The Great Depression and Money Supply

Topics: Monetary policy, Great Depression, Federal Reserve System Pages: 3 (838 words) Published: September 17, 2013
Often we hear about the Great Depression of the 1930 being compared to the recession of 2008-2009. The Depression was followed by a financial system in the years before that went out of control with assumption in the markets and stocks were sold on margins with non-existent money. In 2008, the United States experienced a financial crisis followed by a deep recession. Several of the developments during the time were similar of events during the 1930s. This was causing many people to fear the economy might experience a second Great Depression. In the years 1930-1933, more than 9,000 banks suspended operations, often defaulting on their depositor. This caused the money supply to fall by altering the behavior of the depositors and the bankers. In the recession, the financial system was not able to perform normal operations, and the profitability of companies was called into question. When investment banks packed heaps of risky mortgages into mortgage-back securities then sold them to buyers that weren’t aware of the risks they were acquired. Between 1929 and 1933 the money supply fell 2 percent, at which time the unemployment rate increased from 3.2 to 25.2 percent. The price level also fell 25 percent. In the Recession of 08-09, the Federal Reserve cut its target for federal funds rate from 5.25 in 2007 to roughly zero in 2008. At this time, the unemployment rate was at 10.1%. The monetary base rose 18 percent over the period, while it increased about 200 percent from 2007 to 2011. Additionally, the GDP decreased by 15 percent from 2008-2010. The Federal Reserve could have responded to the decline in the money multiplier by increasing the money base even more than it did. The Reserve Act of 1932 increased various taxes, especially those falling on lower and middle income consumers. In 2008, Bush signed into law a $168 billion stimulus package which funded tax rebates. In 2009, Obama signed into law a $787 billion stimulus which included tax reductions and an...
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