Thanks to Mason Gaffney for his request that I provide further
information on Lauchlin Currie's monetary economics in the pre-General
Theory years. In particular he asks what were his favoured alternatives
to commercial loans, given that these had been declining as a proportion
of all bank assets (to about 10 percent by 1930), and that anyway they
were, paradoxically, the least liquid of bank assets (in the sense of
their marketability).

As Mason indicates, the key thing was to maintain the flow of purchasing
power, and one of Currie's main conclusions in his January 1931 PhD
thesis was that "it is evident that the commercial loan theory of
banking is incompatible with the view that the chief function of the
banking system is to supply purchasing power, and that a central bank
should control this supply in the interests not only of commercial
borrowers but also of the interests of the community in general."

Thus he was relatively relaxed about bank security loans, and in general
thought that banks' loanable funds had in the late 1920s flowed into
channels where they could most profitably be used by industry in a
prospering economy. Inter alia he argued that security loans were not
responsible for the rise in interest rates (instead he blamed the Fed);
and nor was the rise in stock prices nearly as irrational or unselective
as many believed.

Banks' holdings of government bonds also helped to keep them fully
loaned up - essential if the Fed was to exercise effective control over
the supply of purchasing power.

Thus Currie also urged a broadening in the range of assets eligible for
rediscount in times of stress, while not ignoring "the safety factor":
"The Federal Reserve Act should be amended so as to make the question of
eligibility turn on the safety factor, it being within the discretion of
the board to define the degree of safety required. This would make the
member banks' notes, secured by marketable securities as well as good
commercial loans, eligible for rediscount."

He also found that "there is no question that security loans and
investments have had a better record of safety than commercial loans."

I am sympathetic to Mason's concerns over rising land and asset prices
being used as collateral for new loans, thus feeding a potentially
unsustainable asset price boom. But Currie seems to have thought this
"merely one of many factors contributing to the business cycle and not
an independent cause". The volume and composition of loans "can furnish
little guidance to central banking authorities [relative to other
available indicators of the state of the economy] in the determination
of their policies."  

The relevance of all this to the textbook debate is that the AD-AS
apparatus and/or the General Theory was not needed to explain the Great
Depression. Aggregate demand is the flow of total expenditures and the
question is whether and why the expansion of the means of payment (cash
plus demand deposits) is adequate, after allowing for changes in
velocity, to purchase the full employment level of output at relatively
stable prices. Economists such as Currie understood by 1930 that fiscal
policy needs to be coordinated with monetary policy to achieve this
goal, especially if the private sector would not or could not spend into
circulation all of the available cash and bank reserves. In those
circumstances the supply of money would fall and would need to be
boosted, (i) via full exercise of the central bank's
lender-of-last-resort duties, and if that is not enough (ii) via
increased government spending financed by the creation of new money
and/or the activation of existing idle balances. (Fiscal policy can only
work through its impact on money.) 

But yes, as Mason indicates, before the General Theory and even after,
this kind of fiscal intervention was widely regarded as both
economically and politically dangerous, and it was even common to label
New Dealers like Currie (as well as Keynes himself) as communists bent
on debauching the currency.

On the way that the first edition of Samuelson's Economics was thus
treated, see W Solberg and R Tomilson, "Academic McCarthyism and
Keynesian Economics", HOPE, 29:1 (1999).

Roger Sandilands