FEDERAL RESERVE AND THE GREAT DEPRESSION

FEDERAL RESERVE AND THE GREAT DEPRESSION

FEDERAL RESERVE AND THE GREAT DEPRESSION

It is wisely said that whatever we do in a financial crisis affects us in the next financial crisis. The history of American economy is full of such cases of financial crisis that had led to changes in the economy on a major scale. In nearly every scenario, the cause of the crisis was traceable, and most of the times it was due to the expansion or contraction of credit in the economy. Before the advent of institutions like FED, it was not possible to determine the cause of such problems; the reasons behind the expansion or contraction had been turbulent. The first real test of the Federal Reserve was during the famous “Great Depression” in America, in which the FED failed to response properly and could not play its part to stop the turn down in the economy. After that depression, the FED has learned a great deal about how to manage its policies during difficult times, and the recent house-financing crisis in the American economy was the biggest challenge for FED after the great depression. (Roger 2009)

The reasons behind the great depression are not clear, but many people blame the FED for the great depression. It was the responsibility of the Federal Reserve to handle the economy and avoid such crisis. To understand this phenomenon we need to discuss in brief the working and responsibilities of the FED.

The Federal Reserve has been playing a huge role in the economy of America, but it does not receive much publicity in America. Things changed dramatically when the American economy collapsed a year or two ago after the whole house financing sector collapsed. The Federal Reserve was established in the year 1913, as the central bank of America. The Federal Reserve has a governing board, which consist of seven members and they handle twelve regional branches of the FED over the country. The FED is in constant interaction with the government and keeps the US government aware of the financial health of the country. The role of the Federal Reserve is described very clearly; it is responsible to manipulate the monetary policy of the country, to keep the inflation under control by changing the interest rate level in the economy. It is the biggest responsibility of the Federal Reserve to maintain price stability in the American economy. In their efforts to maintain the price stability in the market, FED sometimes has to take the following steps,

To increase the interest rate in the economy to slow down the activities in the economy and keep things under control

To take difficult and unpopular step to cure the problems being faced by the American economy

The most important work of the FED is to control the short-term interest rates in the economy, which it does through the open market operations. (Meltzer 2003)

Then the most important function of the FED is to control the monetary policy of the ...