DP11164 Network Contagion and Interbank Amplification during the Great Depression

Author(s): Kris James Mitchener, Gary Richardson
Publication Date: March 2016
Keyword(s): Bank networks, banking panics, contagion, Great Depression, interbank market
JEL(s): E44, G01, G21, L14, N22
Programme Areas: Economic History, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11164

Interbank networks amplified the contraction in lending during the Great Depression. Banking panics induced banks in the hinterland to withdraw interbank deposits from Federal Reserve member banks located in reserve and central reserve cities. These correspondent banks responded by curtailing lending to businesses. Between the peak in the summer of 1929 and the banking holiday in the winter of 1933, interbank amplification reduced aggregate lending in the U.S. economy by an estimated 15 percent.