In 1920s, during Great Depression, the United States underwent a Great Crash with stock prices being largely overvalued. However, the thoughts of coming up with monetary policy that would be tight did not help recover the economy. Rather, the measures worsened the situation in the nation. The prices for items of different goods continued to go up, especially with the inflow of ‘easy’ money into the market. The government, therefore, decided to change its focus to change the monetary policy with the main concern put on Gold Standard, as it would help bring back the nation to prosperity (Wheelock, 2008). By the year 1929, there was a fall in the shared prices meaning that the new monetary policy became effective.
Key terms: Federal Reserve System (Fed), Great Depression, and Monetary Policy
Federal Reserve’s monetary policy, which was applied during Great Depression, became more of a disaster than rescue solution. This was reflected in the prices of goods that went up because of the low supply of money in the market. At the same time, the banks crashed by thousands. Many people blamed Fed for coming up with misguided policy rules and inability of the institution to respond as expected to the rapid changes in economic conditions. At the same time, Fed was also blamed for preserving Gold Standard which overrode the objective of the policy coming up with offlawed operating guides. In the year 1960s, inflationary monetary policy was created to decrease the strains caused by Gold Standards and also to sustain the economy back to normal (Wheelock, 2008). Finally, the monetary policy reconsidered back then proved to be effective in correcting the economy and bringing sanity back to the nation.
Monetary Policy used During Great Depression
After the failure of Fed to stabilize the market, several institutional reforms were initiated in the year 1932, which brought about great effects for the monetary policy. The Glass-Steagall Act became the most crucial of them, since it allowed Fed to utilize government securities with the intention of backing up its note issues. This included international gold standard suspension, which was executed in the year 1933. At the same time, Thomas’ Amendment to the Agricultural Adjustment Act was also passed the same year, which gave Federal Reserve the ability to adjust all the commercial bank reserves. At the same time, in the year 1934, Gold Reserve Act was passed, and this gave president the authority to fix the dollar price problem, which had been caused by the Gold Standard (Svensson, 2004). Lastly, Treasury Exchange Stabilization Fund Act was passed in the year 1935, which altered all the Fed structures and at the same time gave them the authority to make adjustments based on reserve requirements. In fact, the Glass Steagall Act helped in the removal of the most crucial constraints that were placed on the monetary policy (Svensson, 2004). It ended up enhancing the abilities of Fed to initiate various transactions that ended up monetizing the government debt.
The new monetary policy ensured that gold was not used as the absolute determinant of the ways in which the government manipulated money supply. The dollar value might have remained linked to the weakened gold standard value, but the good thing was that gold was no longer used as the economic prosperity determinant, rather its value had been cracked (Wheelock, 2008).
Effectiveness of Monetary Policy
Monetary policy can be established in such a way that it regulates the ways in which money is supplied to provide the government with costless funds while maintaining the interest rates at a level that has been selected for economic stability. At the same time, monetary policy can be used to regulate the nation’s currency exchange rate to ensure that the value of the money is not lowered which can otherwise lead to inflation. It is also effective in protecting the gold of the nation in addition to other important international reserves to bring about domestic price leveling (Rasche & Williams, 2007). The other benefit of monetary policy is that it has the potential to promote or facilitate the employment rate to go up.
In conclusion, during Great Depression, the monetary policy established by Fed did not prove to be successful, rather it continued to bring down the economy of the nation. In this regard, several acts were passed to ensure that Fed used the right strategy and come up with appropriate monetary policy that would correct the situation. In the end, the monetary policy turned out effective in regulating the currency, maintaining the dollar value, and leveling the prices of goods in the nation.
Rasche, R.H. & Williams, M.M. (2007). The effectiveness of monetary policy. St Louis Review 89(5), 447-89.
Svensson, L. (2004). Federal reserve bank. St. Louis Review 86(4), 161-4.
Wheelock, D.C. (2008). Monetary policy in the Great Depression and beyond: The sources of the Fe’s inflation bias. New York: The Upjohn Institute.