Keys Ideas/Topics/Issues (F&S 7-7.5)

• %ΔM, %Δv, %ΔP, %Δy– Closer look at velocity

• Importance of HPM, D/C, D/R => %ΔM• Importance of Great Contraction• Timeline of key events (1929-33)• Why existence of Fed prevented 1907-type solution• Closer look at bank failures

– Why were they important?

– Why did they happen?

– Why was Fed relatively unconcerned?

1

Great Contraction1929-1333

Great Contraction1929-1333

Time Line of Key Events: • Fed “tightens” money to fight stock-market

speculation – 1928-29. – FRB-NY raises discount rate from 3.5% to 5% in early 1928.– Fed securities holdings drop from over $600 to $210 million

(year-end 1927 to August 1929).– FRB-NY raises discount rate from 5% to 6% in August 1929.Result: Money stock declines slightly from April 1928 to August 1929

(only other 16-month declines are 1907-08 and 1920-21).

• Stock Market Crash – October 1929

2

Great Contraction1929-1333

Time Line of Key Events: • First Banking Crisis – October 1930• Second Banking Crisis – March 1931• Britain’s Departure from Gold – September 1931 • Large-Scale Open-Market Purchases – April 1932• Banking Panic of 1933

3

Great Contraction1929-1333

4

Great Contraction1929-1333

5

Great Contraction1929-1333

6

Great Contraction1929-1333

7

Great Contraction1929-1333

8