Phillips, McManus, and Nelson Claim That the Roots of the Great Depression Go Back to the Monetary Inflation and Credit Expansion Begun by the Fed in 1922

C.A. Phillips, T.F. McManus, and R.W. Nelson claimed that the roots of the Great Depression go back to the monetary inflation and credit expansion begun by the Fed in 1922.

Phillips, McManus, and Nelson leave no doubt of Fed culpability for the boom-bust of the 1920s and 1930s:

The Federal Reserve System, in other words, entered upon an active policy of positive control. Banking developments in this country from 1922 onward were almost entirely the consequence of Federal Reserve control operations. Dr. Miller’s characterization of the 1927 “boot-strap lifting” experiment as “one of the most costly errors committed by it or any other banking system in the last 75 years” applies with equal force to the experiments of 1922 and 1924. In the formulation and execution of an essentially inflationistic policy of control, the Board must be charged with a colossal error, the ultimate effect of which was, as Dr. Miller himself admits, the depression.

Murray Rothbard, in his account of the Great Depression written contemporaneously with Friedman’s, calculated that the money stock increased from $45.3 billion on June 30, 1921 to $73.3 billion on June 30, 1929, a rise of nearly 62 % or 7.7 % annually. As with increases in bank credit, increases in the money stock came in waves during 1922–1923, late 1924, late 1925, and late 1927. Rothbard showed that the entire increase came in the form of money substitutes, as currency in circulation was $3.64 billion in 1929 and $3.68 billion in 1921. The main cause of the increase in bank money substitutes was an increase in reserves.

--Jeffrey Herbener, "Fed Policy Errors of the Great Depression," in The Fed at One Hundred: A Critical View on the Federal Reserve System, ed. David Howden and Joseph T. Salerno (Cham, CH: Springer International, 2014), 44-45.