“Yes, inaction by the Fed, whose responsibility was to provide liquidity to banks in times of economic recession. They did the opposite at the outset of the Great Depression and shrunk the money supply by 30%. The Fed caused the bank failures most have heard about from the GD.”
You have the inaction part right, but the Fed didn’t actually do anything to cause the bank failures and the 30% collapse of the money supply. The collapse was a vicious spiral set in motion by bank runs, the absence of deposit insurance to protect customers, and the peculiarity of American branch banking law.
It’s likely that the bank runs began when the unfortunately named ‘Bank of United States’ failed in 1931. Americans feared that their own savings would vanish and they pulled their money out of banks which in turn made those banks weaker, and the process fed on itself.
Due to the nature of fractional reserves and no FDIC, when banks failed a portion of the money supply simply evaporated. Rural American banks were especially at risk and they failed by the thousands. Canada didn’t have this problem because their branch banking laws were different.
Had the Fed known what to do they should have bought up the assets of banks under pressure much like what Bernanke did in 2008. He was a student of Friedman and Schwartz and undoubtedly was familiar with their chapter The Great Contraction which you can sometimes find online.
But the Fed's inaction was akin to a doctor who fails to give antibiotics to a patient with the beginnings of a serious bacterial infection. The Feds inaction set a chain of events in motion just as certainly as a proper action by the Fed could have set a chain of events in motion that would have prevented bank failures.
Inaction was a decision by the Fed, so they did do something that caused bank failures and the GD: they made the wrong decisions.