How the Federal Reserve Caused the Great Depression
EducationHow the Federal Reserve Caused the Great Depression
The Federal Reserve caused the Great Depression by doing the exact opposite of what it was created to do.
In a previous article Why Congress Created the Federal Reserve I explained that Congress created the Federal Reserve to prevent any appreciation in money from occurring. The Federal Reserve was given the power to print money and release that money into the economy to prevent money supply declines which causes appreciation in money. To furnish an elastic currency is the first thing the Federal Reserve is charged with in the very first line of the Federal Reserve Act.
The Federal Reserve Failed to Furnish An Elastic Currency
After the October stock market crash of 1929 money started to be lost from the United States Economy as lenders such as banks started to take write-offs. As the write-offs snowballed into 1930 more and more money was lost from the economy and all remaining money appreciated in value and people and businesses greatly slowed their borrowing and spending of money. The currency was anything but elastic at that time.
The Federal Reserve SOLD Assets Instead of Buying Them
The Federal Reserve should have started buying assets in the economy and paying for those assets with printed money to replace the lost money and keep the currency elastic which is exactly why Congress created the Fed. Instead the Federal Reserve did the exact opposite and forced banks to buy Treasuries from the Fed which the banks paid for with cash. This had the effect of causing even more money to be lost from the economy which caused unprecedented appreciation in money. People responded by hoarding money as never before and economic activity completely collapsed.
The Federal Reserve Caused a 25% Drop in Available Money
By doing the exact opposite of what it was created to do the Federal Reserve caused 25% of the money that was in circulation in 1929 to be lost from the economy by 1933. This caused money to become extremely valuable and wholesale prices collapsed as did asset prices and of course economic activity which caused massive unemployment.
Why Did the Federal Reserve Cause the Great Depression?
Why did the Federal Reserve force banks to purchase Treasury securities from it which caused massive amounts of money to be lost from the economy? The simple answer is they had absolutely no idea what they were doing. One can only speculate what goes on in simple minds but they probably saw all assets prices declining in value except for government securities so they forced the banks that did not go under to load up with the one asset that was not wrecking their balance sheets but in the process the Federal Reserve drained money out of the economy and caused the Great Depression.
Had the Federal Reserve Furnished An Elastic Currency the Great Depression Would Not Have Occurred
Had the Federal Reserve done what it was created to do and furnished an elastic currency by buying assets in the economy with printed money it would have prevented money from appreciating in value and people and businesses would have kept borrowing and spending money at normal levels and the Great Depression would never have happened.
By doing the exact opposite of what it was created to do the Federal Reserve caused the Great Depression.
For more see Why Congress Created the Federal Reserve
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