Macroeconomics

August 1929

March 1933

Money Supply

26.5

19.0

Currency

3.9

5.5

Demand deposits

22.6

13.5

Monetary Base

7.1

8.4

Currency

3.9

5.5

Reserves

3.2

2.9

Money Multiplier

3.7

2.3

Reserve–deposit ratio

0.14

0.21

Currency–deposit ratio

0.17

0.41

Source: Adapted from Milton Friedman and Anna Schwartz, A Monetary History of 

the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1963),

Appendix A.

The Money Supply and Its Determinants: 1929 and 1933

TA B L E

1 9 - 1

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Bank Capital, Leverage, and Capital Requirements

The model of the banking system presented in this chapter is simplified. That is

not necessarily a problem: after all, all models are simplified. But it is worth draw-

ing attention to one particular simplifying assumption.

In the bank balance sheets presented so far, a bank takes in deposits and uses

those deposits to make loans or to hold reserves. Based on this discussion, you

might think that it does not take any resources to open up a bank. That is,

however, not true. Starting a bank requires some capital. That is, the bank

owners must start with some financial resources to get the business going.

Those resources are called bank capital or, equivalently, the equity of the

bank’s owners.

Here is what a more realistic balance sheet for a bank would look like: