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The Effects of Reconstruction Finance Corporation Assistance on Michigan's Banks' Survival in the 1930s

In: The Microeconomics of New Deal Policy

Author

Listed:
  • Charles W. Calomiris
  • Joseph R. Mason
  • Marc Weidenmier
  • Katherine Bobroff

Abstract

This paper examines the effects of the Reconstruction Finance Corporation's (RFC) loan and preferred stock programs on bank failure rates in Michigan during the period 1932-1934, which includes the important Michigan banking crisis of early 1933 and its aftermath. Using a new database on Michigan banks, we employ probit and survival duration analysis to examine the effectiveness of the RFC's loan program (the policy tool employed before March 1933) and the RFC's preferred stock purchases (the policy tool employed after March 1933) on bank failure rates. Our estimates treat the receipt of RFC assistance as an endogenous variable. We are able to identify apparently valid and powerful instruments (predictors of RFC assistance that are not directly related to failure risk) for analyzing the effects of RFC assistance on bank survival. We find that the loan program had no statistically significant effect on the failure rates of banks during the crisis; point estimates are sometimes positive, sometimes negative, and never estimated precisely. This finding is consistent with the view that the effectiveness of debt assistance was undermined by some combination of increasing the indebtedness of financial institutions and subordinating bank depositors. We find that RFC's purchases of preferred stock - which did not increase indebtedness or subordinate depositors - increased the chances that a bank would survive the financial crisis. We also perform a parallel analysis of the effects of RFC preferred stock assistance on the loan supply of surviving banks. We find that RFC assistance not only contributed to loan supply by reducing failure risk; conditional on bank survival, RFC assistance is associated with significantly higher lending by recipient banks from 1931 to 1935.
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Suggested Citation

  • Charles W. Calomiris & Joseph R. Mason & Marc Weidenmier & Katherine Bobroff, 2012. "The Effects of Reconstruction Finance Corporation Assistance on Michigan's Banks' Survival in the 1930s," NBER Chapters,in: The Microeconomics of New Deal Policy National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13197
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    References listed on IDEAS

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    1. Cole, Rebel A. & Gunther, Jeffery W., 1995. "Separating the likelihood and timing of bank failure," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 1073-1089, September.
    2. Calomiris, Charles W & Mason, Joseph R, 1997. "Contagion and Bank Failures during the Great Depression: The June 1932 Chicago Banking Panic," American Economic Review, American Economic Association, vol. 87(5), pages 863-883, December.
    3. Charles W. Calomiris, 2010. "The political lessons of Depression-era banking reform," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 540-560, Autumn.
    4. 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.
    5. Butkiewicz James L., 1995. "The Impact of a Lender of Last Resort during the Great Depression: The Case of the Reconstruction Finance Corporation," Explorations in Economic History, Elsevier, vol. 32(2), pages 197-216, April.
    6. Eugene N. White, 1998. "The Legacy of Deposit Insurance: The Growth, Spread, and Cost of Insuring Financial Intermediaries," NBER Chapters,in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 87-122 National Bureau of Economic Research, Inc.
    7. Michael D. Bordo & Claudia Goldin & Eugene N. White, 1998. "The Defining Moment: The Great Depression and the American Economy in the Twentieth Century," NBER Books, National Bureau of Economic Research, Inc, number bord98-1.
    8. Joseph Mason, 2001. "Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks During the Great Depression," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(1), pages 77-95, September.
    9. Alston Lee J. & Grove Wayne A. & Wheelock David C., 1994. "Why Do Banks Fail? Evidence from the 1920s," Explorations in Economic History, Elsevier, vol. 31(4), pages 409-431, October.
    10. Charles W. Calomiris & Joseph R. Mason, 2003. "Fundamentals, Panics, and Bank Distress During the Depression," American Economic Review, American Economic Association, vol. 93(5), pages 1615-1647, December.
    11. Mason, Joseph R., 2003. "The political economy of Reconstruction Finance Corporation assistance during the Great Depression," Explorations in Economic History, Elsevier, vol. 40(2), pages 101-121, April.
    12. Awalt, Francis Gloyd, 1969. "Recollections of the Banking Crisis in 1933," Business History Review, Cambridge University Press, vol. 43(03), pages 347-371, September.
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    Cited by:

    1. Butkiewicz, James, 2015. "Eugene Meyer And The German Influence On The Origin Of Us Federal Financial Rescues," Journal of the History of Economic Thought, Cambridge University Press, vol. 37(01), pages 57-77, March.
    2. Calomiris, Charles W. & Flandreau, Marc & Laeven, Luc, 2016. "Political foundations of the lender of last resort: A global historical narrative," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 48-65.
    3. Bernd Schwaab, 2013. "Discussion of Bank Funding and Financial Stability," RBA Annual Conference Volume,in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.
    4. Barry Eichengreen, 2016. "The Great Depression in a Modern Mirror," De Economist, Springer, vol. 164(1), pages 1-17, March.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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