TY  - JOUR
AU  - Bordo,Michael D.
AU  - Landon-Lane,John
TI  - The Lessons from the Banking Panics in the United States in the 1930s for the Financial Crisis of 2007-2008
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16365
PY  - 2010
Y2  - September 2010
UR  - http://www.nber.org/papers/w16365
L1  - http://www.nber.org/papers/w16365.pdf
N1  - Author contact info:
Michael D. Bordo
Department of Economics
Rutgers University
New Jersey Hall
75 Hamilton Street
New Brunswick, NJ 08901
Tel: 732/822-7152
Fax: 732/932-7416
E-Mail: bordo@econ.rutgers.edu

John Landon-Lane
Department of Economics
75 Hamilton Street
Rutgers University
College Avenue Campus
New Brunswick, NJ  08901-1248
E-Mail: lane@econ.rutgers.edu
AB  - In this paper we revisit the debate over the role of the banking panics in 1930-33 in precipitating the Great Contraction. The issue hinges over whether the panics were illiquidity shocks and hence in support of Friedman and Schwartz (1963) greatly exacerbated the recession which had begun in 1929, or whether they largely reflected insolvency in response to the recession caused by other forces. Based on a VAR and new data on the sources of bank failures in the 1930s from Richardson (2007), we find that illiquidity shocks played a key role in explaining the bank failures during the Friedman and Schwartz banking panic windows.

In the recent crisis the Federal Reserve learned the Friedman and Schwartz lesson from the banking panics of the 1930s of conducting expansionary open market policy to meet demands for liquidity. Unlike the 1930s the deepest problem of the recent crisis was not illiquidity but insolvency and especially the fear of insolvency of counterparties.
ER  -