On Tue, 05 Dec 1995, Anne Mayhew wrote in response to Steven  
Horwitz's:  
 
> >  
> > 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?   
> >  
> >   
> Let's extend Esther's exam (though not with such elegant questions) and 
ask 
> a)  What assumptions are required to reach the conclusion that it was  
> "tight" monetary policy that produced the decline in the money supply? 
>  
> And, 
>  
> b) Is it likely that the high rate of bank failures during the 1920s  
> (before the autumn of 1929) played a role in the changed ratios of  
> currency to deposits and of reserves to deposits? 
>  
> 
 
I am in sympathy with Ann's and Esther's position.  Indeed, J.D.  
Hamilton's piece in the Journal of Monetary Economics (1987) also  
reports the growth of high-powered money between 1930 thus: 1930 (- 
2.8%), 1931 (5.5%), 1932 (6.4%), and 1933 (2.0%).  I. Fisher (1936)  
also reports that high-powered money (the direct liability of the  
Fed) did rise from 4 to 5 billion between 1929 and 1933. 
 
So it would seem to me that to avoid nurturing an interminable debate  
(again) over the role or "money" in the Great Depression, the precise  
definition (yes, that's my pet issue) of what we mean by money (and  
who controls what) ought to be settled.   
 
If we define money as currency or high-powered money, then there was  
no tight monetary policy between 1930 and 1933.  (The discount  
rate also fell from 5.00% in 1929 to 2.5% in 1930, further to 1.5%  
in 1930, but back up to 2.5% in 1931 and stayed there in 1932 and  
1933.  But if we choose the modern definition, which includes bank  
credit, M = C + D = C + R + BC = H + BC, where H = C + R, then there  
was a significant contraction of money over that period.   
 
>From Hamilton's piece, the growth rates of M1 were: -3.5% (1930), - 
5.7% (1931), and -15.5% (1933).  But the contraction came from BC  
(bank credit) -- mainly from a rise in the public's currency-deposit  
ratio and banks' currency-reserve ratio -- following the run on  
banks. 
 
I hope we can spare ourselves the agony of an inconclusive argument  
by settling quickly on the measure of money we want to employ (and  
why).  I would also think that historians of economic thought would  
be more inclined to follow the classical tradition and choose H over  
variants of M. 
 
James Ahiakpor 
CSU Hayward.