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

Charles Calomiris, Joseph R. Mason and David Wheelock

No 2022-011, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: reserve requirements; reserve demand; excess reserves; money multiplier (search for similar items in EconPapers)
JEL-codes: E51 E58 G21 G28 N12 N22 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2022-05-04, Revised 2023-08-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-his, nep-mac and nep-mon
Note: Publisher DOI: https://doi.org/10.1016/j.jfi.2023.101056
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Citations: View citations in EconPapers (1)

Published in Journal of Financial Intermediation

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Journal Article: Did doubling reserve requirements cause the 1937–38 recession? New evidence on the impact of reserve requirements on bank reserve demand and lending (2023)
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DOI: 10.20955/wp.2022.011

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