During the early years of the Great Depression, what happened to the monetary base and M2?

During the early years of the Great Depression, the monetary base experienced an increase while M2 decreased. The monetary base, which consists of the total currency in circulation plus the reserves held by banks, expanded due to various policy measures aimed at stabilizing the economy. For instance, the Federal Reserve increased the money supply to combat the economic downturn, leading to a higher monetary base.

In contrast, M2—which includes all the components of M1 (physical currency and demand deposits) plus savings accounts, time deposits, and other near-money assets—saw a decrease. This decline can be attributed to a reduction in confidence among consumers and businesses, which led to a decrease in deposits and a preference for holding cash rather than maintaining savings or using banking services.

Understanding this dynamic is critical as it illustrates how different components of the money supply can respond to economic conditions and policy measures in contrasting ways, especially during a financial crisis. The increase in the monetary base reflects the Federal Reserve's efforts to provide liquidity, while the decline in M2 indicates reduced economic activity and borrowing willingness within the economy.