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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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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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Find related papers by JEL classification:
  • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • 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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  1. James A. Wilcox, 1984. "Excess Reserves in the Great Depression," NBER Working Papers 1374, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. Charles Calomiris & David Wheelock, 1998. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 23-66 National Bureau of Economic Research, Inc.
  5. 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.
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Cited by:

  1. Douglas A. Irwin, 2011. "Gold Sterilization and the Recession of 1937-38," NBER Working Papers 17595, National Bureau of Economic Research, Inc.
  2. 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.
  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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