NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bank Distress during the Great Depression: The Illiquidity-Insolvency Debate Revisited

Gary Richardson

NBER Working Paper No. 12717
Issued in December 2006
NBER Program(s):   DAE   ME

During the contraction from 1929 through 1933, the Federal Reserve System tracked changes in the status of all banks operating in the United States and determined the cause of each bank suspension. This essay analyzes chronological patterns in aggregate series constructed from that data. The analysis demonstrates both illiquidity and insolvency were substantial sources of bank distress. Periods of heightened distress were correlated with periods of increased illiquidity. Contagion via correspondent networks and bank runs propagated the initial banking panics. As the depression deepened and asset values declined, insolvency loomed as the principal threat to depository institutions.

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Document Object Identifier (DOI): 10.3386/w12717

Published: Richardson, Gary. “Bank Distress during the Great Depression: The Illiquidity-Insolvency Debate Revisited." Explorations in Economic History 44, 4 (October 2007):586-607.

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