The graph Krugman shows is monetary base - ie actual green Federal Reserve notes. Unforunately, most of the U.S. money supply is not in the form of federal res

The graph Krugman shows is monetary base - ie actual green Federal Reserve notes. Unforunately, most of the U.S. money supply is not in the form of federal reserve notes, but in the form of credit ( savings accounts, money market funds, etc). Note that in the first graph the monetary base starts at $850 billion. At this time the U.S. national debt was around $8 trillion. Perhaps Krugman would like to explain how the U.S. government could owe 8 trillion dollar bills, when only 850 billion dollars exist in the world. The basic cause of both the depression and our current crisis is maturity mismatching - ie treating a collection of long term loans as short term deposits. The trouble is that when people want to redeem their deposits, the money is not there, as it has been loaned out. This causes a bank run and a sharp contraction of credit, which bankrupts both households and businesses.