The Check Tax: Fiscal Folly and the Great Monetary Contraction

Abstract

Although its role has been overlooked by monetary historians, a two-cent tax on bank checks effective from June 1932 through December 1934 appears to have been an important contributing factor to that period's severe monetary contraction. According to our estimates, the currency-demand deposit ratio was about 15 percent larger, and the M1 money stock about 12 percent smaller, ceteris paribus, than each would have been in the absence of the tax. The contractionary consequences of the check tax had in fact been anticipated by many legislators who were, nevertheless, unable to prevent the measure from being included in the Revenue Act of 1932.

JEL Classification: E31, E51, N12