Did Doubling Reserve Requirements Cause the Recession of 1937-1938? Implications for China

February 13, 2011

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HistorySquared

Did Doubling Reserve Requirements Cause the Recession of 1937-1938? - via St Louis Fed – 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.

Source : SimoleonSense, St Louis Federal Reserve

HIstorySquared :

China has been hiking the reserve ratio and now has begun increasing interest rates. Removing the source of bubbles is how they are pricked.

“Without citing sources or giving details, the newspaper said the People’s Bank of China had tailor-made reserve ratios for various city commercial banks, reports Reuters. Bloomberg points out that it is unclear whether the ratio has risen or fallen. Given the general move to combat inflation in China, an overall tightening is likely, however.”

“The reserve ratio for smaller banks in China is about 15.5 per cent, after several rises since November last year; this time last year the ratio was 13.5 per cent. Larger banks have been subject to almost double the increase, with reserve ratios at about 19.5 per cent, up from 16 per cent at the start of last year.”

Source Financial Times Blog

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