The Course of The Great Depression Essay

One economic policy was that “the Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices” (Romer, 3). At the time the “stock prices had risen more than fourfold from the low of 1920”

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time, including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve, including both the traditional and non-traditional measures to ease credit markets and stimulate the economy.

The Great Depression was a dreadful worldwide economic depression that occurred in the 1930s and it was the most profound and longest depression in the American History, which lasted from 1929-1939. Although the Great Depression began soon after the crash of the stock market in October 1929, it is too straightforward to say that that was the major cause of the Great Depression. This crash did not by itself cause the Great Depression. Even before the year 1929, signs of economic trouble had become evident. (Give Me Liberty! An American History, 5TH Edition, Eric Foner, Pg 811).

The lackluster effort of the Fed to control the money supply shows their true hand. In the mid to late 70s, the increasing inflation had gone out of control, and Volcker made it his mission to stop that inflation. To the members of the Federal Reserve Board, this policy was clearly to reduce inflation, but market outsiders were confused by the Fed’s switch in policy, and scared by the volatility of the money supply. In 1981, the uncertainty of Federal Reserve policy could be seen in the bond markets, which rely heavily on stable interest rates. According to Greider, the bond market had a “traumatic seizure” that could best be described as an “anxiety attack” in April of 1981, as a result of the monetary policy pursued by the Fed, which fundamentally abandoned the control of interest rates (Greider 374). With the new policy, the Fed caused interest rates to fluctuate with the money supply, which relies heavily on the velocity of money, or the amount of times money changes hands over an interval of time. Monetarists believed that the velocity of money was constant, and criticized the Fed for not simply increasing the money supply slowly over time, but tit became clear in the early 80s that the velocity was not constant at all. Even though

This source discusses the great crash of 1929. The year 1929 saw the peak of the roaring ‘20s which was known as the “Bull Market” and the stock market collapse that led to the Great Depression. This source also discusses how one third of the U.S. workforce was unemployed which is also a reason for

The group worked around the clock, grappling with questions such as who would own the central bank, how many institutions it would contain, and how open market operations would be conducted (Diaz-Unzalu and Maze). In December 1913, the Federal Reserve Act established the Federal Reserve System to remedy the conditions underlying the money crisis that had overwhelmed the countries financial crisis for many years. Congress has amended the act several times since to develop the Fed's ability to foster a sound financial system and a healthy economy. Today, many economists are critical of the Fed’s decisions in the early 1930s because they believe the decisions made by the FED’s, declining to make loans to banks based on poor business decisions of the banks, increased the severity of the Great Depression (Hubbard, R. G., and O’Brien,

The events of 9/11 further set back an already fragile economy (Figure 2). It heightened uncertainty, shaken confidence, and caused a widespread pullback from economic activity. Equity prices fell sharply for several weeks and credit risk spreads widened. The main focus of the Federal Reserve in the first few days following the attacks was to reinstate the infrastructure of financial markets and to provide massive quantities of liquidity to the functioning of those markets. The enhanced economic fallout from the events of 9/11 led the Federal Open Market Committee (FOMC) to cut the target federal funds rate through the end of the year. (Federal Reserve Board, 2002)

To stabilize the economy bonds are used which release money into the market. The responsibility of the Central Bank is to maintain the health of the banking system and regulating the purchase and sale of bonds. The interest rates are controlled to balance the markets. According to the Monetary Policy Report to Congress, “The Federal Open Market Committee (FOMC) maintained a target range of 0 to ¼ percent for the federal funds rate throughout the second half of 2009 and early 2010” while representing forecasted economic decisions to rationalize low levels for longer times on the federal funds rate (Federal Reserve, 2010). Purchases were still being made by the Fed’s to result in improvements to the economy through focusing on mortgages, the real estate market, and the credit market. Predictions by the Federal Open Market Committee depicted low levels on the federal funds rates in early 2010 which would continue for some time while over time the economy would see growth, a rise in inflation, and a decline in unemployment. Feds were in agreement though they expected the recovery process to be slower. Purchases by the Federal reserve were slowed, “$300 billion of Treasury securities were completed by October” and “the purchases of $1.25 trillion of MBS and about $175 billion of agency debt” were suppose to be finished the first quarter of 2010 (Federal Reserve, 2010).

In the 1920s, American economy had a great time. The vast majority of Americans in 1929 foresaw a continuation of the dizzying economic growth that had taken place in most of the decade. However, the prices of stock crested in early September of 1929. The price of stock fell gradually during most of September and early October. On “Black Tuesday” 29 October 1929, the stock market fell by forty points. After that, a historically great and long economic depression started and lasted until the start of the Second World War. The three causes of the Great Depression are installment buying, uneven distribution of wealth and the irrational behavior in the stock market.

The Great Depression is undoubtedly one of the most significant events in American and world history. It was the most widespread depression in the 20th century affecting most nations in the world and lasting for as long as a decade. However, there still remain unanswered questions regarding the cause of the great depression. One of the most debated topics regarding the Great Depression continues to be the role of the Federal Reserve (Fed) in causing and prolonging the crisis. The Federal Reserve, the central banking system of the United States, was created on December 23, 1913, with the enactment of the Federal Reserve Act, primarily in response to a series of financial panics in 1907. The Fed had being in existence for 15 years before the

During the financial crisis, the Fed’s monetary policy and the Treasury’s fiscal policy were both expansionary and thus essentially complementary to each other. Both policies aimed at stimulating the economic activities and stabilizing the credit market and the entire financial system. During the crisis, the inflation rate dropped significantly as the commodity prices plummeted, which freed the Fed from worrying about inflation risk. The foreign investors poured their money into the U.S. Treasury, allowing the U.S. government to borrow at extremely low interest rates. The various actions taken by the Treasury and the Fed served to work together to address the problems which were critical to save the U.S. financial system from collapse and to end the most severe recession since the Great Depression.

The Great Contraction is a chapter from the book A Monetary History of the Unites States that exclusively focuses on the Great Depression. In this chapter, Schwartz and Friedman fault the Federal Reserve System for not preventing the economic crash of 1929. They argue that the cause and severity of the Depression was not the result of inexorable consequences of the Stock Market Crash. Schwartz and Friedman claim that the Federal Reserve System did not carry out its role as lender of last resort for the failing banks and thus did not properly supervise the nation’s money supply. They offer explanations of what the Reserve System should have managed to get rid of monetary stress and eventual economic collapse, but insist that the Federal Government

monetary aggregates, whose main policy tool was an interest rate. The switch from pro-cyclical to anti-cyclical monetary

The Federal Reserve has a mandate to foster economic growth, manage inflation and manage the unemployment rate (Federal Reserve, 2005). In order to achieve these mandates, the Fed has been given a number of tools. The three primary tools of Fed policy are open market transactions, setting the discount rate and setting the reserve requirements for banks. This paper will discuss how each of these works and what effect each should have on the state of the economy.

Monetary policy is a powerful governmental weapon which has historically proven that it is difficult to wield. This difficulty is one of the reasons why some economists doubt the effectiveness of monetary policy as a whole. These economists find that monetary policy is difficult to implement because of estimation problems and time lag problems, as well as cyclic effects. They also point out situations in which monetary policy may not work at all. On the other hand, some economists swear by monetary policy as one of the most influential economic tools. These economists show that controlling money supply in America is a relatively young idea, and is developing rapidly. They