American Economic Association
This paper addresses a general theoretical question—the appropriate specification of the transactions demand for money—as well as a particular historical question: what triggered the Great Depression? Theoretically, fluctuations in the volume and value of asset exchanges in secondary asset markets can influence the transactions demand for money independently of real output and interest rates, and ought to be integrated into the analysis of those forces perturbing the demand for money and shifting LM curves in the absence of monetary intervention. Empirically, I demonstrate that, over the years 1919-29, monthly fluctuations in the volume and value of trading on the New York Stock Exchange did influence the transactions demand for money independently of fluctuations in real output and interest rates. Moreover, in the context of relatively slow post-1925 growth rates of monetary aggregates, the unprecedented increase in the volume and value of such trading from the beginning of 1925 to October 1929 had the effect of shifting the LM curve persistently to the left. The failure of U.S. monetary authorities to accommodate this surge in transactions demand, a failure unrecognized at the time, was associated with an antispeculative policy that drove real interest rates to very high levels in 1928-29, levels not approached again until the early 1980's. This deflationary impulse, larger than is apparent from a simple examination of monetary growth figures in relation to GNP growth, was the proximate cause of the downturn in real activity generally dated from August 1929.
Field, Alexander J. 1984. "Asset Exchanges and the Transactions Demand for Money, 1919-1929," American Economic Review 74 (March): 43-59.