Fed's Inadequate Response Worsened Great Depression, Historians Argue

Financial historians and economists have long debated the role of monetary policy in exacerbating the Great Depression. A recent analysis by Traders Union highlights a critical aspect of the Federal Reserve's response to the crisis: its failure to address surging reserve ratios and public currency withdrawals.

According to George Selgin, as noted by Traders Union, the Fed did not actively reduce the money stock between 1929 and 1933. Instead, the issue was the Fed's insufficient response to rising bank reserve ratios and public currency withdrawals, which lowered the base money multiplier during this period.

Selgin has previously clarified that supporters of fractional reserve banking do not oppose fully backed deposit accounts. He has also addressed criticism from those favoring 100-percent reserves, arguing that antebellum U.S. free banking systems were flawed and not true examples of successful free banking.