Working Paper: NBER ID: w16460
Authors: Mark Carlson; Kris James Mitchener; Gary Richardson
Abstract: Scholars differ on whether Federal Reserve intervention mitigated banking panics during the Great Depression and in recent years. The last panic prior to the Depression sheds light on this debate. In April 1929, a fruit fly infestation in Florida forced the U.S. government to quarantine fruit shipments from the state and destroy infested groves. When Congress recessed in June without approving compensation for farmers, depositors in citrus growing regions began withdrawing deposits from banks, culminating in runs on institutions in the financial center of Tampa and surrounding cities. Using archival evidence, we describe how the Federal Reserve Bank of Atlanta halted the spread of the panic by rushing currency to member banks. Analysis based on a new micro-level database of commercial banks in Florida shows that bank failures would have been twice as high without the Fed's intervention. The policy response of the Fed ended the panic and suggests that similar interventions by the Fed may have been useful during the Great Depression, even in cases where banks faced questions about their solvency.
Keywords: Federal Reserve; banking panics; liquidity provision; Great Depression; historical analysis
JEL Codes: E44; E58; G21; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's liquidity provision (E52) | bank stability (G28) |
| solvency shock from fruit fly infestation (G33) | liquidity crises (G01) |
| liquidity crises (G01) | bank failures (G21) |
| Federal Reserve's liquidity provision (E52) | depositor expectations (G21) |
| depositor expectations (G21) | bank failures (G21) |