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Fall 1930 to winter 1933Reputable source · 2 sourcesWell documented

The Money Supply Collapses and the Fed Fails to Act

From 1930 to 1933 the quantity of money falls by nearly a third, and prices fall with it

On the timeline · around Fall 1930 to winter 1933 · The Crash and CollapseThe Crash and CollapseThe New DealThe Money Supply Collapses and the Fed Fails to Act19311932

Quick facts

Money supply decline
Nearly 30 percent, 1930 to 1933
Mechanism
Deflation raised debt burdens and forced bankruptcies
Monetarist source
Friedman and Schwartz, A Monetary History, 1963
Bernanke, 2002
"We did it. We're very sorry. We won't do it again."

What happened

From the fall of 1930 through the winter of 1933 the money supply fell by nearly 30 percent as the banking system collapsed. Deflation on that scale raised the real burden of debts, distorted decisions, cut consumption, and pushed banks, firms, and individuals into bankruptcy. The Federal Reserve could have countered the fall by preventing bank collapses or expanding the monetary base, but it did not, held back by a decentralized decision structure, disagreement among its leaders, adherence to the real bills doctrine, and a determination to defend the gold standard by keeping money tight. In 2002 Ben Bernanke told an audience honoring Milton Friedman that regarding the Great Depression, we did it, we're very sorry, and we won't do it again.

Why it matters

This is the heart of the monetarist explanation of the Depression, set out by Milton Friedman and Anna Schwartz in their 1963 Monetary History: the slump became a catastrophe because the Federal Reserve let the money stock collapse. That reading, once contested, later shaped how central banks including Bernanke's Fed responded to the 2008 crisis, when they flooded the system with liquidity rather than letting it drain away.

How we know

The nearly 30 percent fall in the money supply and the Fed's failure to act as lender of last resort are documented in the Federal Reserve History overview essay, which reflects the conclusions of Federal Reserve chairmen and the Friedman and Schwartz monetary history it cites.

Sources

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Part of a timelineThe Great Depression20 events · The longest and deepest downturn in the history of the modern industrial economy, from a stock market that lost 89 percent of its value to breadlines that ran for a decadeView all →
The Money Supply Collapses and the Fed Fails to Act · The Great Depression · SourcedStory