Banking Crises and the Great Depression

Exogenous shock whose origins can be found in any sudden and unanticipated revision of expectations of deposit loss accompanied by an attempt to substitute currency for checkable deposits

How did Elmus Wicker define a “banking panic”

Deposit to currency ratio decreases and the money multiplier falls

During a banking panic, what happens to the deposit to currency ratio

Insolvency

This often involves negative-cash flow constraints through defaults and delinquents repayment problems of debtors

Lender of last resort powers

How can the Federal Reserve theoretically offset a liquidity crunch?

True

True or false: U.S. policies played a large role in starting the Great Depression

Real bills doctrine

A theory that a banking system will never over-issue

Smoot-Hawley tariffs of 1930 restricted the operation of the price-specie flow mechanism under the gold standard

Meltzer hypothesis

Prevented U.S. price level from declining to an equilibrium price level consistent with the rest of the world

What did the Smoot-Hawley tariff

America’s trading partners retaliated against the U.S.

What happened following the implementation of the Smoot-Hawley tarrifs?

1,350 banks failing and $837 million in suspended deposits

What did the year 1930 end with

Heavy currency withdrawals out of bank deposits during the crisis, and a return of currency back to the banks after the panic subsides

How are most banking crises in America defined as

The Fed expanding credit in the 1920s

What led to an unsustainable boom?

Lender of last resort

an institution—typically a country's central bank—that provides emergency credit to financial institutions experiencing severe financial distress or liquidity crises

The U.S. was under the gold standard

Why was monetary expansion limited at the time?

Monetary contraction and banking instability

Why did the Depression become severe?