THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 457

CHAPTER 16 A PP LI CATI O N The Money Supply Process 425 The Great Depression Bank Panics, 1930 1933 We can also use our money supply model to help us understand major movements in the money supply that have occurred in the past In this application, we use the model to explain the monetary contraction that occurred in the United States during the Great Depression In Chapter we discussed bank panics and saw that they could harm the economy by making asymmetric information problems more severe in credit markets, as they did during the Great Depression Here we can see that another consequence of bank panics is that they can cause a substantial reduction in the money supply As we will see in the chapters on monetary theory later in the book, such reductions can also cause severe damage to the economy Figure 16-1 traces the bank crisis during the Great Depression by showing the volume of deposits at failed commercial banks from 1929 to 1933 In their classic book A Monetary History of the United States, 1867 1960, Milton Friedman and Anna Schwartz describe the onset of the first banking crisis in late 1930 as follows: Before October 1930, deposits of suspended [failed] commercial banks had been somewhat higher than during most of 1929 but not out of line with experience during the preceding decade In November 1930, they were more than double the highest value recorded since the start of monthly data in 1921 A crop of bank failures, particularly in Missouri, Indiana, Illinois, Iowa, Arkansas, and North Carolina, led to widespread attempts to convert chequable and time deposits into currency, and also, to a much lesser extent, into postal savings deposits A contagion of fear Deposits (US$ millions) 500 400 300 200 100 Start of First Banking Crisis End of Final Banking Crisis 50 40 30 20 10 1929 F I G U R E 16 - 1930 1931 1932 1933 Deposits of Failed Commercial Banks, 1929 1933 Source: Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867 1960 (Princeton, N.J.: Princeton University Press, 1963), p 309