Working Paper: NBER ID: w21341
Authors: Eugene N. White
Abstract: During the 1920-1921 recession, the Federal Reserve Bank of Atlanta resisted the deflationary policy sanctioned by the Federal Reserve Board and pursued by other Reserve banks. By borrowing gold reserves from other Reserve banks, it facilitated a reallocation of liquidity to its district during the contraction. Viewing the collapse of the price of cotton, the dominant crop in the region, as a systemic shock to the Sixth District, the Atlanta Fed increased discounting and enabled capital infusions to aid its member banks. The Atlanta Fed believed that it had to limit bank failures to prevent a fire sale of cotton collateral that would precipitate a general panic. In this previously unknown episode, the Federal Reserve Board applied considerable pressure on the Atlanta Fed to adhere to its policy and follow a simple Bagehot-style rule. The Atlanta Fed was vindicated when the shock to cotton prices proved to be temporary, and the Board conceded that the Reserve Bank had intervened appropriately.
Keywords: financial stability; Federal Reserve Bank of Atlanta; World War I; recession; lender of last resort
JEL Codes: E58; G01; N12; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| collapsing cotton prices (Q02) | FRBA's decision to increase liquidity provisions (G28) |
| FRBA's decision to increase liquidity provisions (G28) | preventing fire sale of cotton collateral (G33) |
| preventing fire sale of cotton collateral (G33) | limiting bank failures (G28) |
| FRBA's decision to increase liquidity provisions (G28) | stabilizing cotton prices (E64) |
| stabilizing cotton prices (E64) | broader economic stability (E60) |
| FRBA's interventions (G28) | effective in limiting bank failures (G28) |
| FRBA's successful intervention (G28) | emboldened stance in future crises (H12) |