Monetary Policy During The Great Depression Essay -- Economics Economy

Monetary Policy During The big(p) Depression One of the or so classical aspects of the Great Depression that stands out in economists minds is the surge of bank panics and ills during the impressions onset (1930-1933). However, an institution created with the intention of preventing such a string along of disasters failed to fill its obligation as a lender of last resort. This is the federal official, and its failure to prevent the early bank panics of the Great Depression is a genuinely(prenominal) interesting economic issue. So why did the Fed fail to fulfill its duty? The reason for the Feds actions (or lack thereof) was a faction of the strict elitist leadership in the Fed and the results of adaptive expectations on green monetary policy. The Fed had only been created in 1913, and while there were previous(prenominal) experiences with bank panics (1907), the consequences were much less drastic, and so the elitists were unable to foresee the weighty blow to the bullion supply that would result from the failure of so some(prenominal) small banks. In 1907 the money stock fell by 5% due to bank panics the Fed had no idea that bank panics would powerfully contribute to the 31% decrease in the money supply by 1933(Friedman 156). While it may seem obvious that this might occur when 10,000 banks close, most of the banks that closed were non-members, and since these banks felt the opportunity cost of keeping reserves with the Fed was too great, the Fed returned the sentiment by denying them aid when they closed. Also, many of these banks were very small, and the Fed did non expect these small banks to have such a large effect on the money supply (Friedman). All this is support by the writings of Milton Friedman, Charles W. Calomaris and Richard H. Timberlak... ...ey were its responsibility. According to Friedman, they saw panics as a result, and not a cause of the depression. The Fed did not know what its responsibilities were, and as a result failed to see the connection between the publics confidence, banks and the money supply. While the Feds monetary policies blew up in their face, it did stage them with the undeniable need for deposit insurance. Ultimately the Great Depression shock the Fed into reality, and because of this future depressions will be averted. Works CitedCalomiris, Charles W. Runs on Banks and the Lessons of the Great Depression Regulation 22.1 4-7Friedman, Milton, and Schwartz, Anna. A Monetary History of the United States 1867-1960. Princeton , N.J. Princeton University Press. 1963Timberlake, Richard H. The grow of the Great Depression. (Interview) Navigator. (2001).