Quote from WaveStrider:
Really? So when people were trying to get at their savings, the Fed made extra-sure they couldn't?
Why would they do that?
You don't understand.
The FED "contracted" the money supply by one-third and wiped-out purchasing power in an unprecedented fashion. A series of cummulative mistakes by the FED literally caused the Great Depression.
For example, this tightening of policy was followed by falling prices and weaker economic activity:
"During the two months from the cyclical peak in August 1929 to the crash, production, wholesale prices, and personal income fell at annual rates of 20 per cent, 7-1/2 per cent, and 5 per cent, respectively." Of course, once the crash occurred in October--the result, many students of the period have surmised, of a slowing economy as much as any fundamental overvaluation--the economic decline became even more precipitous.
Incidentally, the case that money was quite tight as early as the spring of 1928 has been strengthened by the subsequent work of James Hamilton (1987). Hamilton showed that the Fed's desire to slow outflows of U.S. gold to France--which under the leadership of Henri Poincaré had recently stabilized its economy, thereby attracting massive flows of gold from abroad--further tightened U.S. monetary policy."
Another tightening occurred in September of 1931, following the Sterling crisis.
In that month, a wave of speculative attacks on the pound forced Great Britain to leave the gold standard. Anticipating that the United States might be the next to leave gold, speculators turned their attention from the pound to the dollar. Central banks and private investors converted a substantial quantity of dollar assets to gold in September and October of 1931. The resulting outflow of gold reserves (an "external drain") also put pressure on the U.S. banking system (an "internal drain"), as foreigners liquidated dollar deposits and domestic depositors withdrew cash in anticipation of additional bank failures. Conventional and long-established central banking practice would have mandated responses to both the external and internal drains, but the Federal Reserve--by this point having forsworn any responsibility for the U.S. banking system, as I will discuss later--decided to respond only to the external drain. As Friedman and Schwarz wrote, "The Federal Reserve System reacted vigorously and promptly to the external drain. . . . On October 9 [1931], the Reserve Bank of New York raised its rediscount rate to 2-1/2 per cent, and on October 16, to 3-1/2 per cent--the sharpest rise within so brief a period in the whole history of the System, before or since (p. 317)." This action stemmed the outflow of gold but contributed to what Friedman and Schwartz called a "spectacular" increase in bank failures and bank runs, with 522 commercial banks closing their doors in October alone. The policy tightening and the ongoing collapse of the banking system caused the money supply to fall precipitously, and the declines in output and prices became even more virulent. Again, the logic is that a monetary policy change related to objectives other than the domestic economy--in this case, defense of the dollar against external attack--were followed by changes in domestic output and prices in the predicted direction."
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm
In other words, the FED's pre-occupation with the Dollar ( and external issues ) and no concern about the U.S. Banking System lead to an incredible series of "tightening" operations that created a spectacular amount of bank failures and bank runs.
The FED didn't figure out its mistakes until Congress began to put a lot of pressure on the FED to ease monetary policy and stop the rounds of "tightening" . . . This didn't happen until the Spring of 1932, from April to June.
