If the Federal Reserve was created to prevent huge recessions, how did the great depression happen?

Answer 1

I'm not sure I agree with your premise.

Nevertheless, the Federal Reserve does not control the stock market and how stocks are valued and bought.

Answer 2

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. The history of central banking in the United States begins with the Bank of the United States, which received its charter in 1791 from the U.S. Congress -- a charter signed by President George Washington. The Bank's charter was designed by Secretary of the Treasury Alexander Hamilton, modeling it after the Bank of England, the British central bank.
The Federal Reserve System is a quasi-governmental/quasi-private banking system composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with their own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Bank; and (5) various advisory councils.

The Federal Reserve Bank didn't keep records of the flow of money in the US as they do today. Had that happened the great depression may not have happened.

Answer 3

two things happened at the same time ...

1st, the Federal Reserve didn't understand that managing the whole banking system was different than managing a single bank. In 1929/1930, the FRB's leaders were all RL bankers from the industry, not economists or professional Fed managers.

A single bank tightens lending, possibly quite a lot, when a panic starts. That is exactly the wrong thing for the central bank to do in a financial panic ... and it is what the Fed did in 1929/1930. oops.

2nd, Congress got itself into panic mode and passed the Smoot-Hawley Tariff Act. Then, the President signed it.

Smoot-Hawley tried to preserve American jobs and industry from foreign competition by raising tariff rates quite high.

It backfired badly. Foreign governments retaliated by raising their own tariffs. Then foreign trade dried up dramatically.

This threw longshoremen, sailors, railroad workers, and truckers out of their jobs ... no loads going in or out meant no work in those days and unemployment compensation was unknown.

Further, domestic manufacturers couldn't suddenly increase production to replace the foreign goods -- many didn't have the physical plant to do so. And domestic exporters suddenly discovered that their factories were too big for the domestic market.

So the prices that made in America goods commanded, now being limited to the US market, plunged as production volumes were way too high. And the prices of goods to replace foreign imports soared because there wasn't enough production to meet demand.

This means that some factories laid off their workers while others tried to run double shifts, etc.

It turned out that layoffs exceeded hiring [no surprise, eh?] and with transportation workers already out of jobs and more lost in manufacturing that employment plunged and then those workers stopped spending ...

wham! Instant depression.

Which the Fed refused to counteract with cheap money because the bankers running it 'knew' that the thing to do was pull in their horns on lending.

***
Could this happen again?

I'd like to tell you "NO WAY!" and that would be a lie.

Congress wants to 'save American jobs' (again) by raising trade barriers against foreign goods. Today's bugaboo is China. Yesterday's was Mexico. In the 1980's it was Japan. I have no idea who will be the import scare victim country of next decade -- India, Indonesia, and several others are all possibles.

Of course, unemployment is actually running at 4.5% -- near a historic low. That doesn't help individuals who have lost their jobs and who'd like to freeze the world's economy so that they can have their 'lifetime' job back at cushy wages and benefits.

Nor does it prevent Congress from pandering to these individuals by raising the prices you have to pay at the grocery stores, at the gas pump, and all the other stores just so these few individuals can keep their jobs forever.

{but, if you're running for Congress, don't try to sell this in seattle. folk there know that foreigners can't buy Boeing aircraft if they can't sell their products in america for the dollars to pay Boeing ... and they also know that their jobs at Boeing pay a lot better than jobs at Starbucks.}


does this help?