Shadowy Banks and the Interbank Amplifier During the Great Depression

Description

In this essay Kris James Mitchener and Gary Richardson examined how interbank networks contributed to the severity of the contraction during the Great Depression. We assess how the reserve pyramid and deposit linkages among commercial banks amplified banking distress during the 1930s. Runs on the periphery triggered a cascade of interbank withdrawals, first in regional financial centers, and then in the central reserve cities of New York and Chicago. Fed member banks in these two central reserve cities responded by curtailing lending to businesses and households. We estimate that this banking-network effect substantially reduced lending in financial centers during the contraction from 1929 through 1933.