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The impact of bank failures on the money stock during the inter-war period in the United States

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  1. Abstract.
  2. Introduction.
  3. The general arguments.
  4. Literature review.
    1. Financial and economic problems.
    2. The pre-war period of World War I.
    3. Deflation as the result of price level adjustments and real value collateral.
    4. The Great Depression.
    5. Relationship of various components like money supply, quantity and level of economic activity.
  5. Anne Mayhew, Friedman and Schwartz's view and reasons.
  6. Consumption side of the Great Depression aspects.
  7. The factors responsible for leading to the Great Depression.
  8. The failing of the banks.
  9. Conclusions.
  10. References.

In the following study the researcher attempt to analyze whether the monetary policy adopted by the Federal Reserve during the interwar period led to the Great Depression. The study would investigate through an extensive literature review by studying the perspectives of renowned economists in this genre. The researcher will base the analysis on the Friedman and Schwartz, and Temin model which are considered to be the most effective theoretical framework in the history of Great Depression studies.

[...] The specified the decrease in output on the other hand had been due to the system of manufacturing prevalent at the time that restricted production such as building permits, shipments of machines and price indexes of metal products accounted for the stagnant liquid money which froze in the midst of regulations. Temin also looked at the consumption side of the Great Depression aspects. He followed the Keynesian model that report that due to the failure of demand people stopped buying goods. [...]


[...] Temins critically examined consumption behavior during that period and hypothesize that the low liquid supply of money during the Depression had been the result of lack of consumption or demand. Since there was no spending or low spending money also subsequently decreased. The banks and the monetary policy in actuality did not have the catalytic effect on the money supply. Both of these views are contradictory and controversial. According to this researcher, both the views are valid in their own respective stance. [...]


[...] Indeed from 1929 to the cyclical trough in 1933 the Federal Reserve allowed the money stock to fall by 33 percent while one fifth of commercial banks closed and real money income fell 36 percent." This Chapman is of the opinion that Friedman and Schwartz had been of the opinion that the money supply had been the root cause of the Great Depression rendering many banks bankrupt through high reserve requirements and interest rate hikes. On the other hand Chapman is also understanding of the fact that Friedman and Schwartz's critic Temin (1976) posit that the money supply hypothesis is not true. [...]

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