“It was the greatest and boldest operation ever undertaken by the Federal Reserve System, and, in my judgment, resulted in one of the most costly errors committed by it or any banking system in the last 75 years. I am inclined to think that a different policy at that time would have left us with a different condition at this time… Business could not use and was not asking for increased money at that time.”
Adolph Miller, former Federal Reserve Board Member, testifying to the U.S. Senate in 1931 about the Federal Reserve’s 1927 interest rate cuts and acceleration of open market purchases – which fueled speculation and low-quality credit expansion that culminated in the 1929 peak, collapse, and ultimately the Great Depression.
“Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand.”
Ludwig von Mises, The Causes of Economic Crisis (1931)
