What happened during the Great Depression?

This is from Wikopedia:

The great depression describes the period from roughly 1930 to 1941 when economic activity in America was categorized by unemployment, dropping prices, bank failures, and generally poor economic performance. The cause of the great depression has been answered by the Austrian School of economics. In the early twentieth century, the United States created the federal reserve bank (Fed) which was given power over interest rates. In the past, interest rates were controlled by market forces, but the new Fed was given the power to dictate the interest rate. In the “Roaring Twenties”, the federal reserve lowered interest rates too low resulting in an economic boom. This boom resulted in a misallocation of economic resource, that is, investments were made in the wrong industries, especially the highly speculative action on the stock market. What this means is that because interest rates were so low, money was basically “free” resulting in poor investment decisions nationwide. In order to protect the nations gold reserves and prevent a general price inflation, the Fed raised rates in 1929. Once rates started to rise, all of the industries which relied on cheap money were revealed as being unprofitable. This had a domino effect throughout the economy — as businesses went bankrupt, they caused other businesses which were owed money to declare bankruptcy also. This resulted in massive unemployment. Furthermore, with the new Federal Reserve System, banks were using the fractional reserve system. Therefore, bankers deposits were only backed by 10 cents on the dollar. As people realized that banks were getting into trouble, they ran to the bank to get their money out. This resulted in many banks going out of business as they did not have the reserves to pay off the depositors. If the recession had been allowed to run its course, it would probably have been over by 1932. Instead the government, both Republican under Hoover, and Democrat under FDR tried to prop up failing industries. Furthermore the Fed lowered interest rates which provided credit to failed businesses. By these actions, the recession turned into a decade long depression which was finally ended by World War II. If readers are interested in a more modern example, read about the depression in Japan which started in 1990 and was still ongoing by 2005. Again, the government and central bank stepped in to prop up misallocated businesses instead of letting the market correct itself.

Our take on this is that the Fed may not have control of interest rates at some point in this economic cycle, that control will move to the foreign investors who have bought all of our debt over the past seven years.  That is when things will get scary.

 

 

 

 

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