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and on the willingness of individuals to spend which exerted a depressing influence on the course of business. But by themselves, these effects could not have produced a collapse in economic activity. At most, they would have made the contraction somewhat longer and more severe than the usual mild recessions that have punctuated American economic growth throughout our history; they would not have made it the catastrophe it was. |
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For something like the first year, the contraction showed none of those special features that were to dominate its later course. The economic decline was more severe than during the first year of most contractions, possibly in response to the stock market crash plus the unusually tight monetary conditions that had been maintained since mid-1928. But it showed no qualitatively different characteristics, no signs of degenerating into a major catastrophe. Except on naïve post hoc ergo propter hoc reasoning, there is nothing in the economic situation as it stood in, say, September or October, 1930 that made the continued and drastic decline of the following years inevitable or even highly probable. In retrospect, it is clear that the Reserve System should already have been behaving differently than it did, that it should not have allowed the money stock to decline by nearly 3 per cent from August 1929 to October 1930a larger decline than during the whole of all but the most severe prior contractions. Though this was a mistake, it was perhaps excusable, and certainly not critical. |
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The character of the contraction changed drastically in November 1930, when a series of bank failures led to widespread runs on banks, which is to say attempts by depositors to convert deposits into currency. The contagion spread from one part of the country to another and reached a climax with the failure on December 11, 1930 of the Bank of the United States. This failure was critical not only because the Bank was one of the largest in the country, with over $ 200 million in deposits, but also because, though an ordinary commercial bank, its name had led many both at home and even more abroad to regard it as somehow an official bank. |
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Prior to October, 1930, there had been no sign of a liquidity crisis, or any loss of confidence in banks. From this time on, |
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