Question

Briefly explain why the Fed's failure to increase the money supply starting in 1928 exasperated the negative impact of the October 1929 stock crash.

Please have your answer well composed.

Answer 1

The consensus among economists is that both monetary and non monetary factors played a role in the Great Depression. There is relatively little consensus, however, regarding the specific transmission mechanism through which monetary factors created prolonged non neutralities. Recent research on the Great Recession sheds light on a new subset of monetary transmission mechanisms that works through constraints on credit supply, rather than the traditional money supply or credit demand. In some minds, the financial crisis raised the specter of the Great Depression of the 1930s, when in its worst year one out of four Americans who wanted to work could not find a job. In 2008 and 2009, officials in the Treasury, Federal Reserve, and other parts of government were acting vigorously to prevent a recurrence of that outcome.

The legislative head of the Federal Reserve Bank of New York, George Harrison, supported an alternate methodology. He needed to raise the discount loaning rate. This activity would legitimately expand the rate that banks paid to acquire assets from the Federal Reserve and in a roundabout way raise rates paid by all borrowers, including firms and shoppers. In 1929, New York over and again mentioned to raise its markdown rate; the Board prevented a few from claiming the solicitations. In August the Board at last submitted to New York's game plan, and New York's markdown rate achieved 6 percent.

The Federal Reserve's rate increment had unintended results. In view of the worldwide highest quality level, the Fed's activities constrained remote national banks to raise their very own loan fees. Tight-cash strategies tipped economies around the globe into subsidence. Global trade contracted, and the worldwide economy impeded.

The monetary blast, notwithstanding, proceeded. The Federal Reserve observed restlessly. Business banks kept on advancing cash to theorists, and different moneylenders put expanding wholes in credits to merchants. In September 1929, stock costs spun, with unexpected decreases and quick recuperations.