[adios]

Actually what happened was that the Fed basically drained liquidity from the system at a time when they should have been increasing the money supply. I think it was a thread by Borodog where I posted the relationship between the money supply, inflation, economic growth, and the velocity of money. The result of mismanagement of the money supply during the depression was severe deflation and subsequent negative economic growth. The job of the Fed is to maintain price stability more or less as the desired inflation rate is somewhere between 1% in 3% (some might argue with these numbers). The Fed controls the money supply and must anticipate econimic growth and the velocity of money in order to maintain price stability.