Contagion During the Initial Banking Panic of the Great Depression

Erik Heitfield, Gary Richardson and Shirley Wang

No 23629, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The initial banking crisis of the Great Depression has been the subject of debate. Some scholars believe a contagious panic spread among financial institutions. Others argue that suspensions surged because fundamentals, such as losses on loans, drove banks out of business. This paper nests those hypotheses in a single econometric framework, a Bayesian hazard rate model with spatial and network effects. New data on correspondent networks and bank locations enables us to determine which hypothesis fits the data best. The best fitting models are ones incorporating network and geographic effects. The results are consistent with the description of events by depression-era bankers, regulators, and newspapers. Contagion - both interbank and spatial - propelled a panic which healthy banks survived but which forced illiquid and insolvent banks out of operations.

JEL-codes: C11 C23 C41 E02 N1 N12 N2 N22 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-ban, nep-his, nep-mac and nep-net
Note: DAE
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Citations: View citations in EconPapers (15)

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