#11-03
Did Doubling Reserve Requirements Cause the Recession of 1937-1938? A Microeconomic Approach
Charles W. Calomiris, Joseph R. Mason and David C. Wheelock, January 2011
Abstract: In
1936-37,
the
Federal
Reserve
doubled
the
reserve
requirements
imposed
on
member
banks.
Ever
since,
the
question
of
whether
the
doubling
of
reserve
requirements
increased
reserve
demand
and
produced
a
contraction
of
money
and
credit,
and
thereby
helped
to
cause
the
recession
of
1937-1938,
has
been
a
matter
of
controversy.
Using microeconomic
data
to
gauge
the
fundamental
reserve
demands
of
Fed
member
banks,
we
find
that
despite
being
doubled,
reserve
requirements
were
not
binding
on
bank
reserve
demand
in
1936
and
1937,
and
therefore
could
not
have
produced
a
significant
contraction
in
the
money
multiplier.
To
the
extent
that
increases
in
reserve
demand
occurred
from
1935
to
1937,
they
reflected
fundamental
changes
in
the
determinants
of
reserve
demand
and
not
changes
in
reserve
requirements.
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