The Federal Reserve Caused the Great Depression

I agree with my opponent for dropping the presupposed stances, and from now on, there will be no required stances. I. How Did the Federal Reserve Cause the Great Depression In 1913, the Democrats wanted a more centralized banking system, and they did just that with the Federal Reserve Bank. It would lower interest rates, regulate the amount of money in the economy and control inflation. All of this sounds good right? The reserve was ratified by Congress in the same year. Things went right initially. The Federal Reserve drastically reduced interest rates, and fueled by recent stock gains, stock market investment was at an all time high. The Stock Market was making gains approaching 20% per year in the mid-1920s, while the interest rate was around 1% at the time. If you could borrow money at 1% and get a return of 20% with inflation being marginal, wouldn't that sound like a good idea? Thus, massive loans were taken out. The economy was in the best shape it had ever been. But there was a problem. Inflation started happening as people bought more and more, and there soon was too much money chasing too few goods. As incomes went up, so do costs. The Federal Reserve had to maintain a steady flow of money into the economy to keep the economy running. Thus, the economy had become dependent not only on the low interest rates for growth, they had become dependent on a steady supply of money flowing in. To try to counteract this inflation, the Federal Reserve raised interest rates. This caused fewer loans to be given out and less money to be flowed into the economy. The savvy investors saw this, and got out of the market. This weakened the market. The other investors saw the slowdown in the growth, and immediately paniced, and withdrew all their money as fast as they could. "Some investors who saw this happening got out of the marketplace early, weakening the bullish market. As the markets stopped going up investors began to panic and sell their shares of stock. Overleveraged investors scared of losing their life savings sold their shares of stock and forced the market downward. "[1] This caused the stock market to nose dive. Americans started saving more and more, causing the essential parts of GDP, Consumption and Investment to be drastically reduced, this having a disasterous effect on GDP itself. "After the crash Americans started spending less and started saving more. This lead to less production and less jobs, causing unemployment to go higher and higher. "[1] And thus, we have a recession. II. What Did the Federal Reserve Do Wrong? II. i Lower interest rates The Federal Reserve at the time was doing the exact opposite of "correct" monetary policy. Normal monetary policy is to have low interest rates during recessions, high interest rates during inflation, and medium interest rates at all other times. But before the crash, which started out normal and then turned into an extreme boom period, the Federal Reserve's interest rates, as stated earlier at 1%. "You could borrow money at 1%. ". This was bound to be a disaster as infation was encouraged and a huge boom was created that was so large that the pace could not be kept up. And because of that, when the Federal Reserve had to raise interest rates, there was a crash. II. ii. Pumping of money into the economy When you pump money into the economy during infation, you are basically just contributing more to inflation. This caused the interest rates to be raised higher and to be raised higher quicker. II. iii. Retreaction of money into the economy "And what happened is that [the Federal Reserve] followed policies which led to a decline in the quantity of money by a third. For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing from beginning to end, with millions of people having their savings essentially washed out, that decline was utterly unnecessary. "[2] The Federal Reserve caused a decline in money in 1929 (not to be confused with the pumping of money in the mid-1920s that caused the inflation in the first place) that restricted the amount of money flowing into the economy. This is disasterous during a recession when you need all the money you can get. "This massive destruction of liquidity began when the Federal Reserve responded to the 1929 stock market crash by allowing the quantity of money to decline by 2.6 percent over the next year. This extremely tight monetary policy put the economy into severe recession. "[3] III. The Federal Reserve Failed to Help the Great Depression The Federal Reserve several times during the great depression decreased liquidity, when it actually should have increase liquidity, thus making money harder to get. "The Federal Reserve was derelict in this responsibility during the three banking crises that culminated in the Great Depression. Indeed, more often than not the Federal Reserve sold bonds and raised the discount rate, thus reducing banking liquidity when it should have increased liquidity. The first banking crisis began in the autumn of 1930 when the Federal Reserve stood aside and permitted banks to fail in the South and Midwest. The result was to undermine confidence in banks. Runs on banks spread as depositors rushed to convert their deposits into currency. "[3] The Federal Reserve also allowed bank reserves to be reduced, when they should have been increased, "The second banking crisis began in the spring of 1931 when the Fed stood aside negligently while banks reduced their lending in order to meet their depositors' demands for cash. By August commercial bank deposits had shrunk by 7 percent, a further contraction in the supply of money. Then in September, in response to the British leaving the gold standard, the Fed further deflated a deflating economy by pushing through the biggest hike in the discount rate in history. This extraordinary mistake caused commercial banks to stop their use of the discount window and to hoard cash in order to meet rising withdrawals stemming from the public's declining confidence in banks. . .. this put the famous multiple expansion of bank reserves into vicious reverse. By January 1932 bank deposits had declined another 15 percent. Large monthly declines in the money supply continued through June 1932. "[3] Then, the Federal Reserve made yet another mistake; they raised the discount rate even higher, making the already hard way to get loans worse. "The Fed responded to these events by again raising the discount rate, making it harder for banks to meet the cash demands of depositors. From January to March the money supply fell dramatically. "[3] ""The central banking system, set up primarily to render impossible the restriction of payments by commercial banks, itself joined the commercial banks in a more widespread, complete and economically disturbing restriction of payments than had ever been experienced in the history of the country. One can certainly sympathize with President Hoover's comment about that episode: ‘I concluded the Reserve Board was indeed a weak reed for a nation to lean on in time of trouble. '"[4] Conclusion: So the Federal Reserve did the exact opposite of what it was supposed to do on numerous occasions, and even made the Great Depression itself worse by doing the same thing. Sources: [1]:. http://www.stocks-simplified.com... [2]:. http://www.wnd.com... [3]:. http://www.hoover.org... [4]:Friedman, Miltons writings, contributed by Source 3