![]() In order to cover their own losses, the leaders drained cash from the corporations that they controlled. The parent got into trouble when its leaders invested too heavily in securities markets and lost substantial sums when stock prices declined. It provided its clients with an array of services – banking, brokerage, insurance – through an expanding chain controlled by its parent corporation headquartered in Nashville, Tennessee. Caldwell was a rapidly expanding conglomerate and the largest financial holding company in the South. These problems turned the collapse of Caldwell and Company into a painful financial event. That bank, in turn, might not have reserves available or might not respond to the request. If so, the correspondent would, in turn, have to request reserves from another correspondent bank. The correspondent bank also might not have the funds on hand because its reserves consisted of checks in the mail, rather than cash in its vault. 3When a bank needed cash, because its customers were panicking and withdrawing funds en masse, the bank had to turn to its correspondent, which might be faced with requests from many banks simultaneously or might be beset by depositor runs itself. This reserve pyramid limited country banks’ access to reserves during times of crisis. Many, but not all, of the ultimate correspondents belonged to the Federal Reserve System. Nonmember banks kept a portion of their reserves as cash in their vaults and the bulk of their reserves as deposits in correspondent banks in designated cities. This meant that the banking system as a whole had fewer cash (or real) reserves available in emergencies (Richardson 2007).Īnother problem was the inability to mobilize bank reserves in times of crisis. The quantity of fictitious reserves rose throughout the 1920s and peaked just before the financial crisis in 1930. Bankers at the time referred to the reserves composed of float as fictitious reserves. 2In reality, however, the cash resided in only one bank. These ‘floating’ checks were counted in the reserves of two banks, the one in which the check was deposited and the one on which the check was drawn. One cause was the practice of counting checks in the process of collection as part of banks’ cash reserves. ![]() ![]() Graph created by: Sam Marshall, Federal Reserve Bank of Richmond) (Data: Federal Reserve Bulletin, September 1937. In 1929, the annual number of bank suspensions began to rise, peaking in 1933 before collapsing to near zero after the banking holiday. As the figure shows, the annual number of bank suspensions between 19 totaled less than 1,000. A second vertical line at 1933 indicates the banking holiday of 1933. A vertical line at 1929 indicates the beginning of the stock market crash. ![]() Chart 1: Total number of bank suspensions, 1921 to 1936. That environment harbored the causes of banking crises. Those nonmember banks operated in an environment similar to that which existed before the Federal Reserve was established in 1914. When the crises began, over 8,000 commercial banks belonged to the Federal Reserve System, but nearly 16,000 did not. In November 1930, however, a series of crises among commercial banks turned what had been a typical recession into the beginning of the Great Depression. A rapid and robust recovery was anticipated. 1The downturn that began in the summer of 1929 had lasted for fifteen months. The previous three contractions, in 1920, 1923, and 1926, had lasted an average of fifteen months. In the fall of 1930, the economy appeared poised for recovery.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |