Banking
Economics
US Government

How did the federal reserve contribute to the depression?

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Wiki User
03/16/2011

An economy based on fractional reserve banking is cyclical in nature with economic booms followed by periodic busts. These booms and busts reflect either an expansion or contraction of the money supply. Booms are considered good times, whereas busts are deemed undesirable economic downturns. Economic downturns used to be called depressions, at least until the Great Depression of the 1930s. In an effort to lessen their psychological impact they have called recessions since the decade long Great Depression of the 1930s

The Federal Reserve Banking System was created in 1913. The Federal Reserve Banking cartel was given exclusive control over the nation's money supply. It aided the Federal Government in financing World War I and expanding the general domestic economy in the 1920s, a decade known as the Roaring Twenties. The Fed expanded the money supply in the 1920s in an effort to shore up the weak British Pound Sterling. Suddenly in 1929, the Fed reversed its monetary policy and begin contracting the money supply. Between the summer of 1929 and the election of 1932 the Fed reduced the money supply by 1/3. Individuals and businesses were caught short and forced to liquidate at reduced prices causing the economy to cave in on itself.

Rather than improving the nation's poor economy the fiscal policies of the New Deal only made a bad situation worse. It was not until the outbreak of World War II that the Great Depression came to an end. With more than 10 million plus men wearing the uniform unemployment ceased to be a problem. Furthermore, with the conversion to a war economy there was plenty of work for those who wanted to work.

Without question the monetary policy of the Fed was the single cause of the Great Depression. The Great Depression's longevity was due to the failed fiscal policies of the FDR administration.

It should be noted that the Federal Reserve System is a private banking cartel that is only very loosely controlled by the Federal Government. It might be fairer to say that the Fed is the engine that drives the Federal Government. For many years we have been in a situation where the central banking tail is wagging the political governing dog. If you remember from one of the 2000 presidential debates both candidates Gore and Bush responded to a question about a falling stock market by saying the first thing they would do would be to call Greenspan (then Fed chairman).