The Strategy and Consistency of Federal Reserve Monetary Policy, 1924–1933

The contribution of monetary forces to the Great Depression continues to be debated, but today most researchers agree that Federal Reserve System (hereinafter referred to as the “Fed”) actions prolonged, if not worsened, the economic collapse. Most serious criticism of the Fed comes from monetarists such as Friedman and Schwartz (1963, pp. 300–1), who write, “The contraction is … a tragic testimonial to the importance of monetary forces. … [D]ifferent and feasible actions by the monetary authorities could have prevented the decline in the stock of money. … [This] would have reduced the contraction's severity and almost as certainly its duration.” But many who contend that monetary forces were not paramount still argue that mistakes by the Fed contributed to the depression's severity.

This study examines the causes of Federal Reserve errors during the Great Depression. Its premise is that monetary policy was mishandled and that the depression would have been less severe had the Fed taken appropriate measures to counteract it. Others have suggested a number of explanations of Fed behavior during the depression, but generally they fall into two categories. The first is that during the 1920s policy makers responded swiftly and appropriately to fluctuations in economic activity, but a change in leadership prior to the depression produced a distinct shift in Fed behavior, causing policy to be unresponsive to economic conditions thereafter.