Saturday, July 20, 2013

Stockman (9) Bank Reserves

Milton Friedman has blamed the Fed for tightening money too much following the 1929 share market crash. David Stockman disagrees. He notes that Excessive reserves in the banking system rose from $35 million in 1935 to $100 million in 1931 and ultimately to $525 million in 1933. The tenfold expansion of excessive reserves in the banking system was proof that banking system had not been parched with liquidity, but was actually awash in it.

M1 money did drop by about 25 percent over the same period as excess reserves soared tenfold. This meant the money multiplier had crashed. It was merely the arithmetic effect of a nearly 50 percent decline of the commercial loan book, as billions of loans were liquidated.

David Stockman

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