Bank Asset Liquidation and the Propagation of the U.S. Great Depression

Posted: 12 Oct 2007

See all articles by Joseph R. Mason

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

James W. Kolari

Texas A&M University - Department of Finance

Ali Anari

Texas A&M University - Mays Business School

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Abstract

We hypothesize that financial disintermediation during and after the Great Depression arose from the slow liquidation of failed-bank deposits in the years following financial crises. We construct a data series containing the stock of failed national bank deposits for the period 1921-1940. Our data series indicates that the slow liquidation rate of bank assets correlates well with business cycle persistence. Vector autoregression models show that the stock of failed-bank deposits undergoing liquidation is as important as money stock in terms of explaining output changes over forecast horizons from one to ten years. Failed-bank deposit shocks lasted for about five years and then became transitory. Furthermore, failed-bank deposit shocks had permanent negative effects on money supply and transitory negative effects on prices. Consistent with recent theories concerning linkages between the financial system and economic growth, we infer that the dynamic effects of banking sector shocks were cumulative and pervasive during and after the Depression.

Keywords: Business cycles, persistence, bank failures, liquidation, bankruptcy costs

JEL Classification: E3, E6, G2, N0, N1, N2

Suggested Citation

Mason, Joseph R. and Kolari, James W. and Anari, Ali, Bank Asset Liquidation and the Propagation of the U.S. Great Depression. Journal of Money, Credit, and Banking, Vol. 37, August 2005. Available at SSRN: https://ssrn.com/abstract=1020087 or http://dx.doi.org/10.2139/ssrn.326782

Joseph R. Mason (Contact Author)

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Ali Anari

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States
979-845-2094 (Phone)
979-845-0460 (Fax)

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