THE EFFECT OF CHANGES IN RESERVE REQUIREMENTS DURING THE 1930s

Thomas Mayer and Thomas F. Cargill
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Thomas F. Cargill: Department of Economics, University of California Davis

No 317, Working Papers from University of California, Davis, Department of Economics

Abstract: The differential response of cash reserves of member banks and nonmember banks not subject to the 1936-37 increase in reserve requirements is estimated to determine whether the 1937-38 recession was caused by the increase in reserve requirements. We identify 17 states that maintained constant reserve requirements from June 1934 to June 1941. While member banks increased their cash reserve ratios relative to nonmember banks, the magnitude of the adjustment is too small to have contributed to the 1937-38 recession. Shock prices and public reaction to the increase in reserve requirements are consistent with the empirical results. While the Fed was responsible for the Great Contraction, the results are inconsistent with the view the Fed?s reserve requirement increase contributed significantly to the 1937-38 recession.

Keywords: excess reserves; Federal Reserve; Great Depression; reserve requirements; 1937-38 (search for similar items in EconPapers)
JEL-codes: E32 E65 N12 (search for similar items in EconPapers)
Pages: 33
Date: 2004-01-12
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