The Federal Reserve in the Great Depression

The Federal Reserve contributed to the Great Depression in a couple of ways. First of all, the Fed was slow to ease monetary policy, to use monetary policy to provide support for the economy. Instead, by keeping monetary policy tight for too long, the Fed allowed prices actually to fall. There was a period of deflation, where prices were falling very sharply, which turned out to be a very negative thing for the economy. So, monetary policy was too tight, too long, was not supportive of the economy, to not keep prices stable the way you know we are mandated to do it today. The other mistake or problem that the Federal Reserve made in the 1930s was that it didn't do enough to protect the stability of our financial system. There was a global financial crisis in the late 20s and early 30s. In the United States, about third of all the banks, thousands of banks in the United States failed. They collapsed and went bankrupt. People lost their money because we didn't have deposit insurance protecting people's deposits in the banks. The banks were not available to make loans, and that collapse of the banking system was a major factor explaining why the Depression was as deep and as long as it was. And it was very, very severe. Unemployment reached about 25% in 1932, and it was not until World War II began in 1941 that the economy really began to fully recover.