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Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta's Dissenting Policy

Eugene N. White

NBER Working Paper No. 21341
Issued in July 2015, Revised in July 2015
NBER Program(s):The Program on the Development of the American Economy, The Monetary Economics Program

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.

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Document Object Identifier (DOI): 10.3386/w21341

Published: 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

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