Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz

Kris James Mitchener; Gary Richardson

doi:10.1257/aer.103.3.73

American Economic Review Vol. 103 No. 3 2013

Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz

Kris James Mitchener¹; Gary Richardson²

¹ Department of Economics, University of Warwick, Gibbet Hill Road, Coventry, UK, CV4 7AL. · ² Department of Economics, University of California, Irvine, 3151 Social Science Plaza, Irvine, CA 92617.

Abstract

This essay assesses whether network linkages within the banking system amplified the real effects of bank failures during the Great Contraction. In 1929, nearly all interbank deposits held by Federal Reserve member banks belonged to “shadowy” nonmember banks which were outside the regulatory reach of federal regulators. Regional banking panics in the early 1930s drained these interbank deposits from central reserve city banks. Money-center banks in Chicago and New York responded to volatile and declining interbank deposits by changing their asset composition. They reduced their lending to businesses and individuals, and increased their holdings of cash and government bonds.

DOI: 10.1257/aer.103.3.73
Volume: 103
Issue: 3
Pages: 73-78
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz

Abstract

Cite