Abstract
Following a period of prosperity after the First World War the world economy collapsed. During the Great Depression of the 1930s, the Federal Reserve failed to dampen the crisis. A lack of economic insight at the central bank, a wait-and-see mindset and the absence of good data led to a string of policy mistakes. Instead of lowering interest rates and expanding the money supply, the Fed did virtually nothing even when prices were falling rapidly and unemployment reached record levels. It also largely failed in its role of lender of last resort, reacting with great hesitance when banks started failing in large numbers as the depression deepened. Fearing that their deposits would be frozen, households and firms scrambled to withdraw their money. Europe was subsequently plunged into a deep depression. Loans were withdrawn on a massive scale causing some big and many small banks to fail. Throughout the 1930s the world experienced chaotic floating currencies and widespread protectionism. The depression only bottomed out after decisive government intervention. In the process central banks lost most of their independence.
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de Beaufort Wijnholds, O. (2020). From War to War: 1914–1939. In: The Money Masters. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-40041-5_5
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DOI: https://doi.org/10.1007/978-3-030-40041-5_5
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