Member Bank Borrowing and the Fed's Contractionary Monetary Policy during the Great Depression

This paper examines the causes of Federal Reserve policy errors during the Great Depression. It finds compelling evidence that the Fed developed a flawed strategy during the 1920s, and continued to use that strategy during the depression. The Fed's strategy relied on the behavior of member bank borrowing and interest rates as policy indicators. A detailed empirical examination of borrowed reserve demand reveals the errors in the Fed's strategy and helps to explain why the Fed did not undertake vigorous countercyclical policy during the depression.