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Bank Distress during the Great Depression: The Illiquidity-Insolvency Debate Revisited

  • Gary Richardson

During the contraction from 1929 through 1933, the Federal Reserve System tracked changes in the status of all banks operating in the United States and determined the cause of each bank suspension. This essay analyzes chronological patterns in aggregate series constructed from that data. The analysis demonstrates both illiquidity and insolvency were substantial sources of bank distress. Periods of heightened distress were correlated with periods of increased illiquidity. Contagion via correspondent networks and bank runs propagated the initial banking panics. As the depression deepened and asset values declined, insolvency loomed as the principal threat to depository institutions.

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File URL: http://www.nber.org/papers/w12717.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12717.

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Date of creation: Dec 2006
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Publication status: published as Richardson, Gary. “Bank Distress during the Great Depression: The Illiquidity-Insolvency Debate Revisited." Explorations in Economic History 44, 4 (October 2007):586-607.
Handle: RePEc:nbr:nberwo:12717
Note: DAE ME
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  1. 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.
  2. Meltzer, Allan H., 1976. "Monetary and other explanations of the start of the great depression," Journal of Monetary Economics, Elsevier, vol. 2(4), pages 455-471, November.
  3. 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.
  4. Kris James Mitchener, 2004. "Bank Supervision, Regulation, and Instability During the Great Depression," NBER Working Papers 10475, National Bureau of Economic Research, Inc.
  5. Christina D. Romer, 1993. "The Nation in Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 19-39, Spring.
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