The Liquidity Trap of the 1930s and Its Relevance Today

'The great economist John Maynard Keynes dubbed this phenomenon a "liquidity trap." It was perhaps the first realization that the Fed's powers were not as great as previously thought. (If you think about it, this is the same thing that is keeping Japan down for the last 15 years.)This was most disconcerting, since the main reason behind the creation of the Fed back in 1913 was to ensure that panics, such as the one in 1907 that was caused by insufficient liquidity in the economy, could be nipped in the bud - if not prevented altogether by a generous dollop of liquidity from the central bank.'