The Four Major Monetary Policy Errors
1. The tighening of the money supply in 1928 helped lead to the crash. This tightening of the money supply took the form of increased interest rates. The logic was that this would help those who needed the credit for productive purposes, and would disuade those who were using the credit for speculation. The Fed at the time had an onging concern with the speculation.
It worked. The Crash of 1929 will show us that the efforts the Fed did in fact pay off. They managed to bring down prices and slow down speculation. The flaw in their "pyrrhic victory" was that they accomplished their goal at extreme cost.
2. Next, the gold standard came under fire. (LINK)
When many speculators doubted the ability of certain countries, namely Britain, to maintain their currency value relative to gold, they acted. The speculators who expected Britain to be forced off the gold standard and exchanged their pounds for gold forced the pound off of the gold standard. Here, like the panicky crash of '29, we have a "self fulfilling prophecy."
3. In 1932 the Fed eased the interest rates on government bonds and corporate debt because they were under fire from Congress. This brought about an uproar who argued that the depression was necessary to get rid of the financial excess of the 20's. The claimed that the relative disparity between the rich and poor had grown too large. When the Fed eased many fired back claiming that there was already easy money, clearly seen in the Treasury Bonds and the almost zero nominal interest rate. Later in 1932, the Fed reversed their policy.
4. The bank problems of the time received no help from the Fed and were left to their own devices. During the "bank holidays" from 1930 to 1933, half of the U.S. banks had closed their doors or merged. Not only was there a problem with having less banks but the banks that survived did not seek to expand their deposits or increase their loans to replace those lost when other banks had closed. Furthermore, people did not trust banks and hoarded cash, taking currency out of circulation. The dollar bills in the shoebox buried in the lawn can't be circulated. This exacerbated the already dismal and decreasing money supply.
The Liquidationists of the time applauded these circumstances because they felt that this was weeding out the weak banks. It was harsh, yes, but necessary for the banking system to be strong in the long run.
