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The Discount Window and the Great DepressionResearch Paper • March 2nd, 2018
Widespread agreement exists that the Federal Reserve did not add enough reserves to the banking system in the early 1930s to prevent banking panics and a sharp monetary contraction. But banks should have been able to obtain ample reserves through the discount window. This paper argues that concerns about the use of the discount window to fund stock market speculation in early 1929 and about the quality of collateral in the 1930s conflicted with the Federal Reserve’s mandate to provide emergency liquidity assistance. It presents evidence, based on a panel of Federal Reserve district-level data, of a sharp decline in the demand for borrowed reserves consistent with a tightening of the terms of access to the discount window. The change in policy mattered: bank failures varied inversely with the amount of borrowed reserves provided during the currency drains of the Great Depression.
The Discount Window and the Great DepressionResearch Paper • January 10th, 2018
Widespread agreement exists that the Federal Reserve did not add enough reserves to the banking system in the early 1930s to prevent banking panics and a sharp monetary contraction. But banks should have been able to obtain ample reserves through the discount window. This paper argues that concerns about the use of the discount window to fund stock market speculation in early 1929 and about the quality of collateral in the 1930s conflicted with the Federal Reserve’s mandate to provide emergency liquidity assistance. It presents evidence, based on a panel of Federal Reserve district-level data, of a sharp decline in the demand for borrowed reserves consistent with a tightening of the terms of access to the discount window. The change in policy mattered: bank failures varied inversely with the amount of borrowed reserves provided during the currency drains of the Great Depression.
