MONETARY INTERVENTION REALLY DID MITIGATE BANKING PANICS
DURING THE GREAT DEPRESSION: EVIDENCE ALONG THE ATLANTA
FEDERAL RESERVE DISTRICT BORDER
By
Andrew J. Jalil+
Acknowledgments. I am indebted to J. Bradford DeLong, Barry Eichengreen, Christina D.
Romer, David H. Romer and James A. Wilcox for their continuous guidance, advice and
support. I am grateful to Lauren Bloomquist, Thomas Verghese and Joseph Warren for
exceptional research assistance and to numerous seminar participants and the referees for
helpful comments and suggestions.
+
Department of Economics, Occidental College, 1600 Campus Road, Los Angeles, CA 90041. Email:
[email protected].
MONETARY INTERVENTION REALLY DID MITIGATE BANKING
PANICS DURING THE GREAT DEPRESSION: EVIDENCE ALONG THE
ATLANTA FEDERAL RESERVE DISTRICT BORDER
Abstract
Throughout the Great Depression, the Federal Reserve Bank of Atlanta aggressively
intervened to stabilize its banking system.
To assess these policies, I analyze the
performance of banks along counties straddling the border of the Atlanta Fed. My results
indicate that expansionary initiatives designed to inject liquidity into the banking system
reduced the incidence of bank suspensions by 34 to 72 percent in some regions.
Moreover, an analysis of the balance sheets of individual Federal Reserve Districts
suggests that liquidity intervention did not expend large resources.
“Why was monetary policy so inept?...The monetary system collapsed, but it clearly need not
have done so….pursuit of the policies outlined by the System itself in the 1920’s, or for that
matter by Bagehot in 1873, would have prevented the catastrophe.”
[Friedman and Schwartz, A Monetary History of the United States, 1867-1960, p. 407]
Introduction
The causes of bank failures during the Great Depression remain one of the most
important issues scholars face in attempting to explain the severity of the contraction of 19291933. Two schools of thought dominate the debate. Milton Friedman and Anna J. Schwartz
(1963), argue that the massive waves of banking panics reflected liquidity crises. As fear spread
throughout the country, deposit withdrawals accelerated and bank runs became self-fulfilling
panics, forcing many solvent but illiquid institutions to fail or suspend operations. By contrast,
1
advocates of the second school of thought, such as Peter Temin (1976), contend that the banking
panics were crises of fundamental solvency. Mounting default rates, deteriorating bank loan
portfolios, and a downward trend in the value of bank assets contributed to a decline in the
fundamental health of banks, undermining the solvency of financial institutions throughout the
country. According to this view, banks failed because they were insolvent, rather than simply
illiquid.1
Two recent studies have made substantial headway in empirically testing these competing
claims. Charles W. Calomiris and Joseph R. Mason (2003) use a disaggregated panel data set of
individual bank characteristics to model the determinants of bank failure risk. They conclude that
fundamentals describe bank failure risk well and that, as a consequence, Friedman and Schwartz
exaggerated the extent to which the banking panics of 1929-1933 were liquidity crises.
According to their analysis, efforts by the Federal Reserve to act as a lender of last resort to
provide liquidity assistance to struggling banks would have proven ineffective.
Gary Richardson and William Troost (2009) analyze the performance of banks in
Mississippi during the depression. The Federal Reserve Act of 1913 separated the southern half
of Mississippi from its northern half. The southern half fell under the jurisdiction of the Atlanta
Federal Reserve District, whereas the northern half fell under the St. Louis Federal Reserve
District. These two districts adopted divergent policies in response to banking panics. The
Atlanta Fed aggressively intervened to stabilize its banking system, adhering to a principle known
as Bagehot’s Rule. This rule dictated that during times of panic, the central bank should act as a
lender of last resort, extending credit to banks and rushing cash to ailing financial institutions. By
contrast, the St. Louis Fed favored nonintervention in the midst of panics. It was a staunch
advocate of the Real Bills doctrine, a principle that called for a contraction of the supply of credit
during recessions and limited intervention in the face of banking panics. Richardson and Troost
track bank survival rates in Mississippi during the major banking panic of 1930 and conclude that
bank performance was far superior in the portion of Mississippi that fell under the jurisdiction of
2
the Atlanta Federal Reserve District. As a consequence, Richardson and Troost conclude that
liquidity intervention mitigated banking panics during the depression.2
Both studies provide first-rate analysis.
Yet, because these two studies offer
contradictory policy implications, it is difficult to determine the extent to which liquidity
intervention could have mitigated the banking panics of the Great Depression. Moreover, both
studies have limitations. As they acknowledge, Calomiris and Mason confine their analysis to
Fed member banks although most failing banks were nonmembers. Due to data deficiencies, they
rely on biennial data (available on two dates: Dec 31, 1929 and Dec 31, 1931) in assembling
their bank-specific characteristics—a constraint that may render their data unrepresentative of the
health of institutions at the timing of failures. Regarding the second study, Richardson and
Troost limit their analysis to one state—Mississippi—raising the possibility that some force other
than Fed policies could be driving their results and generating concerns about the external validity
of their findings.
A New Test
The debate over the nature of the banking panics of the Great Depression continues.
Economists remain divided as to whether liquidity intervention could have alleviated the nation’s
banking panics. A new test—one that could provide additional evidence to evaluate the merits of
Friedman and Schwartz’s classic claim that the Federal Reserve could have stabilized the
country’s banking system had it acted as a lender of last resort—would be beneficial for this
debate. As a consequence, I propose a new test in this paper—one that is similar in nature to that
proposed by Richardson and Troost, but more expansive in geographic scope.
Throughout the course of the depression, the Federal Reserve Bank of Atlanta
championed monetary activism and aggressively intervened to support its banking system. In the
midst of panics, the Atlanta Fed acted as a lender of last resort, extending credit and rushing
money to ailing financial institutions. Richardson and Troost (2009) draw on myriad sources to
3
document the policy regime of the Atlanta Fed. They cite memos from Eugene Black, the
Governor of the Atlanta Fed, showing that agents rushed large sums of cash to banks during the
panic of 1930—a panic that broke out following the collapse of Caldwell and Company, an
investment banking firm that controlled the largest financial conglomerate in the South.
Richardson and Troost also cite Richard Gamble’s History of the Federal Reserve Bank of
Atlanta, 1914-1989 to document that such interventionist actions were not isolated instances and
that the Atlanta Fed continually responded to banking panics with expansionary measures.
Moreover, they document that these policies predated the Great Depression and that the Atlanta
Fed adhered to Bagehot’s Rule as far back as the early 1920s.
Richardson and Troost (2006) and Friedman and Schwartz (1963) document that, by
contrast, the Federal Reserve System as a whole did not intervene to support its banking system.
Fed officials from other districts espoused liquidationist ideologies, believing that occasional
recessions helped purge economies by removing inefficient firms and institutions from the
market. According to this view, expansionary monetary initiatives would impede these healthy
market corrections and hinder economic recovery.
As a consequence, the Federal Reserve
System as a whole did not intervene to support the country’s banking system.
Richardson and Troost describe in detail how the St Louis Fed adhered to the Real Bills
doctrine and actively opposed intervention during the banking panic in the fall of 1930. Lyster V.
Chandler (1971) provides a similar account of the St. Louis Fed. Chandler (p. 142) reports a
speech by William McC. Martin, Sr., Governor of the St. Louis Federal Reserve Bank, indicating
his opposition to monetary intervention:
I cannot see how the situation can be benefited by putting fifty millions of dollars, or, in
fact, any other amount, into the general market at this time…The reason that more money
is not being used is because it is not needed, and when there is already sufficient money
to meet the expressed needs, it seems to me unwise artificially to add to the amount
already sufficient in order to encourage a use which because based on a redundancy of
money rather than on actual needs may be hazardous.
4
Chandler extends this characterization to most of the other Federal Reserve Districts, including
those that shared a border with Atlanta. For example, Chandler (p. 139) describes Lynn P.
Talley, Governor of the Dallas Fed, as “yet another opponent of actively expansionary policies”
and George J. Seay, Governor of the Richmond Fed, as espousing views similar to those of
Martin.3 David Wheelock (1991, p. 100) corroborates these accounts, noting that “Within the
Reserve System there remained considerable acceptance of the Real Bills view that the supply of
credit should decline during recessions, because lacking ‘productive’ outlets an excess supply
would generate speculation or inflation.” Wheelock cites correspondence from the Richmond
Fed, indicating its adherence to the Real Bills view, as well as correspondence from other Federal
Reserve Districts.4
Given this diversity in policy regimes, I propose a new test of the effects of monetary
intervention on bank performance during the Depression. Specifically, I analyze the performance
of banks in counties located within 50 miles of the Atlanta Federal Reserve District. The Atlanta
Fed (District 6) shared a border with four other Federal Reserve Districts: Richmond (District 5),
St. Louis (District 8), Cleveland (District 4) and Dallas (District 11).
The logic of my approach is as follows. Due to geographic proximity, neighboring
counties should share a similar propensity to suffer from a depositor panic.
However, by
restricting my analysis to counties straddling the Atlanta Federal Reserve District border, I isolate
counties that are geographically close to one another, but that are under the jurisdiction of
different Fed policy regimes. The Atlanta Fed aggressively intervened to stabilize its banking
system by rushing cash to banks undergoing runs and acting as a lender of last resort. The other
districts did not. Consequently, an analysis of bank performance in counties along the Atlanta
Federal Reserve District border should shed insights into the effects of monetary intervention on
banking panics. For example, if the Atlanta Fed’s interventionist policies had no effect on
outcomes, then bank suspension rates in counties under the jurisdiction of the Atlanta Federal
Reserve District should be similar to bank suspension rates in neighboring counties across the Fed
5
border. On the other hand, if the Atlanta Fed’s interventionist policies had substantial effects,
then bank suspension rates should be lower in counties under the jurisdiction of the Atlanta
Federal Reserve District than bank suspension rates in neighboring counties across the border.
To conduct this test, I construct a panel regression model. The sample includes all
counties located within 50 miles of the Atlanta Federal Reserve District border.
I index
observations by county and year and I divide observations into distinct geographic regions and
monetary regimes. Since the Atlanta Federal Reserve District shared its border with four other
Federal Reserve Districts, I define four geographical regions:
Atlanta-Richmond, Atlanta-
St.Louis, Atlanta-Cleveland and Atlanta-Dallas. Each county is allocated to one geographic
region, based on closest proximity. Figure 1 presents these regions. A “monetary regime”
includes all of the counties under the jurisdiction of a particular policy regime. One monetary
regime—the Atlanta Federal Reserve District—aggressively intervened to stabilize its banking
system, whereas the other districts did not. Therefore, I formulate the following linear model:
4
Sit = ∑
1933
∑β
j=1 t=1927
1933
∑ α (A D ) + Ψ
jt (Rij Dt )+
t
i
t
i
+ εit
t=1927
where Sit represents bank suspension rate in county i in year t, Rj represents geographical region
dummies (j=1 Atlanta-Richmond, j=2 Atlanta-St. Louis, j=3 Atlanta-Cleveland, j=4 AtlantaDallas), A represents a dummy variable for the Atlanta Federal Reserve District, Dt represents
yearly dummies (t=1927, 1928, 1929, 1930, 1931, 1932, 1933), and Ψ represents time-invariant
county-level controls.5
I interact region and year dummies to capture region-year fixed effects. These interaction
terms measure the average level of bank suspension rates among counties in a region in a given
year. They reveal the extent to which banking panics gripped a particular region in a given year.
Moreover, I interact the Atlanta Fed dummy with year dummies to capture monetary regime-year
fixed effects. These interaction terms measure the average effect on bank suspension rates of
being in the Atlanta Federal Reserve district in each year. Hence, they provide yearly estimates
6
of the effectiveness of monetary intervention in mitigating banking panics. Lastly, to control for
economic, demographic and regulatory differences across counties, I include a set of county-level
control variables.6
Table 1 presents descriptive data on the sample size. It reports the number of counties,
the number of banks in operation on January 1, 1927, and the number of bank suspensions in each
year of the contraction, along with the two previous years to identify any potential trends in bank
suspensions in the run-up to the depression. The sample includes 356 counties (166 in Atlanta
and 190 in non-Atlanta) and 1614 banks (682 in Atlanta and 932 in non-Atlanta).
Table 2 reports economic, demographic and regulatory characteristics of counties for the
four geographical regions. The table separates each region into its Atlanta and non-Atlanta
component and reports averages across counties. The table reveals a large degree of homogeneity
across each region along a variety of dimensions.
Table 3 presents the regression results. It reports two specifications. Regression 1
presents the full model with county-level economic, demographic, and regulatory control
variables. Regression 2 excludes the county controls. The results are similar across the two
specifications.
First, consider the results before the start of the depression—1927 and 1928. In both
regressions, the region-year fixed effects are small and in most cases, statistically insignificant,
indicating that these regions were not seriously affected by banking panics. The Atlanta Fed
fixed effects are also small and statistically insignificant, indicating that bank suspension rates did
not differ substantially across opposite sides of the Atlanta Fed border in the run-up to the
depression. These findings suggest that bank performance was relatively homogenous along
opposite sides of the Atlanta Fed border before the start of the depression.
Next, consider the results during the Great Contraction. The region-year fixed effects
increase substantially during the contraction. In both regressions, the region-year fixed effects
show that during the early stages of the contraction—1929 to 1930, banking panics were most
7
severe in Atlanta-Richmond and Atlanta-St. Louis in 1929 and 1930 and in Atlanta-Cleveland in
1929. In 1931 and 1932, region-year fixed effects are large and significant in most regions, but in
1933, drop to levels that are, in general, insignificantly different from zero.
The main result from the empirical model, however, is the Atlanta Fed fixed effects. In
both regressions, in 1929 and 1930, the early stages of the depression, the Atlanta Fed fixed
effects are large, negative and strongly significant, indicating that being under the jurisdiction of
the Atlanta Federal Reserve District reduced the incidence of banking panics. These results
support the hypothesis that monetary intervention mitigated banking panics. According to these
results, by the end of 1930, the percentage of bank suspensions in counties located in the Atlanta
district were, on average, roughly 10 to 12 percentage points lower than the percentage of bank
suspensions in neighboring counties across the border in the St. Louis, Richmond, Cleveland, or
Dallas district. Moreover, the magnitude of these results is comparable to those of Richardson
and Troost (2009). Richardson and Troost show that approximately 75 percent of the banks in
the St. Louis district of Mississippi were still in operation by mid 1931, whereas approximately
85 percent of the banks in the Atlanta district of Mississippi were still in operation by mid 1931—
a difference of roughly 10 percent.7
During the later stages of the contraction, in 1931, 1932 and 1933, the Atlanta Fed fixed
effects are statistically indistinguishable from zero, indicating that bank suspension rates did not
differ substantially across opposite sides of the Atlanta Fed border. Thus, while the results from
these regressions suggest that monetary intervention alleviated banking panics during the early
stages of the depression, they also indicate that bank suspension rates began to converge in 1931
and 1932, in spite of high levels of bank suspension rates. What explains this convergence?
There are several potential explanations. One explanation is that liquidity intervention became
less effective over time. As the severity of the depression intensified between 1929 and 1933, the
nature of the banking panics might have changed.
Indeed, as economic conditions and
fundamentals deteriorated over the course of the depression, the banking panics, which initially
8
began as crises of illiquidity, might have transformed into crises of fundamental solvency during
the later stages of the depression.
This might—at least in part—reconcile the findings of
Richardson and Troost (2009) with those of Calomiris and Mason (2003).8 However, another
explanation is that other organizations—such as the National Credit Corporation and the
Reconstruction Finance Corporation, which began lending money to banks in 1931 and 1932,
respectively—smoothed out differences in credit lending to banks across Federal Reserve
Districts during the later stages of the depression. Furthermore, a third explanation is that other
Federal Reserve Districts, which initially opposed intervention, moved closer to the policies of
the Federal Reserve Bank of Atlanta over time. Richardson and Troost (2009) document that in
response to the successes of the Atlanta Fed, the St. Louis Fed, beginning in the summer of 1931,
started to adopt policies similar to those of the Atlanta Fed. Future research is needed to sort out
these competing potential explanations.9
These results strongly support the hypothesis that monetary intervention mitigated
banking panics during the early stages of the depression. To gauge the magnitude of these
effects, consider the following calculation. Dividing the Atlanta Fed fixed effects, which measure
the impact on bank suspension rates of being in the Atlanta Federal Reserve District in each year,
by the region-year fixed effects, which measure the average level of bank suspension rates among
counties in a region in a given year, provides estimates of the extent to which monetary
intervention reduced the incidence of bank suspensions. For example, the results from regression
2 indicate that the Atlanta Fed reduced the extent of bank suspensions by approximately 43
percent in 1929 and 40 percent in 1930 in Atlanta-Richmond and by approximately 48 percent in
1929 and 34 percent in 1930 in Atlanta-St. Louis. Using the results from regression 1 yields even
stronger statistics: these estimates indicate that after controlling for economic, demographic and
regulatory differences across counties, the Atlanta Fed reduced the extent of bank suspensions by
approximately 51 percent in 1929 and 57 percent in 1930 in Atlanta-Richmond and by
approximately 72 percent in 1929 and 66 percent in 1930 in Atlanta-St. Louis.
9
The Impact of Monetary Intervention on the Fed Balance Sheet
The results indicate that monetary intervention—on the part of the Atlanta Fed—
mitigated banking panics during the early stages of the contraction.
This suggests that
interventionist policies from the Federal Reserve System as a whole would have alleviated the
banking panics of the initial stages of the depression.
However, this finding poses a related question: would such a concerted system-wide
response have been feasible? The United States was on a fixed exchange rate regime, the gold
standard, during the Great Contraction. As a consequence, a potential constraint on Fed policy
might have been its reserve position. If liquidity intervention expended large resources, then it
might be the case that all twelve Federal Reserve Districts would not have been able to extend
support to their banking systems without jeopardizing the reserve position of the Federal Reserve
System as a whole.10
To investigate this issue further, I analyzed the balance sheet of the Atlanta Fed to
determine whether its actions impaired its reserve position. Figure 2 displays the reserve position
of the Atlanta Fed from July 1, 1929 to December 31, 1930. It shows the ratio of total reserves
against note and deposit liabilities—the reserve ratio. For sake of comparison, I include the
reserve position of two other Federal Reserve Districts that experienced serious banking panics
during the first two years of the depression, but that did not intervene to support their banking
systems—St. Louis and Richmond.11
The Federal Reserve Act required each Reserve bank to hold reserves in the form of gold
and lawful money equal to at least 35 percent of its deposit liabilities and reserves in the form of
gold equal to at least 40 percent of its outstanding Federal Reserve notes; as a consequence, the
average reserve requirement against Federal Reserve notes and deposits was between 35 and 40
percent. Figure 2 reveals that the reserve position of the Atlanta Fed remained substantially
above this requirement throughout 1929 and 1930. This suggests that monetary intervention did
not impair the balance sheet of the Atlanta Fed during the early stages of the depression.12
10
What explains the strong reserve position of the Atlanta Fed in the midst of such largescale intervention?
To answer this question, I read contemporary newspaper reports that
described the banking panics that occurred in the Atlanta Federal Reserve District in 1929 and
1930. In July 1929, during the outbreak of a panic in Florida, aggressive efforts to rush cash to
banks undergoing runs and strong declarations from Fed officials restored confidence and quelled
the panic. Creed Taylor, Deputy Governor of the Atlanta Federal Reserve Bank, proclaimed
“local bankers could ‘have all the money with which they need to meet the situation’” and The
New York Times reported, “confidence had been restored…the arrival of $5,000,000 here today
and yesterday from the Atlanta Federal Reserve Bank and the sight of the money in huge stacks
in the cages of the bank tellers had a reassuring effect.”13 In November 1930, during the panic
that coincided with the collapse of Caldwell and Company, the newspaper reports indicate that
the actions taken by Atlanta Fed officials—of rushing cash and pledging support to banks—
reassured depositors, inducing them to redeposit their money. The New York Times reported,
“Many depositors who had withdrawn their money from the East Tennessee National and the City
National Banks redeposited it today and business was again almost normal…huge stacks of cash
and currency [from the Federal Reserve Bank of Atlanta] reassured the most timid.”14 The
newspaper accounts indicate that the Atlanta Fed was able to rush cash to banks without
impairing its reserve position because its promise to extend aid to banks, coupled with visible
displays of rushing cash to banks, had a powerful effect in restoring confidence.
Conclusions
This paper extends the analysis of Richardson and Troost (2009) beyond Mississippi to a
larger region—the entire border of the Atlanta Federal Reserve District. It directly tests a chief
concern of the work of Richardson and Troost—the possibility that the results may be specific to
Mississippi and consequently, may be driven by some force other than differences in monetary
policy. By analyzing bank performance in counties straddling the border of the Atlanta Federal
11
Reserve District during the Great Depression, this paper conducts a new test of the effects of
liquidity intervention on bank performance in a more expansive range of regions. According to
my empirical estimates, liquidity intervention reduced the incidence of bank suspensions by 34 to
72 percent, depending on the model specification, across a wide array of areas. These findings
corroborate those of Richardson and Troost and support the assertion that the Federal Reserve
System could have mitigated the banking panics of the early stages of the depression had it acted
as a lender of last resort. They also indicate that the conclusions of Richardson and Troost are not
specific to one state, but rather are generalizable to a much larger, more diverse area.15
Would monetary intervention during the early stages of the depression have been
sufficient to prevent subsequent panics?
According to Friedman and Schwartz (1963), the
banking panics of the Great Depression were liquidity crises. In their view, the Federal Reserve
could have contained the banking panics had it rushed cash to banks undergoing runs and injected
liquidity into the country’s banking system. Unfortunately, because the counterfactual—bank
performance between 1929 and 1933 with the Federal Reserve System acting as a lender of last
resort—is unobservable, it may be impossible to know with certainty whether monetary
intervention would have been sufficient to stop a nationwide banking crisis and avert the worst of
the depression. Nonetheless, the results of this paper suggest that monetary intervention was
strongly effective during the early stages of the depression. As a consequence, the failure of the
Federal Reserve System to act as a lender of last resort during the initial stages of the depression
was a squandered opportunity.
12
Endnotes
1
The second school has two variants: bank insolvency as a result of bad conditions versus insolvency due
to bad lending. Temin (1976) is an advocate of the former variant.
2
In related work, Carlson, Mitchener, and Richardson (2011) describe how liquidity intervention—on the
part of the Atlanta Fed—helped arrest a banking panic in Florida in 1929.
3
While Chandler makes it clear that there were important differences among the individual Federal
Reserve Districts, Chandler describes the Federal Reserve Banks, except for those of Atlanta and New
York, as in general being opposed to aggressive expansionary initiatives. Chandler summarizes, “With
ideas such as those described above so widely prevalent within the System, it is no wonder that the Reserve
banks other than New York and Atlanta were unwilling to support positive and aggressive expansionary
policies, including prompt and sharp reductions in discount and bill-buying rates and large purchases of
government securities” (p. 142).
4
For a detailed discussion of the views at the various Federal Reserve Banks, see Chandler (1972), Meltzer
(2003), and Wheelock (1991).
5
The data on bank suspensions come from a study conducted by the Federal Deposit Insurance Corporation
(FDIC).
This data has been transferred to computer format by the University of Michigan’s Inter-
University Consortium for Political Science Research (ICPSR). The FDIC data set contains county level,
annual data that reveal the number of banks in operation, the number of banks suspending, and the total
number of deposits from 1920 to 1936. Two caveats accompany the use of the FDIC data. First, the FDIC
data reports bank suspension rates—not failure rates. It includes both permanent closures (failures) and
temporary closures (suspensions). The distinction could potentially be important for the empirical findings
that follow since not all banks that suspended operations ultimately failed or were liquidated. For example,
it could be possible that actions taken to contain banking panics reduced suspension rates, but not failure
rates. Second, not all bank suspensions (i.e. the closing down of an unsound bank by a bank examiner or a
voluntary liquidation) necessarily accompany banking panics.
6
The economic and demographic county-level control variables come from the census of population,
manufacturing, and agriculture for 1930 and include total population, persons per square mile, fraction of
population in labor force, urban population share, unemployment rate, size of farms, number of
13
manufacturing establishments, percentage of cropland with failures, and ratio of debt to farm value. The
regulatory control variables come from Polk’s Bankers’ Encyclopedia (1929) and the Federal Reserve
Bulletin (November 1928, September 1930) and include state minimum capital and reserve requirements.
7
These results suggest that monetary intervention mitigated banking panics during the early stages of the
depression. However, one potentially complicating factor is the collapse of Caldwell and Company, which
occurred in the Atlanta Federal Reserve District portion of Tennessee in 1930 and could bias the results
against the Atlanta Fed. Richardson and Troost (2006), for example, mention that they focus on Mississippi
rather than Tennessee—both of which are divided by the Atlanta Fed District border—in part because the
collapse of Caldwell and Company occurred in the 6th district portion of Tennessee and could bias the
results against the Atlanta Fed in that area. Thus, the strength of these results—in spite of the collapse of
Caldwell and Company—is noteworthy. Nonetheless, to check whether this source of bias might be
present, as a robustness check, I re-estimate the preceding regressions, but exclude the area surrounding the
collapse of Caldwell and Company—specifically, all counties in a Tennessee Atlanta versus non-Atlanta
pairing in 1930—that is, all counties in Tennessee and all counties whose closest neighbor in the Atlanta
Federal Reserve District is Tennessee. The monetary regime-year and region-year estimates for 1927-1929
and 1931-1933 are virtually unchanged from the previous regressions. However, the Atlanta Fed fixed
effect for 1930 increases dramatically to -0.099 (standard error = 0.029) for regression 1, which includes
county-level control variables, and to -0.085 (standard error = 0.028) for regression 2, which omits the
control variables.
These results indicate that this source of bias is likely real:
excluding the area
surrounding the collapse of Caldwell and Company roughly doubles the Atlanta Fed fixed effect in 1930.
8
This would also indicate that the scope for action from the Federal Reserve—via liquidity support–was
strongest during the initial stages of the depression.
9
An additional finding that merits attention involves the regulatory control variables from regression 1.
The coefficients on the capital and reserve requirement variables are significant and indicate that an
increase in capital requirements reduces bank suspension rates, but that an increase in reserve requirements
increases bank suspension rates. The direction of these effects is the same as those found in Mitchener
(2005). Thus, these results along the Atlanta Fed border corroborate his findings. Most importantly, these
results indicate that even after controlling for differences in capital and reserve requirements, the Atlanta
14
Fed fixed effects are strongly significant during the early stages of the depression—evidence that monetary
intervention mattered. For a detailed discussion of the role of capital and reserve requirements in bank
stability during the depression, see Mitchener (2005).
10
See, for example, Hsieh and Romer (2006) for a discussion of the role of the gold standard in Federal
Reserve policymaking during the Great Contraction.
11
The reserve ratio data come from the monthly Federal Reserve Bulletin from 1929-1930.
12
In addition, the Federal Reserve Act required that the outstanding notes of each Federal Reserve Bank be
backed 100 percent by collateral in the form of gold and eligible paper. An analysis of balance sheet data
from the monthly Federal Reserve Bulletin reveals that this condition was also met in each month in 1929
and 1930.
13
July 20, 1929. Commercial and Financial Chronicle. “The Florida Bank Failures.” p. 422.
14
November 14, 1930. New York Times. “Money Redeposited in Knoxville.” p. 19.
15
Other scholars—see, for example, Ziebarth (2013)—have used the Mississippi natural experiment
identified by Richardson and Troost to study the effects of monetary policy on outcomes other than bank
failures. A key contribution of this paper is that it makes the case for extending the analysis beyond
Mississippi to the entire Atlanta Fed border.
REFERENCES
Annual Reports. Federal Reserve Banks. 1929-1930.
Calomiris, Charles W., and Joseph R. Mason. “Fundamentals, Panics, and Bank Distress During
the Depression.” American Economic Review 93, no. 5 (2003): 1615-47.
Carlson, Mark, Kris J. Mitchener, and Gary Richardson. “Arresting Banking Panics: Federal
Reserve Liquidity Provision and the Forgotten Panic of 1929.” Journal of Political
Economy 119, no. 5 (2011): 889-924.
Chandler, Lester V. American Monetary Policy, 1928-1941. New York: Harper & Row, 1971.
Commercial and Financial Chronicle. 1929.
15
Federal Reserve Board. Bulletin, 1928-1930.
Friedman, Milton and Anna J. Schwartz. A Monetary History of the United States, 1867-1960.
Princeton: Princeton University Press, 1963.
Hsieh, Chang-Tai, and Christina D. Romer. “Was the Federal Reserve Constrained by the Gold
Standard During the Great Depression?” Journal of Economic History 66, no. 1 (2006):
140-76.
Meltzer, Allen H. A History of the Federal Reserve. Vol 1, 1913-1951. Chicago: Univ. Chicago
Press, 2003.
Mitchener, Kris. “Bank Supervision, Regulation, and Financial Instability during the Great
Depression.” Journal of Economic History 65, no. 1 (2005): 153-85.
Polk’s Bankers Encyclopedia Co. Polk’s Bankers Encyclopedia, March 1929. Detroit, MI.:
Polk’s Bankers Encyclopedia Co., 1929.
Richardson, Gary and William Troost. “Monetary Intervention Mitigated Banking Panics During
the Great Depression: Quasi-Experimental Evidence from the Federal Reserve District
Border in Mississippi, 1929 to 1933.” NBER Working Paper No. 12591, Cambridge,
MA, October 2006.
____________________. “Monetary Intervention Mitigated Banking Panics during the Great
Depression: Quasi-Experimental Evidence from a Federal Reserve District Border, 19291933.” Journal of Political Economy 117, no. 6 (2009): 1031-73.
Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: W.W. Norton,
1976.
Wheelock, David. The Strategy and Consistency of Federal Reserve Monetary Policy, 19241933. Cambridge: Cambridge University Press, 1991.
Wicker, Elmus. The Banking Panics of the Great Depression.
University Press, 1996.
16
Cambridge:
Cambridge
Ziebarth, Nicholas L. “Identifying the Effects of Bank Failures from a Natural Experiment in
Mississippi
during
the
Great
Depression.”
Macroeconomics 5, no. 1 (2013): 81-101.
17
American
Economic
Journal:
TABLE 1
SAMPLE SIZE
Counties
Atlanta-Richmond
Atlanta
Richmond
Atlanta-St. Louis
Atlanta
St. Louis
Atlanta-Cleveland
Atlanta
Cleveland
Atlanta-Dallas
Atlanta
Dallas
Total
Banks
Bank Suspensions
1927
1928
1929
1930
1931
1932
1933
73
62
275
338
3
9
20
14
19
52
16
26
12
14
19
36
1
0
60
78
274
403
4
4
8
4
19
56
21
38
11
20
22
32
2
0
6
18
29
67
0
3
0
0
4
3
0
4
0
7
4
9
0
0
27
32
104
124
1
1
0
0
2
6
8
1
3
1
25
19
0
0
356
1614
25
46
161
114
68
166
3
Note: The data come from the Federal Deposit Insurance Corporation (FDIC), available through the InterUniversity Consortium for Political Science Research. The table reports the number of counties, the
number of banks in operation in 1927 and the number of bank suspensions in each year from 1927 to 1933.
18
TABLE 2
CHARACTERISTICS OF COUNTIES
Atlanta - Richmond
Economic and Demographic Variables
Population (1000s)
Persons per Square Mile
Fraction of Population in Labor Force (%)
Urban Population Share (%)
Unemployment Rate (%)
Average Size of Farms (in acres)
Number of Manufacturing Establishments
Percentage of Cropland with Failures
Ratio of Debt to Farm Value
Regulatory Variables
Minimum Capital Requirement (in $1000s)
Reserve Requirement (%)
Sample Size (# of Counties)
Atlanta - St. Louis
Atlanta - Cleveland
Atlanta - Dallas
Atlanta
Richmond
Atlanta
St. Louis
Atlanta
Cleveland
Atlanta
Dallas
21.5
56.7
35.9
10.5
1.9
84.0
25.5
2.1
34.4
27.6
57.0
34.2
6.2
2.4
84.6
31.5
1.5
30.0
26.4
44.9
36.1
5.5
1.6
75.3
27.6
2.4
36.5
22.2
46.4
36.5
7.6
1.8
74.3
16.8
2.1
44.4
21.9
87.5
32.1
10.2
1.5
82.2
17.8
1.4
29.0
28.3
67.1
28.6
4.5
2.6
83.2
48.2
1.7
25.7
28.7
46.5
37.6
14.6
2.8
61.1
16.4
2.7
35.5
21.8
33.7
37.9
8.0
2.0
153.2
20.4
4.7
31.8
20.1
13.4
20.6
11.2
10.0
12.4
12.1
12.1
10.0
10.0
15.0
10.0
10.0
18.1
10.0
18.0
73
62
60
78
6
18
27
32
SOURCE: Economic and demographic statistics come from the censuses of population, manufacturing, and agriculture for 1930. The data can be electronically downloaded at NHGIS (http://www.nhgis.org)
or ICPSR (http://www.icpsr.umich.edu/icpsrweb/ICPSR). Minimum capital and reserve requirements come from Polk's Bankers' Encyclopedia, 1929, and the Federal Reserve Bulletin, Nov 1928 and Sep 1930.
NOTE: The table reports averages across counties.
19
TABLE 3
PANEL REGRESSION MODEL
DEPENDENT VARIABLE: COUNTY BANK SUSPENSION RATE
Regression 1
Coefficient Standard Error
Monetary Regime Fixed Effects
Atlanta1927
Atlanta1928
Atlanta1929
Atlanta1930
Atlanta1931
Atlanta1932
Atlanta1933
Region Fixed Effects
1927
Atlanta-Richmond
Atlanta-StLouis
Atlanta-Cleveland
Atlanta-Dallas
1928
Atlanta-Richmond
Atlanta-StLouis
Atlanta-Cleveland
Atlanta-Dallas
1929
Atlanta-Richmond
Atlanta-StLouis
Atlanta-Cleveland
Atlanta-Dallas
1930
Atlanta-Richmond
Atlanta-StLouis
Atlanta-Cleveland
Atlanta-Dallas
1931
Atlanta-Richmond
Atlanta-StLouis
Atlanta-Cleveland
Atlanta-Dallas
1932
Atlanta-Richmond
Atlanta-StLouis
Atlanta-Cleveland
Atlanta-Dallas
1933
Atlanta-Richmond
Atlanta-StLouis
Atlanta-Cleveland
Atlanta-Dallas
County-Level Controls
Capital Requirement
(in $1000s)
Reserve Requirement
2
R
Regression 2
Coefficient Standard Error
-0.011
0.005
-0.078**
-0.046**
-0.033
-0.018
0.000
0.006
0.010
0.024
0.017
0.019
0.030
0.007
-0.003
0.013
-0.071**
-0.037*
-0.024
-0.010
0.008
0.006
0.010
0.023
0.017
0.019
0.029
0.006
0.003
-0.028
0.007
-0.059*
0.026
0.024
0.027
0.028
0.015*
0.013**
0.026
0.006
0.006
0.004
0.018
0.004
0.031
-0.029
-0.023
-0.071*
0.028
0.026
0.022
0.029
0.043**
0.011
-0.003
-0.006
0.011
0.007
0.003
0.004
0.152**
0.107**
0.128*
0.008
0.036
0.032
0.064
0.038
0.165**
0.149**
0.147*
0.074**
0.025
0.022
0.059
0.025
0.081*
0.069*
0.033
-0.022
0.033
0.031
0.031
0.032
0.093**
0.110**
0.052*
0.043**
0.020
0.020
0.023
0.013
0.080*
0.020
0.071
-0.038
0.035
0.030
0.043
0.030
0.092**
0.060**
0.090*
0.026*
0.023
0.017
0.037
0.011
0.147**
0.076*
0.136*
0.183**
0.043
0.032
0.055
0.049
0.160**
0.120**
0.156**
0.252**
0.032
0.023
0.051
0.042
-0.009
-0.041
-0.021
-0.069*
0.025
0.024
0.021
0.027
0.003
-0.001
-0.002
-0.004
0.005
0.003
0.002
0.003
Yes
No
**
-0.003
0.004*
0.125
*
0.001
-------
-------
0.002
------0.119
-------
= Significant at the 5 percent level.
= Significant at the 1 percent level.
Note: Robust standard errors, clustered at the county level are in parentheses.
**
20
FIGURE 1
COUNTIES WITHIN 50 MILES OF ATLANTA FED DISTRICT BORDER
Note: The map shows counties located within 50 miles of the Atlanta Federal Reserve District border. The
map comes from the U.S. Census Bureau. The 50-mile buffer was generated using a Geographic
Information System (GIS) program.
21
FIGURE 2
RESERVE POSITION OF ATLANTA, ST. LOUIS AND RICHMOND FEDERAL
RESERVE BANKS
Note: The reserve ratio data come from the monthly Federal Reserve Bulletin. The reserve ratio measures
the ratio of total reserves against note and deposit liabilities.
22