Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta's Dissenting Policy
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.
The author would like to thank the participants in conferences and seminars at the Banque de France, the Federal Reserve Bank of Atlanta, and New York University. Special appreciation for many comments and suggestions goes to Michael D. Bordo, Gary Richardson, William Roberds, Hugh Rockoff, and David C. Wheelock. Financial support from the National Science Foundation under Grant No. 1127094, Rutgers University’s ARESTY program and Rutgers’ Research Council grants is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research
White, E. (2017). Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta’s Dissenting Policy. In P. Rousseau & P. Wachtel (Eds.), Financial Systems and Economic Growth: Credit, Crises, and Regulation from the 19th Century to the Present (Studies in Macroeconomic History, pp. 201-231). Cambridge: Cambridge University Press. doi:10.1017/9781316493281.008