<P> The stock market crash made it evident that banking systems Americans were relying on were not dependable . Americans looked towards insubstantial banking units for their own liquidity supply . As the economy began to fail, these banks were no longer able to support those who depended on their assets--they did not hold as much power as the larger banks . During the depression, "three waves of bank failures shook the economy ." The first wave came just when the economy was heading in the direction of recovery at the end of 1930 and the beginning of 1931 . The second wave of bank failures occurred "after the Federal Reserve System raised the rediscount rate to staunch an outflow of gold" around the end of 1931 . The last wave, which began in the middle of 1932, was the worst and most devastating, continuing "almost to the point of a total breakdown of the banking system in the winter of 1932--1933 ." The reserve banks led the United States into an even deeper depression between 1931 and 1933, due to their failure to appreciate and put to use the powers they withheld--capable of creating money--as well as the "inappropriate monetary policies pursued by them during these years". </P> <P> According to the gold standard theory of the Depression, the Depression was largely caused by the decision of most western nations after World War I to return to the gold standard at the pre-war gold price . Monetary policy, according to this view, was thereby put into a deflationary setting that would over the next decade slowly grind away at the health of many European economies . </P> <P> This post-war policy was preceded by an inflationary policy during World War I, when many European nations abandoned the gold standard, forced by the enormous costs of the war . This resulted in inflation because the supply of new money that was created was spent on war, not on investments in productivity to increase demand that would have neutralized inflation . The view is that the quantity of new money introduced largely determines the inflation rate, and therefore, the cure to inflation is to reduce the amount of new currency created for purposes that are destructive or wasteful, and do not lead to economic growth . </P> <P> After the war, when America and the nations of Europe went back on the gold standard, most nations decided to return to the gold standard at the pre-war price . When Britain, for example, passed the Gold Standard Act of 1925, thereby returning Britain to the gold standard, the critical decision was made to set the new price of the Pound Sterling at parity with the pre-war price even though the pound was then trading on the foreign exchange market at a much lower price . At the time, this action was criticized by John Maynard Keynes and others, who argued that in so doing, they were forcing a revaluation of wages without any tendency to equilibrium . Keynes' criticism of Winston Churchill's form of the return to the gold standard implicitly compared it to the consequences of the Treaty of Versailles . </P>

Explain how mistakes in government monetary policies were also to blame