In the late 1920s and early 1930s, America experienced an extreme depression known as the Great Depression due to a mistake by the Federal Reserve Bank. In an attempt to bring the country out of the depression, the then American president, Franklin D. Roosevelt (FDR), implemented policies known as the New Deal. An important part of the New Deal was the monetary policy that effectively destroyed the Gold standard and put fiat money in its place. The reason the Great Depression was so devastating was due to mismanagement by the Federal Reserve Bank, and the New Deal responded incorrectly by allowing more mismanagement to occur in greater quantities in the future, damaging the economy. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay The root cause of the Great Depression was due to a mistake by the Federal Reserve Bank. During a small economic downturn, people began rapidly withdrawing money from their bank accounts, and over time, some banks ran out of money and collapsed. This led to a massive rush where many people withdrew money from their bank accounts. Eventually more than a quarter of America's banks collapsed, plunging America into the Great Depression. The government had created the Federal Reserve Bank to solve this problem before him, and it had worked in the past. This time, the Federal Reserve Bank did not intervene and watched the banks collapse. M2's offering includes physical currency, such as physical notes and coins, as well as easily liquidated bank accounts owned by people. In the early years of the Great Depression, the M2 money supply rapidly decreased as people liquidated their bank accounts. Historical US statistics have seen a sharp decline in the supply of M2, as shown below. [1]The supply of M2 reached its lowest value on record several years before the start of World War II, when America entered the Great Depression. This means that most of the money circulating in the form of bank accounts has been destroyed. Many banks collapsed due to loss of money and some people lost their money because they could not withdraw it. Many banks have failed. The whole problem of bank runs, where people withdraw huge amounts of money in a short period of time thus bankrupting banks, could have been avoided. The Federal Reserve Bank was created under President Woodrow Wilson precisely for the purpose of giving money to banks in times of need. This policy had already worked effectively before. On the television program Free to Choose, a Utah bank manager was interviewed about how his bank survived a bank run. Although Free to Choose is not an impartial and impartial source, the bank manager interviewed is because he was a witness. The manager was managing the bank run as was happening in his bank[9]. The bank received money from the Federal Reserve Bank and did not collapse. However, it changed its strategies on how to distribute the money when people chose to withdraw money. In the case of the Great Depression, the Federal Reserve acted strictly and decided not to lend money to banks when they desperately needed it. At this time, the government was attempting to reverse the extent of inflation that had occurred during World War I. The chart below shows incremental inflation for each year.[7] In the 1920s, after the First World War, the inflation rateit decreased rapidly, even reaching negative values, indicating deflation. Before 1929 (the year of the stock market crash) the dollar was still experiencing negative inflation. This leads to the conclusion that at that time the government wanted to contract the currency, and for this very reason it chose not to give money to the banks. The Federal Reserve mistakenly thought it was the right time to contract the US dollar, but it fatally mismanaged the money supply and unintentionally caused the collapse of many banks. In one of many New Deal policies, FDR abolished the gold standard. To his advisors, FDR once said, “Congratulations to me. We are off the gold standard” (142, Hiltzik). At that time the US dollar was backed by gold. It would be possible to exchange money for physical gold and the price of gold has not changed much. Part of the New Deal abolished the gold standard and replaced it with fiat money. In this system, the government determines the value of money, not the underlying gold. This placed greater responsibility for controlling the currency in the hands of the government. What was seen with currency mismanagement during the Great Depression will continue into the future. Inflation is rising sharply, which many economists say is not good for long-term economic growth. The government made another mistake by inflating the currency following the abandonment of the gold standard. One way to measure inflation is to use the consumer price index, also known as the CPI. This attempts to capture how much inflation has occurred in prices over time. Cumulative inflation for 1899 is shown below. [7]What can be clearly seen in this graph is that inflation fell or remained fairly stable after World War I, but after the Great Depression, inflation skyrocketed. The currency has not been managed properly by the government, giving the economy a relatively unstable dollar to use. Another place to look to calculate inflation would be the price of gold. The reason gold was used in the first place was because it was, for the most part, stable. Some gold was mined year after year and entered the gold supply, but this only increased by about 1-4% per year. If the quantity of gold remains relatively constant, the price of gold reveals the amount of money needed to obtain the same amount of gold. If the dollar is not worth much, more dollars will be needed to buy the same amount of gold. If the dollar is worth a lot, fewer dollars will be needed to buy the same amount of gold. For an ounce of gold, the price of gold is shown below. [7]During the New Deal, gold was forced to cost $35 an ounce. Subsequently, the price of gold was released and changed based on the value of the dollar. What can easily be seen is that the price of gold remained relatively stable until after 1975 when it skyrocketed and has changed more dramatically since then. The graph clearly points to the idea that inflation was rampant in the mid to late 20th century. Inflation is not good for the economy. It slows growth and damages the daily exchanges that occur with money. When people work for dollars, the employer pays them based on the value of the dollar at that time. Subsequently, the currency may inflate, thus decreasing the actual value of the worker's money. This cripples the purchasing power of some and diminishes the magnitude of overall GDP (gross domestic product) growth. Furthermore, there are many countries that have inflated their currencies and suffered negative effects. While the 20th century had a lot of inflation, some time periods had worse inflation than others. Louis Woodhill writes,?”