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Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending

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Abstract
In 1936-37, the Federal Reserve doubled member banks' reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937-38. Using a new database on individual banks, we show that higher reserve requirements did not generally increase banks' reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.

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  • Charles W. Calomiris & Joseph R. Mason & David C. Wheelock, 2022. "Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending," Working Papers 2022-011, Federal Reserve Bank of St. Louis, revised 15 Aug 2023.
    • Handle: RePEc:fip:fedlwp:94179
    DOI: 10.20955/wp.2022.011
    Note: Publisher DOI: https://doi.org/10.1016/j.jfi.2023.101056
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    1. repec:ucp:bkecon:9780226519999 is not listed on IDEAS
    2. Calomiris, Charles W & Hubbard, R Glenn, 1995. "Internal Finance and Investment: Evidence from the Undistributed Profits Tax of 1936-37," The Journal of Business, University of Chicago Press, vol. 68(4), pages 443-482, October.
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    7. Calomiris, Charles W. & Mason, Joseph R. & Wheelock, David C., 2011. "Did Doubling Reserve Requirements Cause the Recession of 1937-1938? A Microeconomic Approach," Working Papers 11-03, University of Pennsylvania, Wharton School, Weiss Center.
    8. Haelim Park & Patrick Van Horn, 2015. "Did the Reserve Requirement Increases of 1936–37 Reduce Bank Lending? Evidence from a Quasi‐Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(5), pages 791-818, August.
    9. Jaremski, Matthew & Wheelock, David C., 2020. "The Founding of the Federal Reserve, the Great Depression, and the Evolution of the U.S. Interbank Network," The Journal of Economic History, Cambridge University Press, vol. 80(1), pages 69-99, March.
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    1. Charles W. Calomiris, 2023. "Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements," Review, Federal Reserve Bank of St. Louis, vol. 105(4), pages 223-233, October.

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    More about this item

    Keywords

    reserve requirements; reserve demand; excess reserves; money multiplier;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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