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Correspondent Clearing and the Banking Panics of the Great Depression

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  • Gary Richardson

Abstract

Between the founding of the Federal Reserve System in 1913 and the depression of the 1930s, three check-clearing systems operated in the United States. The Federal Reserve cleared checks for members of the system. Clearing houses cleared checks for members of their organizations. Correspondents cleared checks for all other institutions. The correspondent-clearing system was vulnerable to counter-party cascades, particularly because accounting conventions overstated reserves available to individual institutions and the system as a whole. In November 1930, a correspondent system in the center of the United States collapsed, causing the closure of more than one hundred institutions. Bank runs radiated from the locus of events, and additional correspondent networks succumbed to the situation. For the remainder of the contraction, banks that relied upon correspondents to clear checks failed at higher rates than other banks. In sum, weaknesses within a check-clearing system played a hitherto unrecognized role in the banking crises of the Great Depression.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12716.

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Date of creation: Dec 2006
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Publication status: published as Richardson, Gary, 2007. "The Check is in the Mail: Correspondent Clearing and the Collapse of the Banking System, 1930 to 1933," The Journal of Economic History, Cambridge University Press, vol. 67(03), pages 643-671, September.
Handle: RePEc:nbr:nberwo:12716

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  1. Edward J. Green & Richard M. Todd, 2001. "Thoughts on the Fed's role in the payments system," Annual Report, Federal Reserve Bank of Minneapolis, issue Apr, pages 6-27.
  2. Lucia, Joseph L., 1985. "The failure of the bank of United States: A reappraisal," Explorations in Economic History, Elsevier, vol. 22(4), pages 402-416, October.
  3. Christina D. Romer, 1993. "The Nation in Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 19-39, Spring.
  4. R. Alton Gilbert, 1998. "Did the Fed's founding improve the efficiency of the U.S. payments system?," Review, Federal Reserve Bank of St. Louis, issue May, pages 121-142.
  5. Richardson, Gary, 2006. "Records of the Federal Reserve Board of Governors in Record Group 82 at the National Archives of the United States," Financial History Review, Cambridge University Press, vol. 13(01), pages 123-134, April.
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Cited by:
  1. Gary B. Gorton, 2012. "Some Reflections on the Recent Financial Crisis," NBER Working Papers 18397, National Bureau of Economic Research, Inc.
  2. Richardson, Gary, 2007. "Categories and causes of bank distress during the great depression, 1929-1933: The illiquidity versus insolvency debate revisited," Explorations in Economic History, Elsevier, vol. 44(4), pages 588-607, October.
  3. Michael D. Bordo & John Landon-Lane, 2010. "The Lessons from the Banking Panics in the United States in the 1930s for the Financial Crisis of 2007-2008," NBER Working Papers 16365, National Bureau of Economic Research, Inc.
  4. Michael D Bordo, 2012. "The Great Depression and the Great Recession: What have we Learned?," Working Papers id:4924, eSocialSciences.

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