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Benjamin Strong, who had chronic tuberculosis, not died in October 1928, a year before the crash. Shortly before his death, Strong had written a prescription for the Fed: “Not only have we the power to deal with … an emergency instantly by flooding the street with money, but I think the country is well aware of this and probably places reliance upon the common sense and power of the System.”
    The Fed didn’t take his advice. Its mistakes were many. The original sin was to tighten credit and lift interest rates in 1928 and 1929, in what now appears to have been a misguided attack on speculation in the stock marketwhen the deeper problem was a weakening of the overall economy and an absence of inflation.
    As Bernanke retold the story, the post-Strong Fed “passed into the control of a coterie of aggressive bubble-poppers,” the most determined of whom was Adolph Miller, an economist who was among the first members of the Fed board and served for twenty-two years into F DR’S presidency. Herbert Hoover — a neighbor and friend of Miller — was a fervent foe of “speculation” and encouraged him. Under Miller’s influence, the debate inside the Fed shifted from whether to try to stop stock market speculation to how to stop it. The Washington faction threatened to cut off loans to New York City banks as a way to stop them from lending to stockbrokers. It also favored rhetoric, the sort of jawboning that Alan Greenspan tried with his warnings about “irrational exuberance” in 1996.
    Strong’s successor at the New York Fed, George Harrison, a Harvard-trained lawyer who had been the Washington board’s general counsel, argued that the brokers would get money elsewhere and that rhetoric would do nothing. His solution was to raise interest rates in an economy that had hardly recovered from a recession that began in November 1927, and was experiencing no inflation. He prevailed, and the Fed’s discount rate on loans it made to banks went from 3.5 percent in January 1928 to 6 percent by August 1929, higher than at any time since 1921.
    The Fed tightened credit again in 1931 at just the wrong moment, responding with then-conventional tactics when gold flowed out of the United States. By 1932, with Congress shouting for relief, the Fed reluctantly opened its spigot for a few months, and the economy responded. But when Congress went home in July, the Fed reversed course with Harrison’s support, and the economy collapsed. “The monetary policy of the ’30s led to a deflation of about 10 percent a year, so it was extraordinarily tight monetary policy, which created, among other things, the greatly increased value of debts, which therefore led to more defaults and bankruptcies,” Bernanke said.
    Friedman and Schwartz argued the key to the Depression was that the Fed had been too stingy with credit. Bank failures were “important not primarily in their own right” but because they were the vehicle for the “drastic declines in the stock of money,” they wrote. Bernanke contended that that wasn’tthe whole story. In seminal research done while he was still in his twenties, Bernanke emphasized the devastating impact that the collapse of the banking system had even beyond its depressing effect on the money supply. Bank failures and the weakness of surviving banks, he wrote, meant households, farms, and small firms found credit “expensive and difficult to obtain.” In turn, the “credit squeeze … helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression.”
    As happened in 2008, confidence in financial institutions evaporated. A toxic combination of depression and deflation made borrowers insolvent. Nearly half the banks that existed in 1929 had collapsed or been merged into other banks by the end of 1933. Those that survived suffered massive losses and often could not or would not lend. When they did, they often charged outrageous rates.
    As with lesser panics, worries