the Federal Reserve

the Federal Reserve

Bubbles are more likely to occur when capital can be faster freely in all countries. Bubbles is facilitated by easy credit creation. Many bubbles are the result of policies of central banks. Depression is a good example. Fed bore primary responsibility for turning the crisis of 1929 during the Great Depression. By sterilizing the large inflows of gold in the U.S. and preventing an increase in money supply, the Federal Reserve to prevent a bubble from growing bigger. But later, the Fed did too little to counter the credit contraction caused by bank failures. In November and December 1930, 608 banks failed. The Fed made a mistake by reducing the amount of the loan outstanding. Banks have started selling assets in a frantic dash for liquidity, driving down bond prices. When Great Britain abandoned the gold standard in September 1931, foreign banks rushed to convert dollar holdings into gold. The Fed increased the discount rate in two steps by 3.5%. This halted foreign consumption, but caused more bank failures. Between 1929 and 1933, while commercial bank deposits and loans reduced the cash in the hands of the public has increased significantly. Not surprisingly, the economy went in the deflation mode.