Ever since the creation of the Fed, there have been a series of booms and busts that tested its effectiveness and resilience. The first of many such challenges is the stock market crash of 1929.
Part 3. The Gold Standard Era of Money
In November 1930, the double-whammy punch of banking failures and subsequent panics heralded the beginning of the Great Depression.
After the economic chaos we discussed in the last post, you can understand why it was clear that President Franklin D. Roosevelt (FDR) had a mandate to end the Depression.
A part of the Banking Act of 1935, the FDIC was a pivotal act because it restructured the Federal Reserve and financial system as a whole.
The Great Depression was the first great test the Fed faced, and by its own accounts, it did not rise to that challenge. The Fed failed both on the monetary policy side and on the financial stability side.
The collapse of worldwide economies led to the rise of political tensions that kept growing throughout the 1930s, eventually leading to World War II.
Overall, during WWII and its aftermath, the Fed was forced to take a back-seat role, listening to the Treasury instead of making decisions independently.
The development of the Bretton Woods system in 1958 was a pivotal moment in modern banking. The system established the International Monetary Fund (IMF) and what eventually became the World Bank Group.
Initially, the Bretton Woods system seemed to work well. However, this started to change in the 1960s when European and Japanese exports became more competitive with US exports.