The mainstream Monetarist view on the banking system laid the majority of the fault squarely on the Federal Reserve, rather than individual banks. The government had systematically dismantled the power of individual banks since 1913, through the Federal Reserve Act, which created an entity designed to stabilise the American economy outside the control of Wall Street.

This entity has since gotten more and more sophisticated and capable, but at the time of inception, had a fatal flaw - nobody knew what it was supposed to do in a recession. Bank collapse had been fairly common in the past, having happened in 1907 and 1893. In both cases, J P Morgan stepped in to provide leadership and rally the banks to bail each other out, thereby preventing the banking run from spreading and bringing down the entire system. During the Great Depression, the banks had been castrated and there were now several thousand of them, with widespread decentralisation.

In 1929, the Stock Market crashed, this did not immediately lead to the Great Depression, but it did drain the value of assets on almost all bank balance sheets. The Fed then launched the real bills doctrine in 1930, which was designed to prevent inflation by constricting the money supply so that every note was matched by an equal-value asset. The combination of the two began to rapidly put banks in jeopardy, which forced them to reduce lending, putting more and more banks in jeopardy.

In this situation, the typical thing to do would have been to rescue and recapitalise the banks, and lower interest rates so that lending is spurred and the economy stabilises at a higher level. In fact, industrial production had only slipped slightly at the beginning of the Great Depression, and there was no indication that this would be any different from the many minor recessions the world had seen on an almost 5-year basis. Instead, the Fed raised interest rates in order to balance the fiscal budget, then sat by and watched the banks implode.

The recovery of each economy is correlated strongly negatively with the time the country spent on a real bills program like the Gold Standard. As a counterpoint, Japan abandoned the Gold Standard almost immediately, dragged it's interest rate downwards rapidly, recapitalised it's banks with substantial amounts of both private and government capital, and spent money like crazy on infrastructure projects to prop up the economy; consequently the Great Depression only lasted half a year for Japan.