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The Lessons from the Banking Panics in the United States in the 1930s for the Financial Crisis of 2007-2008

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  • Michael D. Bordo
  • John Landon-Lane

Abstract

In this paper we revisit the debate over the role of the banking panics in 1930-33 in precipitating the Great Contraction. The issue hinges over whether the panics were illiquidity shocks and hence in support of Friedman and Schwartz (1963) greatly exacerbated the recession which had begun in 1929, or whether they largely reflected insolvency in response to the recession caused by other forces. Based on a VAR and new data on the sources of bank failures in the 1930s from Richardson (2007), we find that illiquidity shocks played a key role in explaining the bank failures during the Friedman and Schwartz banking panic windows. In the recent crisis the Federal Reserve learned the Friedman and Schwartz lesson from the banking panics of the 1930s of conducting expansionary open market policy to meet demands for liquidity. Unlike the 1930s the deepest problem of the recent crisis was not illiquidity but insolvency and especially the fear of insolvency of counterparties.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16365.

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Date of creation: Sep 2010
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Handle: RePEc:nbr:nberwo:16365

Note: DAE ME
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  1. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
  2. David C. Wheelock, 1995. "Regulation, market structure and the bank failures of the Great Depression," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 27-38.
  3. Tallman, Ellis W & Wicker, Elmus R., 2009. "Banking and Financial Crises in United States History: What Guidance can History Offer Policymakers?," MPRA Paper 21839, University Library of Munich, Germany.
  4. Gary Richardson & William Troost, 2006. "Monetary Intervention Mitigated Banking Panics During the Great Depression: Quasi-Experimental Evidence from the Federal Reserve District Border in Mississippi, 1929 to 1933," NBER Working Papers 12591, National Bureau of Economic Research, Inc.
  5. Gary Richardson, 2006. "Correspondent Clearing and the Banking Panics of the Great Depression," NBER Working Papers 12716, National Bureau of Economic Research, Inc.
  6. repec:reg:wpaper:41 is not listed on IDEAS
  7. 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.
  8. Mark Carlson & Kris James Mitchener, 2007. "Branch Banking as a Device for Discipline: Competition and Bank Survivorship During the Great Depression," NBER Working Papers 12938, National Bureau of Economic Research, Inc.
  9. repec:cup:jechis:v:44:y:1984:i:01:p:119-138_03 is not listed on IDEAS
  10. Gary B. Gorton, 2010. "Questions and Answers about the Financial Crisis," NBER Working Papers 15787, National Bureau of Economic Research, Inc.
  11. Mark Carlson, 2008. "Alternatives for distressed banks and the panics of the Great Depression," Finance and Economics Discussion Series 2008-07, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Alex Klein & Keisuke Otsu, 2013. "Efficiency, Distortions and Factor Utilization during the Interwar Period," Studies in Economics 1317, Department of Economics, University of Kent.
  2. repec:cge:warwcg:146 is not listed on IDEAS
  3. Klein, Alexander & Otsuy, Keisuke, 2013. "Efficiency, Distortions and Factor Utilization during the Interwar Period," CAGE Online Working Paper Series 147, Competitive Advantage in the Global Economy (CAGE).
  4. Bagliano, Fabio C. & Morana, Claudio, 2012. "The Great Recession: US dynamics and spillovers to the world economy," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 1-13.

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