The problem is what happened during the Depression. Banking panics were nothing new -- that is what the Fed was created for. But when banking panics started (as unemployment abruptly jumpted from 6% to 15% at the end of 1930), the Federal Reserve suddenly didn't trust banks enough to back them up. If the banks were insolvent, evidently, they must be allowed to fail. Unfortunately, so many banks were seen as insolvent and allowed to fail that it took the whole United States economy down with it. But the Federal Reserve could be proud of being financially solid itself! This served no purpose, however, beyond bureaucratic ass-covering.
This turns out to be a classic example of bureaucrats who do not have to pay the cost that results from their actions. The banks may fail, the economy may collapse, but they still have their jobs! Indeed, if the Depression could be blamed on "speculators," the bureaucrats could actually see their status, pay, and power increase! In 1907, it is obvious that the banks could work out their own salvation because they actually did not want to fail. Failed banks means bankers out of a job. Perhaps even bankers committing suicide. But among all the Depression stories about window leaps on Wall Street, there don't seem to be any about leaps from the nearby Federal Reserve Bank of New York
