The Great Depression era was characterized by the following occurrences.
(a) There were runs on banks in which the non-bank public's (i.e. non-bank businesses' and households') loss of confidence in banks led them to withdrew large amounts of cash from their banks.
(b) There was massive disruption in the banking system and widespread bank failures that led the President Roosevelt to declare a bank holiday on March 31, 1933.
(c) The monetary authority in the US (i.e. the Fed) took concerted action to increase reserves or the monetary base in an effort to increase the money supply defined as M1.
(d) Given the occurrences described in (a) to (c) above, the money supply defined as M1 fell dramatically during the Great Depression era.
Define the money supply process as the process via which the money supply defined as M1 evolves or is determined. Discuss the validity of the following comment.
"The behavior of M1 during the Great Depression era is consistent with the money supply process which predicts that the Fed is the only significant player in the money supply process".
In analyzing this statement it is important for you to first understand the money supply process. You will know that you have developed a competent understanding of the money supply process when you are able to identify the key players in the money supply process and how their actions affect the money supply defined as M1. Given this understanding, apply it to evaluate the statement above.