all of the below is from the book Money: Whence it Came, Where it Went, available at Amazon last I checked.
The Federal Reserve System is treated by nearly all economists with reverence. On no matter is their instruction of the young in the subtlety and benignity of established institutions more admiring - or in broad effect, more successful....That there is conflict here with circumstance, even the minimally alert will have sensed. As an answer to the great panics, the System was notably defective...Nor was it better as an antidote for an alarming epidemic of bank failures. In the twenty years before the founding of the System there were 1748 bank suspensions; in the twenty years after it ended the anarchy of unstable private banking, there were 15,502.
The Depression: The Fed Botches its Single Most Important Job
In the months following the crash the Federal Reserve Banks did reduce interest rates...More important, open-market purchases of securities were not encouraged but avoided. Increasingly, in these years, depositors, individually or in droves, were descending on the banks for cash. The obvious course was for the Federal Reserve to buy government securities, flood the banks with the resulting funds...But not until 1932 did the Federal Reserve Banks undertake open-market operations on any appreciable scale.
The Ineffectiveness of Monetary Policy
Not surprisingly, after 1933, monetary policy in general and the Federal Reserve System in particular sank into the shadows...There was, however, one glowing moment...In 1936 and 1937, with the economy making a very gradual recovery, the new power to raise the reserve requirements of member banks was invoked...The combination of restrictive monetary policy and restrictive budget policy brought a sharp new recession within the arms, as it were, of the larger depression...
The 1937 action was the last error of the Federal Reserve for a long time. That was because it was its last action of any moment for fifteen years. The problem with monetary policy was now clear. It could make reserves available. It could not cause them to be borrowed, bring about the resulting deposit creation. On the old question of how causation ran, it was plain that, in depression at least, it was the state of trade that ruled. The supply of money did not affect prices and trade nearly so much as the state of trade affected the supply of money and the level of prices...Money must be not only manufactured but spent - made to operate directly on the state of trade. This was the policy that was now, though with great caution, pursued. It was fiscal as distinct from monetary policy. It is tied irrevocably to the name of Keynes.
