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It‘s specifically about the German banking crisis of 1931. I get how the banks increasing their reserves and cutting their loans (starting 1930) would cause money contraction (at least of M1). Doesn‘t the money still remain in circulation (and in M1) after its withdrawal? A fellow student suggested it wouldn‘t be included in M1 after all, which doesn‘t really make sense to me.

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  • $\begingroup$ The reason behind why money supply decreases when bank run occurs is because money supply is not only determined by the monetary base (which is the part central banks can manipulate), but also affected by the credit creation system. I guess you should check the money multiplier, which explains the difference and relationship between money supply and monetary base. $\endgroup$
    – Tunay Sabri Yüksel
    Commented Nov 27, 2023 at 13:16

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