Generating the Great Depression: The First World War and the Federal Reserve System Propagated an Unprecedented Orgy of Inflation

Two events occurred in 1914 that were to have profound influence upon subsequent economic developments in the United States. The first of these was external, the outbreak in Europe of the World War; the second was internal, the formal inauguration of the Federal Reserve System. Both were events propagative of an unprecedented orgy of inflation. The two, inextricably intertwined, brought about a great inflation of bank credit in connection with war finance, and both were productive of striking changes in the economic structure of the world during and after the War.

--C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States (New York: The Macmillan Company, 1937), 11.

Reserve Banking Inherently Inflationistic

Quite apart from the reduction in reserve requirements, however, a magnification of the reserve base came about simply as a result of the creation of a central banking system. This is because of the fact that a system of central banking operates to dilute cash, so that reserves in effect go further. In a system devoid of bankers' banking, reserves consist of lawful money in the vaults of individual banks; in a system incorporating central banking, legal reserves for the member banks of the system exist simply as deposit liabilities of the bankers' banks.

--C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States (New York: The Macmillan Company, 1937), 24.