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Because in 1928 macroeconomics hadn't been invented; until Keynes, people had odd ideas about money supply, inflation, and economic growth. Both of the other answers point to the fed's fear of liquidity. If you kill liquidity, then you kill speculation and all is well. Mundell-Tobin theory suggested that raising interest rates would raise the velocity of ...


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I think you are forgetting that the inflation rate during WWI was staggering. The consumer price index at the end of the war was extremely high, and the deflation that you are referring to can be seen as more of a adjustment in pricing back toward pre-war levels. In fact the CPI was relatively flat through the 20s as a 10 year moving average: In 1928, ...


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Note: this answer is not a comment on the soundness/wisdom, or lack thereof, of the economic policy/theory involved. It was to reduce stock market speculation financed by loans. The Roaring Twenties were a period of strong supply-side driven growth. By the mid to late 1920s, it began to be perceived in some quarters that a speculative bubble was emerging, ...



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