USA HISTORY

Detailed explanation-1: -In the ‘30s, the Fed more or less let the banking system collapse, allowed the money supply to collapse and allowed the price level to fall. You had tremendous deflation, and that contributed to the contraction of the whole economy.

Detailed explanation-2: -The Federal Reserve could have prevented deflation by preventing the collapse of the banking system or by counteracting the collapse with an expansion of the monetary base, but it failed to do so for several reasons. The economic collapse was unforeseen and unprecedented.

Detailed explanation-3: -Deflation increased the real burden of debt and left many firms and households with too little income to repay their loans. Bankruptcies and defaults increased, which caused thousands of banks to fail. In each year from 1930 to 1933, more than 1, 000 U.S. banks closed.

Detailed explanation-4: -The Fed maintained a tight economic policy, keeping real interest rates high, and also limited its extension of credit to troubled banks. C. The Fed provided significant access to credit for struggling banks, in an unsuccessful attempt to stem the tide of bank failures.