Role of Federal Reserve in Casuing the Great Depression

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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 stock market crush in 1929. It was the most devastating market crush in the history of the United States and signaled the beginning of a decade long Great Depression that affected all Western industrialized countries . The primary responsibility of the Federal Reserve was to act as a “lender of last resort”. Essentially, the Federal Reserve was to lend money to private banks in times of crisis. The state and federal banking regulations during this period were restrictive and hence unintentionally caused a systemic weakness in the U.S banking system therefore the need for a lender of last resort. Smaller banks were subject to crisis when depositors lost confidence that their bank had enough reserves to satisfy y all withdrawal demands at a certain time. In this situation, depositors rushed to their banks in a bid to withdraw their money ahead of other depositors before the banks limited reserves runs out. This triggered a bank run. The bank run easily resulted in other bank runs as depositors be... ... middle of paper ... ...9. PALMER, By S. 1931. "Revision of Federal Reserve System to be Keenly Debated." New York Times (1923-Current File), Dec 06, 1-XX24. 10. Warburg assails federal reserve. 1929. New York Times (1923-Current file), Mar 08, 1929. (accessed April 29, 2013). 11. Wheelock, David C. 1992. Monetary policy in the great depression: What the fed did, and why. Review - Federal Reserve Bank of St.Louis 74, (2): 3-3, (accessed April 29, 2013). 12. Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960 (Princeton University Press, 1963). 13. Schwartz, Anna J. "Understanding 1929-1933," in Karl Brunner ed., The Great Depression Revisited (Kluwer-Nijhoff, 1981).
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