In 1928 the Federal Reserve raised discount rates and used open market sales of government securities to drain bank reserves. Officials hoped tighter credit would slow stock-market speculation, but it also made financial conditions more restrictive as the economy weakened heading into 1929.
By late 1929 the Federal Reserve Bank of New York’s discount rate reached 6%, reflecting the prior tightening cycle and continuing concerns about credit conditions. High short-term rates mattered because they influenced banks’ cost of borrowing from the Fed and broader money-market rates.
From late 1929 through mid-1931, the New York Fed’s discount rate fell from 6% to about 1.5% as the Fed attempted to ease credit conditions. Lower discount rates were intended to encourage borrowing and help stabilize banks and the economy during the downturn.
After the United Kingdom left the gold standard on September 21, 1931, some investors feared the United States might follow and began converting dollars into gold. The New York Fed responded in early October by raising its discount rate to make U.S. assets more attractive and slow gold outflows, even as the banking crisis intensified.
Congress created the Reconstruction Finance Corporation (RFC) to lend to banks and other institutions, including many without access to Federal Reserve credit. Federal Reserve History notes that in 1932–1933 the RFC effectively served as the Federal Reserve Board’s “discount lending arm,” widening emergency support during the crisis.
On February 27, 1932, Congress passed the earlier “Glass–Steagall Act” (distinct from the 1933 law), expanding the Federal Reserve’s ability to lend to member banks against a broader range of collateral. The change was aimed at easing credit strains during deflation and banking stress.
Beginning in April 1932, the Federal Reserve carried out a major open market purchase program, buying about $1 billion in U.S. government securities by August. These purchases were meant to add reserves to the banking system and counter deflation, but the program ended while financial stress continued.
After widespread state bank holidays and severe withdrawals of cash, President Franklin D. Roosevelt signed the Emergency Banking Act on March 9, 1933. The law sought to restore confidence and broadened emergency authorities, including expanding the system’s ability to supply currency and support reopening banks.
On June 16, 1933, Roosevelt signed the Banking Act of 1933 (often called Glass–Steagall). The law created federal deposit insurance and separated key types of commercial and investment banking activities, changing the environment in which the Fed’s credit and open market policies operated.
The Gold Reserve Act, signed January 30, 1934, transferred ownership of U.S. monetary gold from the Federal Reserve System to the U.S. Treasury. This shift mattered for monetary policy because it tied key parts of the monetary framework more closely to Treasury decisions during the recovery period.
On November 15, 1934, Marriner S. Eccles was appointed to head the Federal Reserve Board. Eccles argued that stronger, more centralized monetary and banking governance was needed, and he became a key figure pushing reforms that culminated in the 1935 overhaul of the Fed’s structure.
The Banking Act of 1935, signed August 23, 1935, created the Federal Open Market Committee (FOMC) in its modern form and centralized authority over Federal Reserve open market operations. It shifted control toward a national committee and the Board of Governors, ending the earlier, more voluntary coordination among regional Reserve Banks and marking a lasting institutional outcome of Depression-era policy debates.
Federal Reserve Policy and Open Market Actions During the Depression (1929–1935)