On the 22^nd of January 2015, the European Central Bank (ECB) launched a massive government bond-buying program which will inject hundreds of billions in new money into the euro zone economy. The ECB said that the purchasing of sovereign debt will last about a year and a half from March onwards, till the end of September 2016. This would mean that more debt will be scooped up from the biggest economies such as Germany than other small economy. The new Quantitative Easing (QE) program will inject 60 billion euros a month to revive the economy growth as well as eliminating stubborn deflation through lowering interest rates. By the end of the program next year, more than 1 trillion euros will be created.

Of the new QE program, only 20% of purchases would be under the ECB. This means that the major burden lays on the national central banks should any euro zone government default on its debt. The non-single monetary policy has raised concerns over the effectiveness of the bond-buying program and the anticipation that the ECB might be preparing for a breakup of the euro.

Back in 2012, the ECB promised to do “whatever it takes to save the euro”, borrowing costs dropped around the euro zone, yet there weren’t any signs of improvement in the economy. And now, there is little reason to think this new QE program will be of any different. The fact that the ECB have failed to revive the economy back in 2012 showed a decrease in confidence from the Europeans to the ECB.

Whether it be the Fed, Bank of Japan or ECB, it is always wise to look at the monetary failures of the Great Depression before considering the use of government intervention in monetary policies of an economy. Through analyzing the cause of the Great Depression, I believe one could learn a lot from the mistakes made in the past.

Contrary to the objectives of the Fed, it was actually them who caused the Great Depression. On the ninetieth birthday of Milton Friedman, Ben Bernanke representing the Federal Reserve said to Milton Friedman and Anna Schwarz regarding the Great Depression: “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” So how exactly the Fed did caused the Great Depression?

The Great Depression was caused by the Fed because it allowed the money supply to decrease so rapidly, which resulted in a decrease in income coupled with high interest rates. During the period of 1929 to 1933, the money supply fell by 33% while real money income fell 36%. The drastic decline of money supply indicates deflation. During deflation, borrowing becomes less favorable as consumers begin to hold on to their money in anticipation that it will be worth more tomorrow than it is today. Coinciding with this trend, it led to bank failures which reduced public confidence in financial institutions. As a result, the public was less likely to hold money in the bank, less likely to spend, and less likely to borrow due to the fears caused by deflation. Thus, the contraction of the money supply which indirectly led to deflation not only lowered income but also reduced spending by causing uncertainty and depressing investment.

The understanding of the Great Depression proved a very important point. That is, by entrusting a nation’s monetary policies to an institution such as the Fed, the nation economy could be destroyed if not properly managed. As in the case of the ECB, the mismanagement and misjudgment of monetary policies could incur upon the euro zone a massive disaster such as the Great Depression.