The great depression and new deal study guide


) The Federal Reserve’s failure to prevent widespread collapse of the nation’s banking system in the



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2) The Federal Reserve’s failure to prevent widespread collapse of the nation’s banking system in the

late 1920s and early 1930s, leading to severe contraction in the nation’s supply of money in circulation


    • The Federal Reserve System functions as the central bank of the United States. The Federal Reserve Act created the Federal Reserve Bank system in 1913. This law divided the United States into twelve Federal Reserve districts, each of which possesses a Federal Reserve Bank. A Federal Reserve Bank is a banker’s bank. Only banks can have accounts at a Federal Reserve Bank. If a bank needs to borrow money, it may do so from the Federal Reserve Bank. However, a bank must pay interest on its loans from the Federal Reserve, just as individuals must pay interest if they borrow money from a bank. The Federal Reserve Board, appointed by the President of the United States, oversees the actions of the Federal Reserve Banks and sets the interest rate which banks must pay to borrow money from the Fed. The Federal Reserve’s power to set interest rates enables it to control the nation’s money supply. If the Federal Reserve Board believes the American economy is slowing down, it will cut interest rates and thereby encourage borrowing. On the other hand, if the Federal Reserve Board believes the economy is overheating and thereby causing inflation, then it will raise interest rates. (Inflation means prices increase, and the dollar buys less.)



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