In the final months of 1931 it briefly raised the rate twice, but then cut it again in 1932. The modest security purchases counterbalanced the brief raises in rates and resulted in no significant change in the amount of money available to the public. However, this period of inaction by the Fed is the target of much criticism, as we shall see. In 1932, the Fed overcame its idleness and once again made large purchases of U.S. securities. Pretty clearly, the public run on banks.
Banking panics occur when the public fears that monetary institutions are on the verge of collapse.
The securities market falls so fast that investors scramble to convert their holdings into cash, thus creating a public run on banks. But banks, whose loans are based on fractional reserves, cannot afford to give everyone their money all at once, and therefore go bankrupt. A chain reaction follows as deposit-owners who have lost their money can no longer afford to pay off other debts and costs of business, driving others to scramble for cash as well. For example, the stock market crash of 1987 was even larger than the Crash of '29, but timely government action prevented a run on banks. One of the solutions is to make sure that banks have enough reserves to cover their deposits - that is, expand the money supply.