Bank Distress during the Great Depression: The Illiquidity-Insolvency Debate Revisited
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.
I thank Shagufta Ahmed, Shaista Ahmed, Jacqueline Chattopadhay, Ching-Yi Chung, Nathan Montgomery, Yuiichi Inomata, Mark Ng, Mitra Pai, Doris Sum, Brandon Tsang, Ian Wagner, and Eve Wang for research assistance. I thank Reid Click, Deborah Kauffman, Ed and Edwin Richardson, and Gloria Richardson for accommodations near the National Archives. I thank Erik Heitfield for the loan of photographic equipment. I thank Marigee Bacolod, Dan Bogart, William Branch, Mark Carlson, Milton Friedman, Michelle Garfinkel, Joseph Mason, Kris Mitchener, and Elmus Wicker for comments on earlier drafts of this essay. I thank numerous friends and colleagues for comments, advice, and encouragement. Portions of this research was funded by NSF Grant D/SES-0551232. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Richardson, Gary. “Bank Distress during the Great Depression: The Illiquidity-Insolvency Debate Revisited." Explorations in Economic History 44, 4 (October 2007):586-607.