Working Paper: NBER ID: w20267
Authors: Barry Eichengreen; Arnaud J. Mehl; Livia Chiu
Abstract: This paper reconstructs the forgotten history of mutual assistance among Reserve Banks in the early years of the Federal Reserve System. We use data on accommodation operations by the 12 Reserve Banks between 1913 and 1960 which enabled them to mutualise their gold reserves in emergency situations. Gold reserve sharing was especially important in response to liquidity crises and bank runs. Cooperation among reserve banks was essential for the cohesion and stability of the US monetary union. But fortunes could change quickly, with emergency recipients of gold turning into providers. Because regional imbalances did not grow endlessly, instead narrowing when region-specific liquidity shocks subsided, mutual assistance created only limited tensions. These findings speak to the current debate over TARGET2 balances in Europe.
Keywords: Target2; Federal Reserve; Liquidity Crises; Monetary Union
JEL Codes: E58; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| extensive mutual assistance during liquidity crises (E44) | stability within the U.S. monetary union (F36) |
| regional payment imbalances did not grow endlessly (F32) | stabilization and reversal after liquidity shocks subsided (E63) |
| persistence of interdistrict accommodation operations (R28) | only 50% of a typical shock dissipating after about five quarters (C22) |
| increase in Target2 balances during the European debt crisis (F65) | reflection of the European Central Bank's role in facilitating interbank liquidity (E58) |
| increase in Target2 balances during the European debt crisis (F65) | potential bailouts that could risk taxpayer losses (H81) |