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The Check is in the Mail: Correspondent Clearing and the Collapse of the Banking System, 1930 to 1933

Published online by Cambridge University Press:  10 September 2007

Gary Richardson
Gary Richardson
Affiliation:
Associate Professor, Department of Economics, University of California at Irvine, 3151 Social Science Plaza, Irvine, CA 92697-5100, and Research Fellow, the National Bureau of Economic Research. E-mail: garyr@uci.edu.
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Abstract

Weaknesses within the check-clearing system played a hitherto unrecognized role in the banking crises of the Great Depression. Correspondent check-clearing networks were vulnerable to counter-party cascades. Accounting conventions that overstated reserves available to corresponding institutions may have exacerbated the situation. The initial banking panic began when a correspondent network centered in Nashville collapsed, forcing over 100 institutions to suspend operations. As the contraction continued, additional correspondent systems imploded. The vulnerability of correspondent networks is one reason that banks that cleared via correspondents failed at higher rates than other institutions during the Great Depression.

Type
ARTICLES
Information
The Journal of Economic History , Volume 67 , Issue 3 , September 2007 , pp. 643 - 671
Copyright
© 2007 The Economic History Association

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