Role of Federal Reserve in Casuing the Great Depression Essay

The Great Depression is undoubtedly one of the most significant events in American and world history. It was the most widespread depression in the 20th century affecting most nations in the world and lasting for as long as a decade. However, there still remain unanswered questions regarding the cause of the great depression. One of the most debated topics regarding the Great Depression continues to be the role of the Federal Reserve (Fed) in causing and prolonging the crisis. The Federal Reserve, the central banking system of the United States, was created on December 23, 1913, with the enactment of the Federal Reserve Act, primarily in response to a series of financial panics in 1907. The Fed had being in existence for 15 years before the†¦show more content†¦The gold standard regulated the quantity and growth rate of the nation’s money supply. The Federal Reserve was charged with the duty of regulating the inflow and outflow of gold by increasing or decreasing the d iscount rate. The discount rate is the interest rate the Fed charges depository banks that borrow reserves from it. An outflow of gold meant an increase in the money supply and this was triggered by a decrease in the discount rate. On the other hand an inflow implied an increase in the discount rate and hence a restriction of the money supply. The activities of the Federal Reserve with regard to the gold standard were to be in accordance with all other countries on the standard such as the United Kingdom in other for the system to work effectively. On the 11th of January 1929, the Wall Street Journal published an article addressing the probably effects of an increase in the discount rate. The article titled â€Å"Rise In Discount Rate Unlikely Soon† emphasized on the fact that a rise in the discount would most likely diminish the money supply. Banks would be less inclined to borrow money from the Federal Reserve due to the high discount rate and therefore would restrict the amount of money loaned to customers. The article also touched briefly on the effect of the increase on London stating â€Å"An increase in rates here, without an increase in London, unquestionably would attract gold from London† the outcome of which would