Working Paper: NBER ID: w12716
Authors: Gary Richardson
Abstract: Between the founding of the Federal Reserve System in 1913 and the depression of the 1930s, three check-clearing systems operated in the United States. The Federal Reserve cleared checks for members of the system. Clearing houses cleared checks for members of their organizations. Correspondents cleared checks for all other institutions. The correspondent-clearing system was vulnerable to counter-party cascades, particularly because accounting conventions overstated reserves available to individual institutions and the system as a whole. In November 1930, a correspondent system in the center of the United States collapsed, causing the closure of more than one hundred institutions. Bank runs radiated from the locus of events, and additional correspondent networks succumbed to the situation. For the remainder of the contraction, banks that relied upon correspondents to clear checks failed at higher rates than other banks. In sum, weaknesses within a check-clearing system played a hitherto unrecognized role in the banking crises of the Great Depression.
Keywords: No keywords provided
JEL Codes: E42; E44; E65; N1; N12; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| failure of the Bank of Tennessee (E44) | cascade of bank suspensions (E44) |
| correspondent bank failures (F65) | bank runs (E44) |
| correspondent failures (Y80) | bank suspensions (G21) |
| vulnerabilities of the correspondent system (F65) | higher failure rates of banks (G21) |
| accounting conventions that overstated reserves (G38) | feedback loop undermining stability (C62) |
| correspondent clearing systems (F33) | banking failures (F65) |