Weathering the Perfect Storm: The Seemingly Calm Central Money Market During the Great Contraction

Abstract

This paper examines the behavior of all banks in New York State during the Great Contraction and their possible reasons of exit. Combining bank-level balance sheet and failure data for every bank in the state, I find that there are distinct patterns in bank exit. Mergers and consolidations peak in New York City at the height of the banking panics. The majority of liquidations in New York City occur in August of 1931, before Britain abandons the gold standard and during the banking crises in Austria and Germany. The abandonment by Britain and the subsequent increase in the discount rate seem to have had a larger effect on the liquidation rate of banks outside of New York City. Lastly, there differences in bank portfolio allocation when considering different means of exit. These differences support the findings of Calomiris and Wilson (2004) that banks could reduce risk of failure by shifting from loans to riskless assets.

Keywords: great depression, excess reserves, central money market, money and banking

JEL Classification: E44, E52, E51, E41, G11, G21, N00, N12, N22, N82