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Did doubling reserve requirements cause the recession of 1937-1938? a microeconomic approach

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  • Charles W. Calomiris
  • Joseph R. Mason
  • David C. Wheelock

Abstract

In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy. Using microeconomic data to gauge the fundamental reserve demands of Fed member banks, we find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier. To the extent that increases in reserve demand occurred from 1935 to 1937, they reflected fundamental changes in the determinants of reserve demand and not changes in reserve requirements.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2011-002.

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Date of creation: 2011
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Handle: RePEc:fip:fedlwp:2011-002

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Keywords: Money supply ; Bank reserves ; Recessions;

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  1. Charles W. Calomiris & David C. Wheelock, 1997. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Working Papers 5963, National Bureau of Economic Research, Inc.
  2. Charles W. Calomiris & Eugene N. White, 1994. "The Origins of Federal Deposit Insurance," NBER Chapters, in: The Regulated Economy: A Historical Approach to Political Economy, pages 145-188 National Bureau of Economic Research, Inc.
  3. James A. Wilcox, 1984. "Excess Reserves in the Great Depression," NBER Working Papers 1374, National Bureau of Economic Research, Inc.
  4. Cargill, Thomas F. & Mayer, Thomas, 2006. "The Effect of Changes in Reserve Requirements During the 1930s: The Evidence from Nonmember Banks," The Journal of Economic History, Cambridge University Press, vol. 66(02), pages 417-432, June.
  5. Hanes, Christopher, 2006. "The Liquidity Trap and U.S. Interest Rates in the 1930s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 163-194, February.
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Cited by:
  1. Gabriel P. Mathy, 2014. "Uncertainty Shocks and Equity Return Jumps and Volatility During the Great Depression," Working Papers 2014-02, American University, Department of Economics.
  2. Douglas A. Irwin, 2011. "Gold Sterilization and the Recession of 1937-38," NBER Working Papers 17595, National Bureau of Economic Research, Inc.
  3. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.

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