Working Paper: NBER ID: w26859
Authors: Kris James Mitchener; Gary Richardson
Abstract: The Great Depression is infamous for banking panics, which were a symptomatic of a phenomenon that scholars have labeled a contagion of fear. Using geocoded, microdata on bank distress, we develop metrics that illuminate the incidence of these events and how banks that remained in operation after panics responded. We show that between 1929-32 banking panics reduced lending by 13%, relative to its 1929 value, and the money multiplier and money supply by 36%. The banking panics, in other words, caused about 41% of the decline in bank lending and about nine-tenths of the decline in the money multiplier during the Great Depression.
Keywords: banking panics; Great Depression; contagion of fear; monetary aggregates; lending
JEL Codes: E44; G01; G21; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking panics (F65) | reduction in aggregate commercial bank loans and investments (G21) |
| banking panics (F65) | decline in the money multiplier (E51) |
| banking panics (F65) | decline in money supply (E51) |
| banking panics (F65) | decline in bank lending (G21) |
| banking panics (F65) | changes in bank balance sheets (G21) |
| changes in bank balance sheets (G21) | reduced lending to households and businesses (G21) |