Abstract
The Great Depression during the 1930s was referred to as the most severe economic downturn that affected the United States and the global economy. The depression lasted for almost a decade, and some economists and monetary scholars blamed the failure of the banking institutions to come up with effective policies to maintain a sound standing. The banks were not sufficiently prepared to deal with erratic economic movements. Consequently, there were also those who argued that the Fed should be blamed for the economic recession because of their failure to adapt sound monetary policies. It was pointed out that the Fed has focused largely on wanting to maintain the international gold standard, but neglected to implement policies to maintain a sound internal economy. It was only when the government decided to change its perspective and focused on the internal economic movements that it started to show recovery.
Keywords: Great Depression, monetary policies, gold standard
Introduction
The Great Depression in the 1930s was considered as the most severe and longest-lasting recession that affected, not only the United States, but the global economy as a whole. While there are segments of the society that were able to go unscathed during that period, there were many personal and firm bankruptcies that arose. Accordingly, there are many people who believed that the cause of the depression was attributed to failures of banks to implement effective policies and regulations. Some monetarists pointed out that banking panics resulted in the decline of the money supply and the eventual decrease in economic activity. In addition to that, the credit market activities were disrupted, leading to the heightened cost of credit intermediation that considerably decrease national output. The general view is that the Federal Reserve failed to regulate the occurrences of banking anxieties and contractions of the money supply, two factors that largely contributed to the Great Depression (Wheelock, n.d).
Some economist and monetary scholars believed that the depression that lasted through the whole 1930 decade was caused by the misguided monetary policy from 1929 to 1933. They expressed that the Fed still had the open-market operations and the discount rate as two effective tools to influence money supplies. The economists pointed out that the open-market operations allows for the acquisition or dealing of existing bonds, and this operation, combined with the discount rate reductions should have been useful in cushioning bank failure panics and could have backed the money supply. Had the Fed concentrated on moves that aimed at fighting bank failures and unemployment within the US economy, the option could have to lower the discount rate and purchase bonds (Fishback, 2010). However, the Fed during that time was focused on international relations and transaction and paid considerable attention on remaining on the international gold standard. There were many instances when the monetary policies were adjusted in response to gold flows as well as the seasonal credit demands. Meanwhile, the annual wave of bank failures during the early 1930s was not met with active resolve on the part of the Federal government. In 1932, outgoing President Hoover compelled incoming President Roosevelt towards the development of a policy to resolve bank failures, yet the former was still keen on maintaining the gold standard.
The monetary contraction and the gold standard were regarded as two of the factors that contributed to the Great Depression. Thus, scholars weren't surprised to note that the move towards currency devaluations and monetary expansion significantly helped in the economic recovery. It was observed that there was a palpable impact when a country abandon its gold standard and eventually focused on the progress of their output. That is, countries saw a better chance at recovery from the depression when they opted to expand their money supplies, without having to worry about their gold standards.
Conclusion
The worldwide economic depression that occurred during the 1930s was caused by the combination of a multitude of causes. Some argued that the depression was caused by the failures of banking institutions in the implementation of policies and guidelines, while there are also those who blamed the monetary policies that were implemented by the Fed. The government focused largely on maintaining its international gold standard, and this resulted in the neglecting on the needs of the internal economy.
References
Fishback, P. (2010). US monetary and fiscal policy in the 1930s. Oxford Review of Economic Policy, 26(3), 385-413.
Wheelock, D. (n.d.). Monetary policy in the Great Depression: What the Fed did, and why. Retrieved from http://webshares.northseattle.edu/dperry/econ202/articles/Monetary%20Policy%20During%20Great%20Depression.pdf
