THE EFFECT OF CHANGES IN RESERVE REQUIREMENTS DURING THE 1930s:
The differential response of cash reserves of member banks and nonmember banks not subject to the 1936-37 increase in reserve requirements is estimated to determine whether the 1937-38 recession was caused by the increase in reserve requirements. We identify 17 states that maintained constant reserve requirements from June 1934 to June 1941. While member banks increased their cash reserve ratios relative to nonmember banks, the magnitude of the adjustment is too small to have contributed to the 1937-38 recession. Shock prices and public reaction to the increase in reserve requirements are consistent with the empirical results. While the Fed was responsible for the Great Contraction, the results are inconsistent with the view the Fed’s reserve requirement increase contributed significantly to the 1937-38 recession.
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- Clifford B. Sowell & Atul K. Saxena, 2000. "An Examination of Country Member Bank Cash Balances of the 1930s: A Test of Alternative Explanations," Southern Economic Journal, Southern Economic Association, vol. 66(4), pages 923-941, April.
- Karl Brunner & Allan H. Meltzer, 1968. "Liquidity Traps for Money, Bank Credit, and Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 76, pages 1.
- Charles W. Calomiris & Joseph R. Mason, 2003. "Consequences of Bank Distress During the Great Depression," American Economic Review, American Economic Association, vol. 93(3), pages 937-947, June.
- Mayer, Thomas, 1978. "Money and the Great Depression: A critique of professor Temin's thesis," Explorations in Economic History, Elsevier, vol. 15(2), pages 127-145, April.
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