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were great enough to not only 'rock the boat' but to start it capsizing and so the
triggered downturn inevitably precipitated a series of bankruptcies, which in turn
reinforced the downturn itself. While accepting Friedman and Schwartz' analysis
about sharp reductions in money supply causing a fall in output, Bernanke (1983)
argues that the non-neutrality of money over such a long period had no theoretical
foundation. He therefore investigated the role of finance in a depression and argued
that during the early 1930s, the collapse of the banking sector following large loan
losses choked off financial flows to the real economy. As banks substantially
withdrew from their credit intermediary role, both consumer and investor demand
were reduced and this was a more important factor influencing the depth and
persistence of the depression
than monetary forces. Bernanke's approach revives the
Keynesian tradition but enriches it with the role of the financial system. Financial
considerations Played an important part in the theory of investment behaviour as per
Keynes'general theory (Keynes, 1936). Keynes viewed the collapse of either
borrowers or lenders as being sufficient to induce a downturn and that a return to
prosperity required both borrowers and lenders to be confident. However, the
financial system as such did not play a key role in Keynes' theory of output
determination.
In a financial accelerator model, Bernanke and Gertler (1989) explain the
interaction between macroeconomics and finance. They argue that with the decline in
net worth following deflation, collateral value falls and that such a weakening of the
balance sheet forces borrowers to cut back on current expenditure and future
commitments. Banks on their part are faced with a riskier position as collateral are
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