The Great Depression had substantial impacts on the nature of banking regulations and fractional reserve requirements in the United States. The Federal Reserve, established in 1913, badly mismanaged the money supply during the 1920s and 1930s. After thousands of bank failures between 1929 and 1933, the Federal Deposit Insurance Corporation, or FDIC, was created and the Fed gained the ability to set reserve requirements.

The Banking Acts

In 1933, U.S. Congress passed The Banking Act in response to the failures of the Great Depression. The Act has four separate and often contradictory parts, including the famous Glass-Steagall provisions that separated investment banking from commercial banking. Congress took another shot at it in 1935, replacing the old parts of the Banking Act with a new, more consistent document.

The Banking Acts shifted power from regional reserve branches to the Board in Washington, D.C. They reorganized the leadership of the Fed and gave even more independence to its governing body.

FDIC insurance was extended to all American depositors up to $100,000 in the hopes of preventing another bank run. The Fed raised the required amount of capital banks had to keep on deposit and also reduced the amount of money that could be loaned on margin for investment purposes.

The Great Depression and the Federal Reserve

There is a good reason the Fed and banking reserves were changed following the Great Depression: they may have caused, or exacerbated, it.

Two separate theories of the causes of the Great Depression blame the Federal Reserve. The monetarist explanation was offered by economists Milton Friedman and Anna Schwartz in 1963. They claimed the Fed burst the stock market bubble in August 1929 and subsequently failed to prop up prices or offer emergency loans to distressed banks, exacerbating bank runs.

Another theory emerged in 1963 from economist Murray Rothbard. Rothbard asserted that the Fed kept interest rates chronically low during the 1920s, fueling a speculative bubble through highly leveraged margin accounts.

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