The Great Depression is considered as the most severe economic depression in the history of the United States. In terms of the economic and monetary unions, it had meant: a decrease of more than half of US GDP (current prices) and over a third of US GDP (constant prices) between 1929 and 1933 - a decline in income by 36% between 1929 and 1933 and a contraction of income of 53% over the same period - a decline of nearly one third of the money supply in the United States between 1929 and 1933 - a division by three of the number of US banks with the closure of 9,000 banks - bank holidays (bank holiday) for almost eight days in 1933.
According to Friedman and Schwartz, these figures are an expression of the insufficient response of US monetary authorities. The crisis of the 30s brought into focus the importance of 'monetary forces'. The lack of intervention by monetary authorities had largely contributed to exacerbating the contraction in money supply and had almost caused the collapse of the US banking system. The monetary authorities should have taken steps to prevent the contraction of money supply.
There were two factors that caused a crack in October 1929:
The increase in loans granted by the New York banks to brokers to deal with a sudden drying up of loans from the withdrawal of foreign funds: During the two weeks preceding the crack it was down by 120 million dollars in loans from foreign funds; From 4 October to 31 December 1929: there was a decrease in loans from brokers of 4.5 billion dollars.
The beginnings of a reversal of the U.S. economy since August 1929 resulted in the two months preceding the crisis, a 20% drop in production at an annual rate, a 7.5% drop in wholesale prices at an annual rate and a 5% drop in revenue at an annual rate.
The stock market crash, a symptom of a severe contraction of economic activity, creates a climate of uncertainty contrary to the expansion of economic activity. It thus generates a fall in consumption from consumers and businesses are characterized by the declining velocity of money:
The speed of money circulation had dropped by 13% between 1929 and 1930.
In addition, the stock market crash caused a significant monetary contraction:
The money supply had contracted by almost 2.6% between October 1929 and October 1930.
Tags:, Great Depression, 1929-1933; 'The monetary history of the United States'; Friedman and Schwartz
[...] In order to limit the leak of the stock of American gold, the Federal Reserve System increased twice its rediscount rate and it this led to a rise of on October 16. Respect for the Gold Exchange Standard (GHG) by the United States carries difficulties for the banking system as it faces both: - Conversion of dollars into gold: depleting gold reserves of U.S. banks; - A conversion of deposits into currency of the Americans. This leads to further bank failures and a contraction in money supply: - Between August 1931 and January 1932, banks failed in 1860 with the loss of billion of deposits; - The money stock fell by 12% between August 1931 and January 1932 Faced with this situation, banks have only two solutions: - Borrow from the Federal Reserve System; - Sell of their assets in the financial market. [...]
[...] January-August The monetary base would have increased $ 1.170 billion 1931 (instead of increase only $250 million) and bank reserves have increased by nearly $800 million (instead of dropping $120 million), which would have banks to meet the liquidity demands. Banks were not forced to sell assets to meet this demand and have been able to repay the loans from the Federal Reserve System; The appropriations for the Federal Reserve were also more important: they would be increased from $50 million to $470 million; Fewer runs to the banks; The outflow of gold would have reduced the problems in Europe; Perhaps there would be no second banking crisis. [...]
[...] Moreover, banking crises was mitigated and this was because monetary authorities had taken appropriate measures: - Faced with the massive withdrawal of deposits that threatens the entire U.S. banking system, the Federal Reserve System had the first banking crisis and restricted the ability to convert deposits into cash in order to limit the mad rush to liquidity; - Banking crises could have been avoided if banks were able to easily procure monetary base (high-powered money) . They would not have had to engage in a loop contraction of deposits and assets. [...]
[...] II) Crisis worsened by the lack of action taken by the Federal Reserve System Federal Reserve System The Federal Reserve Act was passed by Congress on December and it establishes the Federal Reserve System at the heart of Federal Bank (Central Bank), and it is the holder of three instruments of monetary policy. This system is based on: - The Federal Reserve Board of the System, responsible for two instruments, the discount rate and reserves; - 12 Federal Banks located in major cities - The Open Market Investment Committee (now the Federal Open Market Committee) that was established in 1923 whose purpose is to coordinate the operations of the Federal Bank and is responsible for the third instrument, and the policy of open market. [...]
[...] companies fell by $85 billion; - Bank failures led to a contraction of the money: the money stock fell by one third between the years of 1929 and 1933. Deposits of commercial banks declined by nearly 42% and it represented a sum of $18 billion. September 1931: End of parity between the pound-sterling and gold in the GHG Gold exchange standard transmission factor of the crisis The inputs and outputs with gold determines the level of price and income of the country and its trading partners.The authors suggest that the U.S. [...]
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