merritt sherman, active with the fed since 1926, describes one of its early tools to regulate bankingivity-- the discount rate. that was the first tool used when the fed was created, the discount rate being the rate that is charged to member banks when they need to come in to get additional reserves. and it is raised to restrain their borrowing, lowered to encourage their borrowing. through world war i, through the roaring twenties, most bankers believed the system was safe and went about their business. then one day, it all came tumbling down. october 24, 1929, the greatest stock market crash in history marked the beginning of years of economic devastation. banks failed by the thousands. the fed failed its major test. we asked economist lester chandler for an explanation. professor chandler, the fed was set up to prevent bank failures and avoid depressions, all of which happened in the 1930s. what went wrong? within the federal reserve system, nobody knew who was to do what where the federal reserve act was concerned. they had turned down the aldrich plan for one central bank with br