Monetary Policy During The Great Depression Essay example

Monetary Policy During The Great Depression One of the most important aspects of the Great Depression that stands out in economists’ minds is the surge of bank panics and failures during the depression’s onset (1930-1933). However, an institution created with the intention of preventing such a string of disasters failed to fulfill its obligation as a â€Å"lender of last resort.† This is the Fed, and its failure to prevent the early bank panics of the Great Depression is a very interesting economic issue. So why did the Fed fail to fulfill its duty? The reason for the Fed’s actions (or lack thereof) was a combination of the strict elitist leadership in the Fed and the results of adaptive expectations on immature monetary policy.†¦show more content†¦Later it was determined that â€Å"bank failures were a problem of bank management which was not the systems responsibility (Friedman 358).† This is the first example of the Fed’s apathetic and elitist attitude; this attitude prevented them from seeing that bank panics are contagious. If the public looses confidence in the system because it knows the Fed will not help them, this will only cause more runs on banks. The truth is that the Fed was every bit as responsible for the bank panics as poor bank management was. The Fed did not want to admit to this, and so further separated itself by declaring that non-member banks were not its problem either (Friedman 358). From 1921 to 1930 most failed banks were non-members. The Fed felt no responsibility for these banks, and this is proved by the fact that directors meeting minutes during this time are only concerned with the failures of member banks; they didn’t even discuss the closing of non-member banks (Friedman). The lack of the Fed’s action on non-member banks is also interesting because the Fed was created largely in response to the bank panics of 1907, a time when allShow MoreRelatedEssay on Opposing Views of the Effectiveness of Monetary Policy1414 Words   |  6 Pagesof the Effectiveness of Monetary Policy Monetary policy is a powerful governmental weapon which has historically proven that it is difficult to wield. This difficulty is one of the reasons why some economists doubt the effectiveness of monetary policy as a whole. These economists find that monetary policy is difficult to implement because of estimation problems and time lag problems, as well as cyclic effects. 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