In the early years of the Great Depression, the United States was on the gold standard and the Fed could not easily adjust the quantity of bank reserves. As a result, the Fed did not engage in broad-based lending during the 1929–33 period. Nor did it cut interest rates aggressively.
By 1933, hosts of financial institutions had failed, real GDP had fallen by over 25 percent, unemployment was 25 percent and the nation had experienced annual double-digit rates of deflation. The Fed’s passiveness in 1929–33 was associated with an economic catastrophe. Let me summarize my review of Federal Reserve performance since the beginning of the Great Recession in December 2007.