Question

Discuss what was done by the Federal Reserve and by the President and by Congress to bring us out of the Depression and the effectiveness of those efforts.  

Answer 1

When the economic expansion of the Roaring Twenties came to an end, the Great Depression began in August 1929. The recession was punctuated by a number of financial crises. Such crises included a 1929 stock market crash, a series of 1930 and 1931 local banking panics, and a series of national and international financial crises from 1931 to 1933. When the commercial banking system collapsed, the downturn hit bottom in March 1933, and President Roosevelt declared a nationwide banking holiday. The economic recovery followed sweeping reforms of the financial system, which was disrupted by a double-dip recession in 1937.

The example of the latter is the decision of the Fed in 1928 and 1929 to raise interest rates. This was done by the Fed in an attempt to limit stock market speculation. This intervention hindered the United States ' economic activity. The Fed's behavior sparked recessions in nations around the globe because the international gold standard linked interest rates and monetary policies between participating nations. In reaction to the international financial crisis in the fall of 1931, the Fed repeated the mistake.

Other governors have signed up to a doctrine known as actual bills. This doctrine indicated that, during economic expansions, central banks should provide more funds to commercial banks, when individuals and firms demanded additional credit to finance production and trade, and less during economic contractions, when credit demand was contracted. The doctrine of real bills did not definitely describe what to do in banking panics, but many of its adherents saw panics as symptoms of contractions when central bank loans were to contract.

The Federal Reserve might have prevented deflation by preventing the banking system from collapsing or by counteracting the collapse with monetary base expansion, but it failed to do so for several reasons. The collapse of the economy was unforeseen and unprecedented. Decision-makers lacked clear processes to assess what went wrong and lacked the authority to take enough steps to restore the economy. Due to their adherence to the philosophy of real bills, some decision makers misinterpreted signals about the state of the economy, such as the nominal interest rate.

Originally, Congress established the Fed to "provide for the establishment of Federal Reserve banks, to provide an elastic currency, to provide for means of rediscounting commercial paper, to provide more efficient banking regulation in the United States, and for other purposes." Since then, Congress has enacted legislation to change the powers and functions of the Fed. To ensure its freedom from politics, Congress established the board structure of the Fed. The members of the board serve staggered terms of 14 years each. Each two years the president appoints a new one. They are confirmed by the U.S. Senate. If the phased schedule is followed, the board can not be dominated by any president or plurality of the political party.