The Real Effects of Fed Intervention: Revisiting the 1920-1921 Depression
53 Pages Posted: 16 Sep 2018
Date Written: August 31, 2018
We provide causal evidence that discount rate changes by the Federal Reserve affected lending and economic output during the 1920-1921 depression. Our identification strategy exploits county-level variation in access to the Fed’s discount window. We implement this strategy with hand-collected data on banking and agriculture in Illinois. Intervention by the Fed temporarily lowered agricultural output, but caused debt-to-output levels to be persistently lower, lasting into the Great Depression. The underlying mechanism appears to be consolidation of farms and efficient reallocation of resources. Our findings call into question the conventional narrative that Fed policy was misguided during the 1920-1921 depression.
Keywords: History, Banking, Federal Reserve, Discount Window
JEL Classification: N12, E52, E58, G21
Suggested Citation: Suggested Citation