IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/22074.html
   My bibliography  Save this paper

Network Contagion and Interbank Amplification during the Great Depression

Author

Listed:
  • Kris James Mitchener
  • Gary Richardson

Abstract

Interbank networks amplified the contraction in lending during the Great Depression. Banking panics induced banks in the hinterland to withdraw interbank deposits from Federal Reserve member banks located in reserve and central reserve cities. These correspondent banks responded by curtailing lending to businesses. Between the peak in the summer of 1929 and the banking holiday in the winter of 1933, interbank amplification reduced aggregate lending in the U.S. economy by an estimated 15 percent.

Suggested Citation

  • Kris James Mitchener & Gary Richardson, 2016. "Network Contagion and Interbank Amplification during the Great Depression," NBER Working Papers 22074, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22074
    Note: DAE ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w22074.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Allen, William A. & Moessner, Richhild, 2012. "The international propagation of the financial crisis of 2008 and a comparison with 19311," Financial History Review, Cambridge University Press, vol. 19(2), pages 123-147, August.
    2. R. Glenn Hubbard, 1991. "Financial Markets and Financial Crises," NBER Books, National Bureau of Economic Research, Inc, number glen91-1.
    3. Iyer, Rajkamal & Peydró, José-Luis, 2011. "Interbank contagion at work: Evidence from a natural experiment," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1337-1377.
    4. Gary Richardson & William Troost, 2009. "Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi-Experimental Evidence from a Federal Reserve District Border, 1929-1933," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 1031-1073, December.
    5. Wicker,Elmus, 1996. "The Banking Panics of the Great Depression," Cambridge Books, Cambridge University Press, number 9780521562614, October.
    6. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    7. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    8. 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.
    9. Michael D. Bordo & David C. Wheelock, 2010. "The promise and performance of the Federal Reserve as lender of last resort 1914-1933," Working Papers 2010-036, Federal Reserve Bank of St. Louis.
    10. Claus Puhr & Reinhardt Seliger & Michael Sigmund, 2012. "Contagiousness and Vulnerability in the Austrian Interbank Market," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 24, pages 62-78.
    11. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    12. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    13. Richardson, Gary, 2007. "The Check is in the Mail: Correspondent Clearing and the Collapse of the Banking System, 1930 to 1933," The Journal of Economic History, Cambridge University Press, vol. 67(3), pages 643-671, September.
    14. Ricardo J. Caballero & Alp Simsek, 2013. "Fire Sales in a Model of Complexity," Journal of Finance, American Finance Association, vol. 68(6), pages 2549-2587, December.
    15. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-781, December.
    16. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.
    17. 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.
    18. Richardson, Gary & Van Horn, Patrick, 2018. "In the eye of a Storm: Manhattan's money center banks during the international financial crisis of 1931," Explorations in Economic History, Elsevier, vol. 68(C), pages 71-94.
    19. Andrew J. Jalil, 2015. "A New History of Banking Panics in the United States, 1825-1929: Construction and Implications," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 295-330, July.
    20. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    21. Ben Bemanke & Harold James, 1991. "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison," NBER Chapters, in: Financial Markets and Financial Crises, pages 33-68, National Bureau of Economic Research, Inc.
    22. Richard S. Grossman & Christopher M. Meissner, 2010. "International aspects of the Great Depression and the crisis of 2007: similarities, differences, and lessons," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 318-338, Autumn.
    23. Moessner, Richhild & Allen, William A., 2011. "Banking crises and the international monetary system in the Great Depression and now1," Financial History Review, Cambridge University Press, vol. 18(1), pages 1-20, April.
    24. Accominotti, Olivier, 2012. "London Merchant Banks, the Central European Panic, and the Sterling Crisis of 1931," The Journal of Economic History, Cambridge University Press, vol. 72(1), pages 1-43, March.
    25. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
    26. Davison, Lee K. & Ramirez, Carlos D., 2014. "Local banking panics of the 1920s: Identification and determinants," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 164-177.
    27. Fricke, Daniel & Lux, Thomas, 2012. "Core-periphery structure in the overnight money market: Evidence from the e-MID trading platform," Kiel Working Papers 1759, Kiel Institute for the World Economy (IfW Kiel).
    28. Montgomery, Jacob M. & Nyhan, Brendan, 2010. "Bayesian Model Averaging: Theoretical Developments and Practical Applications," Political Analysis, Cambridge University Press, vol. 18(2), pages 245-270, April.
    29. 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.
    30. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    31. Gary Richardson, 2006. "Quarterly Data on the Categories and Causes of Bank Distress During the Great Depression," NBER Working Papers 12715, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kris James Mitchener & Gary Richardson, 2020. "Contagion of Fear," NBER Working Papers 26859, National Bureau of Economic Research, Inc.
    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. Jaremski, Matthew & Wheelock, David C., 2020. "The Founding of the Federal Reserve, the Great Depression, and the Evolution of the U.S. Interbank Network," The Journal of Economic History, Cambridge University Press, vol. 80(1), pages 69-99, March.
    4. Michele Fratianni, 2008. "Financial Crises, Safety Nets and Regulation," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 169-208.
    5. Charles Calomiris, 2009. "Banking Crises and the Rules of the Game," NBER Working Papers 15403, National Bureau of Economic Research, Inc.
    6. Augusto Hasman, 2013. "A Critical Review Of Contagion Risk In Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 27(5), pages 978-995, December.
    7. Charles W. Calomiris, 2008. "The subprime turmoil: what’s old, what’s new, and what’s next," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 19-110.
    8. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    9. Rajkamal Iyer & José-Luis Peydró, 2011. "Interbank Contagion at Work: Evidence from a Natural Experiment," Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1337-1377.
    10. Nanda, Ramana & Nicholas, Tom, 2014. "Did bank distress stifle innovation during the Great Depression?," Journal of Financial Economics, Elsevier, vol. 114(2), pages 273-292.
    11. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 35, European Central Bank.
    12. Gary B. Gorton, 2012. "Some Reflections on the Recent Financial Crisis," NBER Working Papers 18397, National Bureau of Economic Research, Inc.
    13. Charles W. Calomiris & Matthew Jaremski & David C. Wheelock, 2019. "Interbank Connections, Contagion and Bank Distress in the Great Depression," Working Papers 2019-001, Federal Reserve Bank of St. Louis.
    14. Paul Glasserman & H. Peyton Young, 2015. "Contagion in Financial Markets," Working Papers 15-21, Office of Financial Research, US Department of the Treasury.
    15. Jalil, Andrew J. & Rua, Gisela, 2016. "Inflation expectations and recovery in spring 1933," Explorations in Economic History, Elsevier, vol. 62(C), pages 26-50.
    16. Michael D. Bordo & John Landon-Lane, 2010. "The Lessons from the Banking Panics in the United States in the 1930s for the Financial Crisis of 2007-2008," NBER Working Papers 16365, National Bureau of Economic Research, Inc.
    17. Gary B. Gorton & Andrew Metrick, 2013. "The Federal Reserve and Financial Regulation: The First Hundred Years," NBER Working Papers 19292, National Bureau of Economic Research, Inc.
    18. Aldunate, Felipe & Jenter, Dirk & Korteweg, Arthur & Koudijs, Peter, 2021. "Shareholder Liability and Bank Failure," CEPR Discussion Papers 16309, C.E.P.R. Discussion Papers.
    19. Postel-Vinay, Natacha, 2011. "From a “normal recession” to the “Great Depression”: finding the turning point in Chicago bank portfolios, 1923-1933," Economic History Working Papers 35518, London School of Economics and Political Science, Department of Economic History.
    20. Sanjiv R. Das & Kris James Mitchener & Angela Vossmeyer, 2018. "Bank Regulation, Network Topology, and Systemic Risk: Evidence from the Great Depression," CESifo Working Paper Series 7425, CESifo.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:22074. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.