You need to add two elements to the story to be able to explain 
the role of the Fed in contributing to the length and duration 
of the fall of the economy from 1929-1933.   
     First, focusing on the money stock (however defined) is not 
as useful as focusing on the fall in prices.  Prices fell by 
one-third in four years.  THAT'S A LOT.   
     Whether or not the Fed could have done anything to reverse 
that process, the fact is that everything they did would have 
contributed to that process, and they didn't care.   
 
     Second, bank failures were intensely regional.  Disasters in 
some places, no big deal in others.  The structural disruption 
was thus very uneven, but the overall impact of having some 
areas fall apart completely while others were stable turned out 
to be disruptive to the whole nation.  There have been some 
good studies comparing the Canadian system, which was more 
stable through all this, to the American system and its idiotic 
unitary banking laws.  The troubled regions were isolated, and 
that really hurt them.  (Check out You Can't Go Home Again by 
Thomas Wolfe for a great description of a North Carolina banking 
panic.) 
 
     If you put it together, with dramatically falling prices 
and serious structural disruption in a very short period of time, 
you get a better picture of what was going on.  And with prices 
falling so rapidly, deflationary expectations would have rendered 
the real interest rate higher than the nominal rate.  Hence the 
lack of interest in borrowing and investing.   
 
     First-person accounts, BTW, really stress the disruption in 
individual's lives of having a nearby S & L fail.  And I am 
personally fascinated by the stories of scrip being used by 
local governments and the utility companies in Phiadelphia and 
New Jersey, and other areas. 
 
      -- Mary Schweitzer