>Anne Mayhew wrote: 
> 
>>Before people get too deeply into trying to decide which is the two 
>>versions is correct, they should check the stats for 1930-33 and then 
>>specify precisely what is meant by "tight monetary policy" for this 
>>period.  I  do not have sources at hand just at the moment but remember 
>>that "excess reserves" and "high powered money" (depending on your 
>>preferred way of looking at things) rose.  In F&S's MONETARY HISTORY what 
>>makes monetary policy "tight" over this period is inadequate reserves 
>>given (an important word here) a shift in bank attitudes toward the 
>>Depost/reserve ratio and bank customer attitudes toward the 
>>Deposit/currency ratio.  To blame "tight monetary policy" for the 
>>disaster is, therefore, slightly peculiar. 
 
Esther-Mirjam Sent adds: 
 
>        So, H went from 7.1 to 8.4, M went from 31.5 to 19, cu (=CU/D) 
went 
>from .14 to .41, and re (=RE/D) went from .12 to .21. Anne is right. 
 
Fair enough.  But let's not forget that from Aug. 29 to Oct. 30, the 
money supply *did* fall by 5 percent, bringing production and personal 
income down with it.  Might it not be the case that this "tight" 
monetary policy and its results are to blame for the ensuing bank panics 
that led to the fall in velocity and rise in the currency/deposit ratio 
that Esther points to?  It's true that during 30-33, policy might not 
have been "tight" in some absolute sense, but rather tight given the 
the rise in cu/d and r/d.  But isn't it precisely the monetary au- 
thority's job to respond to such changes with "looser" policy?  If the 
banks want to hold more reserves and the public wants to hold more 
currency, shouldn't the banking system comply? 
 
Remember too that part of the problem here is that currency serves both 
as hand to hand money and bank reserves.  The pre-Fed panics/recessions 
were also marked by increases in the currency/deposit ratio, but the 
results were never as severe because such shifts had smaller (though 
still significant) effects on bank reserve holdings, and thus the 
whole money supply. 
 
In banking systems 
where currency is a bank liability not a reserve asset, changes in the 
c/d ratio can be accomodated by the banks themselves, without the need 
for central bank assistance and the errors they might involve. 
 
Steven Horwitz 
Eggleston Associate Professor of Economics 
St. Lawrence University 
Canton, NY 13617 
TEL (315) 379-5731 
FAX (315) 379-5819 
EMAIL [log in to unmask]