In the late 1920s and early 1930s, America experienced an extreme depression known as the Great Depression, due to an error by the Federal Reserve Bank. In an attempt to pull the country out of the Depression, then-U.S. President Franklin D. Roosevelt (FDR) adopted a policy known as the New Deal. An important part of the New Deal was monetary policy which effectively destroyed the gold standard and put fiat currency in its place. The reason the Great Depression was so devastating was due to mismanagement by the Federal Reserve Bank, and the New Deal responded incorrectly by allowing more mismanagement to occur in the future, on a larger scale. quantity, harming the economy. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get an original essay The main cause of the Great Depression was due to a mistake by the Federal Reserve Bank. During a mild economic recession, people began quickly withdrawing money from their bank accounts, and over time, some banks ran out of money and collapsed. This led to a massive run in which many people withdrew money from their bank accounts. Eventually, more than a quarter of America's banks collapsed, plunging America into the Great Depression. The government had already created the Federal Reserve Bank to solve this problem before it, and it had worked in the past. This time, the Federal Reserve Bank did not intervene and watched the banks collapse. The M2 supply includes physical currency, such as physical notes and coins, as well as easily liquidated bank accounts that people had. In the early years of the Great Depression, the M2 money supply declined rapidly due to the liquidation of their bank accounts. Historical US statistics have recorded a significant decline in M2 supply, as seen below. [1] The supply of M2 reached its lowest value on record several years before the start of World War II, which was when America entered the Great Depression. This means that most of the money in circulation in the form of bank accounts has been destroyed. Many banks collapsed due to loss of money, and some people lost their money because they could not withdraw it. Many banks have gone bankrupt. The whole problem of bank runs, in which people withdraw massive amounts of money over a short period of time, causing banks to fail, could have been avoided. The Federal Reserve Bank was created under President Woodrow Wilson for the very purpose of giving money to banks in a timely manner. of need. This policy had already worked effectively. On the TV show Free to Choose, a Utah bank manager was interviewed about how his bank survived a bank run. Although Free to Choose is not an impartial and impartial source, the bank manager interviewed is because he was a witness. The director managed the bank panic as it occurred in his bank[9]. The bank received money from the Federal Reserve Bank and it did not collapse. It did, however, change its strategies on how to distribute the money when people chose to withdraw money. In the case of the Great Depression, the Federal Reserve acted tough and decided not to lend money to banks when they desperately needed it. At that time, the governmentwas trying to reverse the extent of inflation that occurred during the First World War. The chart below shows progressive inflation for each year.[7] In the 1920s, after World War I, the inflation rate declined rapidly, even reaching negative amounts, indicating deflation. Before 1929 (year of the stock market crash), the dollar was still experiencing negative inflation. This leads to the conclusion that at that time the government wanted to contract the currency and chose not to give money to the banks for this very reason. The Federal Reserve mistakenly thought the time was right to contract the U.S. dollar, but it fatally mismanaged the money supply and unintentionally caused many banks to fail. In one of many New Deal policies, FDR abolished the gold standard. To his advisors, FDR once said, “Congratulate me. We are off the gold standard” (142, Hiltzik). The US dollar was, at that time, backed by gold. It would be possible to exchange silver for physical gold, and the price of gold has not changed much. Part of the New Deal abolished the gold standard and replaced it with fiat currency. In this system, the government determines the value of the currency, not the underlying gold. This gave the government greater responsibility for controlling the currency. What was observed during the mismanagement of currency during the Great Depression will continue in the future. The amount of inflation is increasing significantly, which many economists believe is not beneficial for long-term economic growth. The government made another mistake by inflating the currency following the abandonment of the gold standard. One way to measure inflation is to use the Consumer Price Index, also known as the CPI. This attempts to capture the extent of price inflation over time. Cumulative inflation compared to 1899 is shown below. [7] What is clear from this chart is that inflation declined or remained somewhat stable after World War I, but after the Great Depression, inflation exploded. The currency was not managed properly by the government, resulting in the economy having a relatively unstable dollar. Another place to look to calculate inflation would be the price of gold. The reason gold was used in the first place was because it was, for the most part, stable. A certain amount of gold was mined from year to year and entered into the gold supply, but this only increased by about 1-4% per year. If the quantity of gold remains relatively constant, then the price of gold reveals the quantity of silver needed to obtain the same quantity of gold. If the dollar is not worth much, then more dollars will be needed to buy the same amount of gold. If the dollar is worth a lot, then fewer dollars will be needed to buy the same amount of gold. For one ounce of gold, the price of gold is given below. [7]During the New Deal, gold was forced to $35 per ounce. Later, the price of gold was released and changed due to the value of the dollar. What can easily be seen is that the price of gold remained relatively stable until after 1975, when it skyrocketed and has since changed more dramatically. The chart clearly points to the idea that inflation was endemic in the mid to late 20th century. Inflation is not good for the economy. This slows growth and harms daily exchanges with money. When people work for money, the employer pays them based on the value of the dollar at that time. Later, the currency may become inflated, thereby decreasing the real value of the worker's money. This paralyzes the purchasing power of,?”