Working Paper: NBER ID: w16688
Authors: Charles W. Calomiris; Joseph Mason; David Wheelock
Abstract: In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy. Using microeconomic data to gauge the fundamental reserve demands of Fed member banks, we find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier. To the extent that increases in reserve demand occurred from 1935 to 1937, they reflected fundamental changes in the determinants of reserve demand and not changes in reserve requirements.
Keywords: Reserve Requirements; Recession; Banking; Monetary Policy
JEL Codes: E51; E58; G21; G28; N12; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| doubling of reserve requirements (E52) | reserve demand of member banks (E58) |
| reserve demand of member banks (E58) | money supply or credit (E51) |
| doubling of reserve requirements (E52) | contraction in money supply or credit (E51) |
| changes in reserve requirements (E52) | reserve demand (Q21) |
| determinants of reserve demand (E41) | reserve demand (Q21) |