recom m endations
th at follow from them . The recom m endations, in sum m ary, em ­
phasize adequ ate m on ey supply grow th, m ain tenan ce of world
trade, and th e significance of a stable and sm oothly functioning
banking system .
O ur purpose in delving in to th ese m atters is to suggest that
th ere is n oth in g inevitable about an o th er depression, in part
becau se appropriate public policy resp onses can help to offset
th e deleterious co n seq u en ces of th e break in stock prices.
Furtherm ore, th e policies required are n ot extraordinary in any
way; rather, th ey co n stitu te th e application of experience and
know ledge gained over th e past sixty years. C om peting eco ­
nom ic objectives, how ever, m ay raise form idable challenges to
im plem enting th ese policies.

Gary H. Stern
President







Achieving Economic Stability:
Lessons From the Crash of 1929

r--

^

T h e sharp break in stock prices last fall appropriately com pelled a
reassessm en t of econ om ic p ro sp ects for th e year ahead. In som e
qu arters, an alysis has gone b ey o n d m ere reassessm en t to raise
fu nd am en tal issu es abou t th e likelihood of rep eating th e G reat
D ep ression of th e 1930s. The sp ecter of th e G reat D epression,
to g eth er w ith th e stock m arket crash o f O cto b er 19, 1987, has
u n d erstan d ab ly raised co n cern abou t th e p ossibility of an oth er
m ajo r eco n om ic collapse. This co n cern m erits close and sober
scru tin y b ecau se of th e p o ten tial to m isu n d erstan d w hat h a p ­
p en ed during th e earlier episod e and, in turn, to devise ineffective
and inap p rop riate p olicy resp onses. M ore con stru ctively, proper
p ersp ectiv e on 1929 should be valu able in determ in in g th e policy
cou rse for 1988 and beyond.

In This Essay:
To attain this perspective, we first review the experience of the October

The specter of the Great
Depression, together with the
stock market crash
of October 19,1987, has
understandably raised concern
about the possibility of another
major economic collapse.




1929 market Crash and of the Great Depression with the intent of
portraying a comprehensive picture. With this picture in place, alterna­
tive explanations of the Depression can be considered to reach some
tentative conclusions about the relative merits of these explanations.
Having identified significant factors which contributed to the economic
collapse, an attempt is made to relate them to current circumstances and
developments as a guide to policies to pursue or avoid. It should be
emphasized that, while the review of the 1929 Crash and the Depression
identifies policy errors, both of commission and omission, avoidance of
such errors does not assure satisfactory economic performance in the
year ahead. The cyclical and institutional setting today is obviously much
different from 1929, so that assistance from even a deep and complete
understanding of that earlier episode is limited. Indeed, a review of the
situation raises concerns about some of the fundamentals of our current
economic circumstances and reemphasizes the value of pursuing, here
and abroad, sound and consistent macroeconomic policies.
The conclusion underscores the principal policy recommendations which
emerge. These include:
■ maintaining the stability of the banking system;
■ supporting normal credit extension practices and smoothly
functioning financial markets;
■ assuring adequate growth of the money supply; and
■ sustaining and enhancing international trade.
These recommendations, although in many ways unremarkable, may
well prove difficult to implement. Inherent competition among various
economic objectives, such as price stability, income stability, income
equity, and economic growth, as well as disagreements about the correct
way to achieve these goals, will provide a formidable challenge.
Even today, evidence on the Great Depression is not so conclusive as to
permit wholly objective and unequivocal interpretation. Therefore, this
essay is sometimes highly subjective. Moreover, in discussing current

circumstances, one necessarily must be selective and put aside a number
of interesting issues. The essay does not, for example, delve into the
causes of the October 1987 decline in stock prices nor attempt to assess
how well the markets performed during that experience. These topics are
taken up at length in the Report of the Presidential Task Force on Market
Mechanisms (the Brady Commission report). Rather, we attempt here to
present a policy maker's view of the lessons of the Crash of October 1929
and the Great Depression and how they can be applied in the aftermath
of the stock price collapse of October 1987.

The Course of the Great Depression
The October 1987 collapse in stock prices conjured visions of 1929 and the
Great Depression. Focus on this period is natural because the 32 percent
decline in stock values between the market closes of October 13 and 19,
1987, was of the magnitude of—indeed, it actually exceeded—the October
1929 debacle. Focus on this period is also appropriate because, despite all
that has been learned since to help assure economic stability, we cannot
be completely confident that history will not repeat itself. Consequently,
this first section reviews events of the Depression era.

Los Angeles Times, Feb. 8, 1929

The stock market Crash of October 1929 is frequently credited with
triggering the Depression. The decline was severe and extended; from
their peak in September 1929, stock prices declined by 87 percent to their
trough in 1932. The performance of the economy over this period was
equally disheartening. Real economic activity declined by about onethird between 1929 and 1933; unemployment climbed to 25 percent of the
labor force; prices in the aggregate dropped by more than 25 percent; the
money supply contracted by over 30 percent; and close to 10,000 banks
suspended operations. Given this performance, it is not surprising that
many consider these years the worst economic trauma in the nation's
history.
Policy makers did not stand idly by as the financial markets and the
economy unraveled. There are questions, though, about the appropriate­
ness and magnitude of their responses. Monetary policy, determined and
conducted then, as now, by the Federal Reserve, became restrictive early
in 1928, as Federal Reserve officials grew increasingly concerned about

New York Stock Exchange Archives




the rapid pace of credit expansion, some of which was fueling stock
market speculation. This policy stance essentially was maintained until
the stock market Crash.

1987

Stock Market: Then and Now

1988

1989

1990

1991

Dow-Jones Industrial Average

Source: Dow Jones and Company, Inc.

Museum of the City of New York

While there has been much
criticism of Federal Reserve policy
in the Depression,
its initial reaction to the October
1929 drop in stock values
appears fully appropriate.




While there has been much criticism of Federal Reserve policy in the
Depression, its initial reaction to the October 1929 drop in stock values
appears fully appropriate. Between October 1929 and February 1930, the
discount rate was reduced from 6 to 4 percent. The money supply jumped
in the immediate aftermath of the Crash, as commercial banks in New
York made loans to securities brokers and dealers in volume. Such
funding satisfied the heightened liquidity demands of nonfinancial
corporations and others that had been financing broker-dealers prior to
the Crash and, of course, it helped securities firms maintain normal
activities and positions.
The increase in required reserves, which necessarily accompanied the
bulge in the money supply resulting from the surge in bank lending to
securities firms, was met in part by sizable open market purchases of U.S.
government securities by the New York Federal Reserve Bank and by
discount window borrowing by New York commercial banks. According
to a senior official of the New York Fed at the time, that bank kept its
“discount window wide open and let it be known that member banks
might borrow freely to establish the reserves required against the large
increase in deposits resulting from the taking over of loans called by
others." As a consequence, the sharp run-up in short-term interest rates

6

that had characterized previous financial crises was avoided in this case.
Money market rates generally declined in the first few months following
October 1929.
By the spring of 1930, however, the distinctly easier monetary policy that
had characterized the Federal Reserve's response to the stock market
decline ended. Subsequent policy is more difficult to describe concisely.
Open market purchases of government securities became very modest
until large purchases were made in 1932. Further, although the discount
rate was reduced between March 1930 and September 1931, it then was
raised on two occasions late that year before falling back once again in
1932.
Percent

Monetary Policy

Millions of $

7

1929-1933
6
5
4
3

. . . the direction of monetary
policy was somewhat ambiguous
over this period, what happened
in financial markets was not.




2

0
-l

1929

1930

1931

1932

1933

*Discount rate for the Federal Reserve Bank of New York
**Net change in Federal Reserve System holdings of United States government securities
Source: Board of Governors of the Federal Reserve System

While the direction of monetary policy was somewhat ambiguous over
this period, what happened in financial markets was not. Three severe
banking panics occurred, the first in late 1930, another in the spring of
1931, and the final crisis in March 1933. Overall, close to 10,000 banks
suspended activity. And in the absence of significant efforts to offset these
failures, the money supply (of which 92 percent consisted of bank
deposits) fell by 31 percent between 1929 and 1933.

Unlike monetary policy and related financial disturbances, fiscal policy
did not play a particularly significant role during the Depression. Federal
government spending, including transfer payments, was small before
and during the 1929-1933 period. Moreover, changes in tax and spending
policies, and resulting fluctuations in the budget deficit, were generally
minor. Perhaps fiscal policy could have done more to combat the
Depression; in the event, it was not a major factor.

Causes of the Depression
K eyn esia n Explanation
There is not, at this point, anything approaching a consensus on the
causes of the depth and duration of the Depression. With the passage of
time, the Keynesian view that an inexplicable contraction in spending—
business investment and personal consumption—led to the collapse in
economic activity has fallen into disfavor. A contraction in spending did
of course occur, but showing that the decline was a cause rather than a
reaction to a deeper economic malady is difficult.
Minnesota Historical Society

A contraction in spending did
of course occur, but showing that
the decline was a cause rather
than a reaction to a deeper
economic malady is difficult




Some claim the stock market collapse of October 1929 was the cause of the
spending contraction, but the evidence is suspect. Quantitatively, the
decline in share values, large and persistent as it was during the
Depression, does not seem sufficient to generate a downturn in the
economy of the scope of 1929-1933, even given the psychological trauma
of the stock market Crash. Furthermore, the economy in fact peaked in
August 1929, two months before the severe decline in stock prices,
suggesting that causality may well have run from economic weakness to
stock prices, rather than vice versa.

T h e M onetarist V ie w
Monetary factors currently dominate thinking about the causes of the
Depression. The conventional wisdom, if there is such a thing, attributes
the severity and extent of the Depression to monetary policy mismanage­
ment, and credits the Federal Reserve with turning a "garden variety"
recession into something much worse. There remains, however, con­
siderable dispute about this conclusion.
The pronounced decline in the money supply between 1929 and 1933,
alluded to earlier, is given a preeminent role in the monetarist explanation

8

Billions of $

Money Supply*

5 0 ------

1929-1933




’ Includes currency held by the public and demand and time deposits at commercial banks.
Source: Friedman, Milton, and Anna Schwartz. A Monetary History o f the United States,
1867-1960. Princeton: Princeton University Press, 1963.

of the Depression. The argument is that, as an empirical matter, the
money stock is a significant determinant of economic developments. Its
fall during the Depression, coupled with a predictable decline in velocity,
led to the sharp contraction in output and nominal income, and the
extraordinary climb in unemployment. Consequently, had the Federal
Reserve been aggressively expansionary, so that growth in the money
stock was maintained during the period, the fall in economic activity
could have been moderated considerably.
This monetarist explanation of the Depression has many adherents, but
nevertheless questions remain. More rapid growth in money may well
have been offset by an even more precipitous decline in velocity during
the Depression, so that the economy's path may not have changed as a
consequence. That is, if the downturn in business activity were deter­
mined largely by nonmonetary factors, more money growth would not
necessarily have ameliorated the problem. "You can lead a horse to water,
but you can't make him drink" is often quoted by those who question the
monetarist interpretation of Fed policy.
In addition, the monetarist explanation does not explicitly specify the
channels through which changes in the money stock affect economic

activity. Presumably, when money is in short supply relative to demand,
there will be upward pressure on interest rates that will curtail consumer
and business spending, as well as money demand. This process helps to
equilibrate the money market and also implies a slowing in the economy.
But it is arguable if this pattern fits events during the Depression all that
well; market interest rates did not rise appreciably until the latter half of
1931, when the decline in the economy was already well under way.
Moreover, the monetarist explanation is subject to the same objection
raised to the Keynesian view. It is not clear if the contraction of the money
supply was a cause of, or reaction to, economic weakness.

Banking Panics

Minnesota Historical Society

Bank Suspensions*

In contradistinction to emphasis on the money supply, a third school of
thought, which gives considerable weight to financial matters in explain­
ing the Depression, focuses on banking panics and the consequences of
the multitude of bank failures that occurred throughout the period. It is
not, however, that some bank creditors and owners lost their invest­
ments, but rather that loans were called by banks experiencing liquidity
Number of Banks
4,500

1929-1933




1929

1930

1931

1932

1933

•Includes all banks closed to the public, either temporarily or permanently, by supervisory
authorities or by the banks' boards of directors on account of financial difficulties, whether
on a so-called moratorium basis or otherwise, unless the closing was under a special
banking holiday declared by civil authorities.
Source: U.S. Bureau of the Census. Historical Statistics o f the United States, Colonial Times to
1970, Bicentennial Edition, Part 2. Washington, D.C.: U.S. Government Printing Office, 1975.

10

and solvency problems and, in a significant number of cases, borrowers
could not readily replace the funding. In these instances, such borrowers,
although perhaps fully credit-worthy, would have had to curtail activities
to adjust to the diminution in financing. Depending on circumstances,
such a curtailment in credit could translate into reductions in orders,
employment, and output that contribute to a prolonged downward spiral
in economic activity.
Emphasis on contraction in financial intermediation and mounting
banking problems is intuitively plausible, if not fully convincing. Such
emphasis provides a more likely channel of influence than focus on the
money supply per se. Without question there were banking crises and
closures during the Depression, and it would not have been surprising if
bankers adopted very conservative lending policies in the wake of the
Crash and the first signs of weakness in business activity. There can be
little doubt that the Crash undermined confidence and instilled a far more
conservative attitude. There is, moreover, some empirical evidence which
can be interpreted as indicative of the significance of banking deteriora­
tion in explaining the depth of the 1929-1933 malaise, but the evidence at
this stage is not overwhelming.

International Factors
To this point in the essay the international dimensions of the Depression
have been largely ignored. But the Depression was a global phenomenon.
The international monetary system of the tim e—the gold exchange
standard—was a fixed-rate system which meant that, as long as the rules
were observed, economic conditions in various countries would be
closely related. Hence, problems in one large economy would be
transmitted to others and, ultimately, could feed back to exacerbate
difficulties in the country of origin.
Museum of the City of New York




Further, the severity of the Depression was in all likelihood magnified by
the Smoot-Hawley tariff imposed by the United States in 1930, and similar
"beggar-thy-neighbor" policies adopted by other countries in response to
U.S. policy. Imposition of such trade barriers and the resulting constric­
tion of international trade appear to have contributed to the worldwide
reduction in employment and output. While protectionism, in and of
itself, may not have caused the Depression, it was clearly a contributory
factor.

11

World Trade*
1929-1933

1929

1930

1931

1932

1933

'Total value of exports for nine major industrialized countries
Source: Woytinsky, E. S. and W. S. Woytinsky. World Commerce and Governments, Trends and
Outlook. New York: The Twentieth Century Fund, 1955.

A ssessing Explanations

. . . it seems unlikely that a break
in stock prices, even a severe one,
is sufficient to send the economy
into depression.




Several conclusions stand out from the 1929-1933 period and the research
devoted to it. First, it seems unlikely that a break in stock prices, even a
severe one, is sufficient to send the economy into depression. The history
of 1929-1933 suggests that the collapse of stock values, although possibly
a trigger mechanism, was not central to the sustained downward spiral in
business activity. Subsequent empirical research has indicated that, while
changes in equity prices have significant wealth effects on consumer
spending, such effects are not so large as to produce the 1929-1933
pattern.
Second, explanations of the Depression which emphasize financial factors
are the most convincing. The trade restrictions of Smoot-Hawley and
"beggar-thy-neighbor" policies more generally were contributors to the
Great Depression, but probably not the major cause. Although a collapse
in international trade can have serious adverse consequences for the level
of economic activity, emphasis on trade barriers alone fails to come to
grips with the collapse of domestic demand which characterized the
period. While Keynesian explanations focus on weakness in demand,
they are also suspect. Whether the weakness was the cause of the
economic downturn or a result of a deeper problem is unclear.

12

...

explanations of the
Depression which emphasize
financial factors are the most
convincing.

The third conclusion, though, is that even financial explanations are not
complete. It is not clear whether it was the persistent decline in the money
stock and its velocity that so disrupted economic activity or, rather, the
series of banking panics in those years that undermined confidence and
resulted in the loss of many institutions and the contraction of credit for
viable businesses and households. Reports of conditions during the
Depression and subsequent research do not as yet enable adequate
discrimination between these alternative financial explanations; it is
probably wise to allow for the veracity of both at this stage.

October 1987: Deja Vu All Over Again
The events of autumn 1987 can be weighed against the history of the early
1930s. On the financial side, there are some striking similarities between
October 1929 (and its immediate aftermath) and October 1987. In the
words of the Brady Commission:
From the close of trading Tuesday, October 13,1987, to the close of
trading Monday, October 19, the Dow Jones Industrial Average
declined by almost one third, representing a loss in the value of all
outstanding United States stocks of approximately $1.0 trillion.
What made this market break extraordinary was the speed with
which prices fell, the unprecedented volume of trading and the
consequent threat to the financial system.

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The fall in the stock market, as well as the tenor of the decline—October
1929 was the Crash, after all—was comparable in the two cases.
Moreover, the Federal Reserve responded to the crises in basically the
same manner. The central bank aggressively supplied liquidity through
open market purchase of U.S. government securities, adding $2.2 billion in
nonborrowed reserves between the reserve periods ended October 7 and
November 4. The Fed also made it clear to commercial banks that the
discount window was available should they encounter unusually heavy
reserve needs. On October 20, the day after the 508-point decline in the
Dow, these actions were accompanied by a statement of Alan Greenspan,
Chairman of the Board of Governors, indicating the System's intentions:
"The Federal Reserve, consistent with its responsibilities as the nation's
central bank, affirmed today its readiness to serve as a source of liquidity
to support the economic and financial system ." The Federal Open Market

13

Committee, the key monetary policy group in the System, met daily via
telephone conference call until October 30.

On the financial side, there are
some striking similarities between
October 1929 (and its immediate
aftermath) and October 1987
Moreover, the Federal Reserve
responded to the crises in
basically the same manner.

In the event, interest rates on short- and long-term instruments dropped
in the wake of the more generous provision of liquidity. For example, the
rate on three-month Treasury bills dropped from 6.74 percent on October
13 to 5.27 percent October 30, the federal funds rate declined by 179 basis
points over this interval, and the rate on 30-year Treasury bonds fell from
9.92 percent to 9.03.
And after some initial hesitation, bank lending to securities firms
expanded substantially during the week of October 19-23. Thus, firms
were able to finance the inventories of securities accumulated as they
satisfied their customers' sell orders.
As described above, aggressive open market purchases had been a
hallmark of the response to October 1929 as well. Moreover, the money
supply bulged in October 1987 as it had in 1929. Nevertheless, in both
cases investor preferences for safe and liquid investments increased as
noted by a distinct widening of interest rate spreads.
Basis Points

Interest Rate Spreads*




*The difference between Moody's Corporate AAA bond yields and the yields on long-term
U.S. government bonds
Source: Board of Governors of the Federal Reserve System and Moody's Investors Service

14

Policies for Future Stability
To this point, a cumulative downward spiral in today's business activity
and in prices has been avoided. Indeed, the resilience of the economy, in
the face of the enormous drop in stock values, has been impressive. A key
issue, however, is selection of policies that will maintain the worldwide
economic expansion and simultaneously extend the moderation in
inflation that has been achieved. And while there may be intellectual
agreement on at least some of the policies that should be adopted to
further these ends, implementation may prove difficult because of
inherent competition, if not conflict, among objectives.

. . . as a practical matter, it is
unlikely that fiscal policy makers
will go too far too fast in the
direction of restraint.

Despite the merits of open
markets, it is not a foregone
conclusion that we will even
maintain those that we have.




A consensus has been building in recent years in favor of reducing
substantially the United States' federal budget deficit, particularly if
better balance in currency values and worldwide trade flows is to be
achieved. To be sure, in view of both the negative wealth effects
associated with the drop in stock values and the reductions to the outlook
made by most forecasters, some may feel that this is not an ideal time to
take major actions toward fiscal restraint. However, the risks of such steps
should not be exaggerated, as the lower interest rates resulting from
budget restraint could offset much of the drag otherwise applied to the
economy. And as a practical matter, it is unlikely that fiscal policy makers
will go too far too fast in the direction of restraint.
The lessons of history, together with recent evidence of improvement in
our foreign trade performance, suggest the overwhelming desirability of
avoiding protectionist legislation in current circumstances, particularly if
it would provoke retaliation from some of our major trading partners. In
the long run, moreover, protectionism is likely to make our domestic
industries less rather than more competitive. But this recommendation in
favor of free trade conflicts with some business and labor sentiment that
competition in the prevailing institutional setting is unfairly tilted in favor
of foreign producers. Despite the merits of open markets, it is not a
foregone conclusion that we will even maintain those that we have.
In the financial sphere, the gap between recommendation and implemen­
tation is perhaps even wider. As discussed above, the experience of
1929-1933 suggests that allowing appreciable declines in the money
supply may be very costly. To be sure, the Depression years do not
unequivocally demonstrate that the decline in money was a principal
cause of the economic collapse, but they do suggest that there are material

15

risks in permitting such weakness in money. It follows, then, that the
Federal Reserve should be sufficiently accommodative to sustain growth
in the money stock.

It follows, then, that the Federal
Reserve should be sufficiently
accomodative to sustain growth
in the money stock.

Unfortunately, this recommendation may conflict with the objective of
maintaining the international value of the dollar or even the more humble
goal of promoting stability in the foreign exchange market. That is, there
may be little room to encourage growth in money without simulta­
neously triggering a flight from the dollar. More fundamentally, such a
policy course could contribute to a reacceleration of inflation, and thus
could risk compromising price stability, the paramount long-run objective
of monetary policy.
The Depression also illustrates the risks to the general economy of
banking crises and, of course, the safety net underpinning the banking
system was materially strengthened, with the introduction of deposit
insurance, as a consequence. Although the number of bank failures has
increased in recent years, the situation cannot accurately be described as
a panic, and such a development seems highly unlikely in view of the
safety net in place and the Federal Reserve's commitment to the safety
and soundness of the banking system.

. . . we should not be overly
sanguine about the financial
situation. It is one thing to
maintain banks and other
financial institutions as viable
entities—it is another to see to it
that they continue to provide
services in their normal fashion
and that financing remains
available to credit-worthy
customers at reasonable terms.




Nevertheless, we should not be overly sanguine about the financial
situation. It is one thing to maintain banks and other financial institutions
as viable entities—it is another to see to it that they continue to provide
services in their normal fashion and that financing remains available to
credit-worthy customers at reasonable terms. Achieving this latter
objective may be more difficult than preventing bank runs or containing
bank failures. Confidence is key; lenders must be reasonably sure, before
they commit funds, that sound economic policies will be pursued and
that the environment will give customers an opportunity to prosper.
Policy makers, of course, can try to assure bankers of this outcome, but
ultimately it is their actions, and the resulting performance of the
economy, that matter. This observation is just another way of saying that
the financial system works best when sound and stable policies are
pursued, and when market participants and business people can count on
such policies. As such, this recommendation is unremarkable, but may
prove far easier to state than to achieve.

16

Conclusion
Such a list of policy
recommendations may seem
unremarkable, in part because the
lessons of the past already have
been taken to heart. Achievement,
however, is likely to prove a
challenge.




On the surface at least, there are striking similarities between events of
October 1929 and October 1987. The traumatic severity of the decline in
equity values, the initial response of the Federal Reserve in terms of
discount window access and open market provision of reserves, and the
response of interest rates and quality spreads bear close resemblance in
the two episodes. Given the way 1929 played out, these observations are
not comforting.
Nevertheless, the similarities should not be exaggerated. The economy
today is quite different—institutionally, structurally, cyclically—from
that of 1929. A contraction in economic activity was under way prior to
the market debacle of October 1929. In contrast, the cyclical expansion in
business that followed the recession of 1981-1982 remains intact today.
Moreover, examination of the Depression years can help us to identify
policies that minimize the risk of a slowdown in economic activity and to
avoid the major errors of the past. In this regard, the principal recom­
mendations that emerge from our admittedly subjective review of history
are:
■ maintain our commitment to the stability of the banking system
through judicious use of the federal safety net of deposit
insurance and the discount window;
■ support normal credit extension by banks and, more generally,
smoothly functioning financial institutions and markets through
stable and credible macroeconomic policies;
■ provide adequate growth in the money supply consistent with
prevailing economic circumstances worldwide; and
■ promote open markets for the international trade of goods
and services.
Such a list of policy recommendations may seem unremarkable, in part
because the lessons of the past already have been taken to heart.
Achievement, however, is likely to prove a challenge.
—Gary H. Stem

17

S u g g e ste d R e a d in g

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation
of the Great Depression/' American Economic Review, vol. 73 (June 1986), pp.
257-276.
Brunner, Karl, ed. The Great Depression Revisited. Boston: Martinus Nishoff, 1981.
Chandler, Lester V. American Monetary Policy, 1928-1941. New York: Harper and
Row, 1971.
________ _ America's Greatest Depression, 1929-1941. New York: Harper and Row,
1970.
Diamond, Douglas W. and Philip H. Dybvig. “Bank Runs, Deposit Insurance, and
Liquidity," Journal of Political Economy, vol. 91 (June 1983), pp. 401-419.
Friedman, Milton, and Anna Schwartz. A Monetary History of the United States,
1867-1960. Princeton: Princeton University Press, 1963. (See chapters 7-9.)
Galbraith, John K. The Great Crash. New York: Houghton Mifflin, 1955.
Kennedy, Susan E. The Banking Crisis of 1933. Louisville: University of Kentucky
Press, 1973.
Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: Norton,
1976.
Wanniski, Jude. The Way the World Works. New York: Simon and Schuster, 1983. (See
pages 136-153.)
Wigmore, Barrie A. “Was the Bank Holiday of 1933 Caused by a Run on the
Dollar? " Journal of Economic History, vol. XLVII (September 1987), pp.
739-755.

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Federal Reserve Bank of Minneapolis
Minneapolis, Minnesota 55480




Renaissance frame used in graphic on title page
and page 3 ©Ladd Kessler for The Shape of Lies, N.Y.C.

18




Statement of Condition

(in Thousands)

December 31,
1987

December 31,
1986

$169,000

$168,000

66,000

66,000

13,110
9,750

20,068
206,210

113,526
3,290,251

113,125
2,855,458

$3,403,777

$2,968,583

435,370

492,649

34,543
256,476
66,936
(2,890)

35,976
312,642
48,279
78,225

$4,452,072

$4,396,632

$3,042,763

$2,838,142

847,699
4,950
16,256

884,056
4,950
11,708

$868,905

$900,714

370,656
44,538

495,471
40,035

$4,326,862

$4,274,362

$62,605
62,605

$61,135
61,135

$125,210

$122,270

$4,452,072

$4,396,632

Assets
Gold Certificate Account
Special Drawing Rights Certificate Account
Coin
Loans to Depository Institutions
Securities:
Federal Agency Obligations
U.S. Government Securities
Total Securities
Cash Items in Process of Collection
Bank Premises and Equipm entLess: Depreciation of $24,533 and $23,628
Foreign Currencies
Other Assets
Interdistrict Settlement Fund
Total Assets

Liabilities
Federal Reserve Notes1
Deposits:
Depository Institutions
Foreign, Official Accounts
Other Deposits
Total Deposits
Deferred Credit Items
Other Liabilities
Total Liabilities

Capital Accounts
Capital Paid In
Surplus
Total Capital Accounts
Total Liabilities and Capital Accounts

'Amount is net of notes held by the Bank of $992 million in 1987 and $545 million in 1986.

19




Earnings and Expenses

(in Thousands)

For the Year Ended December 31

1987

1986

$240,914
11,348
2,553
36,599
7,920

$224,145
12,988
1,156
35,416
390

$299,334

$274,095

$27,437
5,256
1,001
5,653
497
1,887

$26,434
5,725
787
5,682
525
1,864

2,602
1,065
734
1,426

2,500
1,050
843
700

687
4,600
2,085
6,083
2,561
1,613

1,014
4,296
1,915
5,577
1,877
1,889

$65,187

$62,678

Reimbursed Expenses2

(3,138)

(3,587)

Net Expenses

$62,049

$59,091

$237,285

$215,004

58,626

64,005

2,649
2,480
3,694
285,618

3,191
2,381
3,554
267,241

$1,470

$2,642

Surplus, January 1
Transferred to Surplus—as above

$61,135
1,470

$58,493
2,642

Surplus, December 31

$62,605

$61,135

Current Earnings
Interest on U.S. Government Securities and
Federal Agency Obligations
Interest on Foreign Currency Investments
Interest on Loans to Depository Institutions
Revenue from Priced Services
All Other Earnings
Total Current Earnings

Current Expenses
Salaries and Other Personnel Expenses
Retirement and Other Benefits
Travel
Postage and Shipping
Communications
Materials and Supplies
Building Expenses:
Real Estate Taxes
Depreciation—Bank Premises
Utilities
Rent and Other Building Expenses
Furniture and Operating Equipment:
Rentals
Depreciation and Miscellaneous Purchases
Repairs and Maintenance
Cost of Earnings Credits
Other Operating Expenses
Net Shared Costs Received from Other FR Banks
Total

Current Net Earnings
Net Additions3
Less:
Assessment by Board of Governors:
Board Expenditures
Federal Reserve Currency Costs
Dividends Paid
Payments to U.S. Treasury
Transferred to Surplus

Surplus Account

Reimbursements due from the U.S. Treasury and other Federal agencies;
$1,549 was unreimbursed in 1987 and $1,973 in 1986.
3
This item consists mainly of unrealized net gains related to revaluation
of assets denominated in foreign currencies to market rates.

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D irectors

December 31, 1987

Federal R eserve Bank of M inneapolis

H elena Branch

JOHN B. DAVIS, JR.
Chair and Federal Reserve Agent

WARREN H. ROSS
Chair

MICHAEL W. WRIGHT
Deputy Chair

MARCIA S. ANDERSON
Vice Chair

Class A Elected by M ember Banks

A ppointed by Board o f Governors

CHARLES W. EKSTRUM
President and Chief Executive Officer
First National Bank
Philip, South Dakota

MARCIA S. ANDERSON
President
Bridger Canyon Stallion Station, Inc.
Bozeman, Montana

DUANE W. RING
President
Norwest Bank La Crosse, N.A.
La Crosse, Wisconsin

WARREN H. ROSS
President
Ross 8-7 Ranch, Inc.
Chinook, M ontana

THOMAS M. STRONG
President
Citizens State Bank
Ontonagon, Michigan

A ppointed by Board o f Directors
FRB o f M inneapolis

Class B Elected by M ember Banks
RICHARD L. FALCONER
District Manager-Finance
Northwestern Bell
Minneapolis, Minnesota
WILLIAM L. MATHERS
President
Mathers Land Company
Miles City, Montana
Vacant

Class C Appointed by the Board o f Governors
JOHN B. DAVIS, JR.
President Emeritus
M acalester College
St. Paul, Minnesota
JOHN A. ROLLWAGEN
Chairman and Chief Executive Officer
Cray Research, Inc.
Minneapolis, Minnesota
MICHAEL W. WRIGHT
Chairman, Chief Executive Officer, and President
Super Valu Stores, Inc.
Minneapolis, Minnesota

M em ber o f Federal Advisory Council
DeWALT H. ANKENY, JR.
Chairman and Chief Executive Officer
First Bank System, Inc.
Minneapolis, Minnesota

21

F. CHARLES MERCORD
President and Managing Officer
First Federal Savings Bank of Montana
Kalispell, Montana
NOBLE E. VOSBURG
President and Chief Executive Officer
Pacific Hide & Fur Corporation
Great Falls, M ontana
ROBERT H. WALLER
President and Chief Executive Officer
First Interstate Bank of Billings, N.A.
Billings, Montana

Officers

December 31, 1987

Federal R eserve Bank of M inneapolis
GARY H. STERN
President

KATHLEEN J. BALKMAN
Assistant Vice President

CAROLYN A. VERRET
Assistant Vice President

THOMAS E. GAINOR
First Vice President

JOHN H. BOYD
Research Officer

JOSEPH R. VOGEL
Chief Examiner

ROBERT C. BRANDT
Assistant Vice President

WARREN E. WEBER
Research Officer

JAMES U. BROOKS
Assistant Vice President

WILLIAM G. WURSTER
Assistant Vice President

MELVIN L. BURSTEIN
Senior Vice President
and General Counsel
LEONARD W. FERNELIUS
Senior Vice President
RONALD E. KAATZ
Senior Vice President
ARTHUR J. ROLNICK
Senior Vice President
and Director of Research

SHELDON L. AZINE
Vice President
and Deputy General Counsel

MARILYN L. BROWN
Assistant General Auditor

H elena Branch
JAMES T. DEUSTERHOFF
Assistant Vice President
RICHARD K. EINAN
Assistant Vice President
and Community Affairs Officer
JEAN C. GARRICK
Assistant Vice President

PHIL C. GERBER
Vice President

JAMES H. HAMMILL
Assistant Vice President
and Secretary

BRUCE J. HEDBLOM
Vice President

CARYL W. HAYWARD
Assistant Vice President

RICHARD L. KUXHAUSEN
Vice President

WILLIAM B. HOLM
Assistant Vice President

DAVID LEVY
Vice President
and Director of Public Affairs

RONALD O. HOSTAD
Assistant Vice President

JAMES M. LYON
Vice President
SUSAN J. MANCHESTER
Vice President
PRESTON J. MILLER
Vice President
and Deputy Director of Research

BRUCE H. JOHNSON
Assistant Vice President
THOMAS E. KLEINSCHMIT
Assistant Vice President
KEITH D. KREYCIK
Assistant Vice President
RODERICK A. LONG
Assistant Vice President

CLARENCE W. NELSON
Vice President
and Economic Advisor

RICHARD W. PUTTIN
Assistant Vice President

CHARLES L. SHROMOFF
General Auditor

THOMAS M. SUPEL
Assistant Vice President

COLLEEN K. STRAND
Vice President

KENNETH C. THEISEN
Assistant Vice President

THEODORE E. UMHOEFER, JR.
Vice President

THOMAS H. TURNER
Assistant Vice President




22

ROBERT F. McNELLIS
Vice President and Manager
DAVID P. NICKEL
Assistant Vice President