The Great Depression era was characterized by the following occurrences. (a) The

Question

The Great Depression era was characterized by the following occurrences.

(a) There were runs on banks in which the non-bank public's (i.e. non-bank businesses' and households') loss of confidence in banks led them to withdrew large amounts of cash from their banks.

(b) There was massive disruption in the banking system and widespread bank failures that led the President Roosevelt to declare a bank holiday on March 31, 1933.

(c) The monetary authority in the US (i.e. the Fed) took concerted action to increase reserves or the monetary base in an effort to increase the money supply defined as M1.

(d) Given the occurrences described in (a) to (c) above, the money supply defined as M1 fell dramatically during the Great Depression era.

Define the money supply process as the process via which the money supply defined as M1 evolves or is determined. Discuss the validity of the following comment.

"The behavior of M1 during the Great Depression era is consistent with the money supply process which predicts that the Fed is the only significant player in the money supply process".

In analyzing this statement it is important for you to first understand the money supply process.  You will know that you have developed a competent understanding of the money supply process when you are able to identify the key players in the money supply process and how their actions affect the money supply defined as M1. Given this understanding, apply it to evaluate the statement above.

Please answer in thorough detail and DO NOT COPY & PASTE from internet. Please give me some good points to help me identitfy and answer the questios here. THANK YOU

Explanation / Answer

M1 is the supply of money from narrow measure. This is the primary source of money supply in an economy.

M1 = Coins and paper notes outside the whole banking system + Demand deposit in banks

Recession is the crisis period of economic activity like production, trade, commerce, and financing in an economy. Acute recession is the great depression, which occurred in the decade of 1930s.

The statement is not correct, since Fed is not the only player in the money supply process. It is clear from the above equation of M1 that there is no participation of Fed. The whole process of M1 depends on general public of the country. Holding currency for future speculation increases the M1. But at the great depression era, people don’t have enough money in their hands causing the fall of M1. On the same time, people’s confidence on banks decreases. They don’t want to keep money in banks, causing the fall in demand deposit and M1.

Increasing reserve by Fed can increase the trust of keeping money in banks. But this is the indirect effect of increasing M1.

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