IV. Empirical Results
The modeling procedure started with the tests of integration and cointegration. The procedure requires that the time series variables under investigation be integrated of order
zero or one. Augmented Dickey-Fuller ADF and Phillips-Perron tests described in the Appendix were used to determine the order of the integration of the variables. Table 1
reports the results of the unit root tests on the levels as well as the first differences of the variables. These tests suggest that IN, PX, MS, and LB are integrated of order one, which
means that these variables are nonstationary in levels but stationary after first differences. By contrast, DB is integrated of order zero and is stationary in level. Thus, these variables
satisfy the necessary conditions for use in the Johansen system.
For the cointegration test, we used the Johansen 1992 sequential test procedure to determine the number of cointegrating vectors and whether a constant term should be
included in the error-correction representation within or outside matrix P. Because this test is sensitive to the number of lags, researchers ordinarily set the number of lags equal
to the periodicity of the data e.g., four lags for quarterly data or base the lag length on a criterion such as the Akaike Information Criteria [see Akaike 1973] and the Schwarz
Criterion [see Schwarz 1978 and Hafer and Sheehan 1991]. As our data are monthly observations, we included 12 monthly lags in the Johansen tests and in the estimated VAR
models. Using this lag length, the test results in Table 2 suggest the existence of two cointegrating vectors.
Two models were then estimated with the same lag length: a vector error correction model with two cointegrating vectors and a VAR model in levels of the variables. The
complete estimates of these models are available upon request from the authors. Using Choleski decomposition of the covariance matrix, the impulse response functions gener-
ated from the two models were estimated to examine whether the models were identified. The results from the impulse responses generated from the VAR and VEC models are
illustrated in Figures 1 and 2, respectively. As shown there, the direction of the responses of industrial output and prices to one standard deviation shock in these variables indicates
5
A problem with the bank deposit series is that the deposits of banks suspended in March 1933 were seven times that of the next worse month. Bernanke 1983 made an adjustment by scaling down the figure to 15 of
the actual deposits of failed banks in March 1933. We found the univariate properties of the deposits of failed banks sensitive to the magnitude of the March 1933 observation; for instance, if we take 15 of the actual
observation, then the series is integrated of order one. We also ran the model with the scaled-down figure, but the model was not identified when the impulse response functions were examined. Subsequently, we used the
actual figure for March 1933 deposits of failed banks.
Table 1.
Unit Root Test Results
Variable
a
ADF Za
Zt Variable
a
ADF Za
Zt IN
20.58 1.10
1.44 DIN
28.19 2118.61
29.94 PX
21.58 20.22
20.57 DPX
27.94 2166.12
211.11 MS
0.25 1.15
3.18 DMS
28.11 2391.06
216.50 LB
21.40 23.30
21.52 DLB
215.88 2275.50
229.43 DB
23.74 2250.97
214.93 DDB
218.97 2294.97
266.50
a
Variable definitions: IN 5 index of industrial output; PX 5 price index; MS 5 money supply M1; LB 5 liabilities of failed businesses; DB 5 deposits of failed banks. The D term denotes first differences of the variables. ADF is the Augmented
Dickey-Fuller test statistic. Za and Zt are Phillips and Perron tests. Critical values for ADF, Za, and Zt are 22.87, 28.17, and 21.96, respectively.
222
A. Anari and J. Kolari
that the signs of price and quantity are consistent with the supply and demand equations. Notice that the differences between the results for the VEC and VAR models are small in
magnitude up to 24 months in the forecast horizon and thereafter increase for longer horizons. Also, Table 3 indicates that Akaike and Schwarz criteria support the selection
of the VAR as opposed to the VEC model. Because the cointegrating restrictions are asymptotically satisfied by levels VAR, and the two models’ results are similar especially
for short term horizons, the VAR model was selected for the estimation of the historical decomposition of the variables during the Great Depression.
An anonymous referee suggested that we check the robustness of the results to alternative variable ordering schemes. These additional analyses yielded the same results
for the most part, and are available from the authors upon request. In our opinion, economic reasoning best supports our recursive ordering of industrial production, price,
money supply, liabilities of failed businesses, and deposits of failed banks. If we had placed the latter nonmonetary variables first in order, the index of industrial production
would have been more greatly influenced by them than the present ordering. Hence, our ordering scheme provides conservative estimates of the influence of the nonmonetary
variables on economic output.
Tables 4 – 8 report the month-by-month decompositions of the variables beginning with the slide in output, prices, and money supply in July 1929 until August 1933. The bank
holiday in March 1993 marks the beginning of massive government intervention, such that it is difficult to infer the effects of bank and business failures on output after this month.
The actual level of each variable is shown in the first column, and the second column gives the forecasted level generated by the VAR model. As shown in the remaining columns, the
differences between actual and forecasted levels were explained by innovations or shocks in each of the variables in the model. For example, referring to the first line in
Table 4, when the decline in output began in July 1929, the actual output was higher than the expected output by 17.6 units, due to a 30.3 unit positive own shock in output, as well
as 5.9 and 8.0 unit negative shocks in prices and money supply, respectively. The unit shocks in liabilities of failed businesses and deposits of failed banks are 0.0 and 2.0,
respectively, which reflects a negligible nonmonetary effect in the beginning of the Depression. From July 1929 to March 1930, the negative shocks in prices and, in
particular, in money supply were responsible for slowing down the growth of output. By
6
We only report results for the focal Great Depression episode 1929–1933 rather than the entire sample period 1921–1941 to conserve space. President Roosevelt announced a national bank holiday in March 1933,
after which the number of bank failures substantially declined e.g., over 95 of the deposits of failed banks in 1933 occurred in the first quarter of that year, and no more than 60 banks failed in any year after this
unprecedented event. Results for the entire period are available upon request from the authors.
Table 2.
Johansen’s Maximum Eigenvalue and Trace Tests
Eigenvalue Eigenvalue Test
Trace Test Test Statistics
90 Critical Value Test Statistics
90 Critical Value 0.223
60.49 20.90
97.87 64.74
0.078 19.54
17.15 37.38
43.84 0.050
12.31 13.39
17.85 26.70
0.022 5.52
10.60 5.54
13.31 0.000
0.01 2.71
0.01 2.71
Bank Failures and Economic Output
223
Figure 1. Impulse response functions for the VAR model.
224
A. Anari and J. Kolari
Figure 2. Impulse response functions for the VEC model.
Bank Failures and Economic Output
225
June 1930, output started to suffer from its own negative shocks, as well as negative price shocks, whereas money supply shocks diminished considerably. From June 1930 to
November 1931, the slide in output is mainly explained by negative own shocks as well as negative price shocks. From November 1931 to August 1933, negative shocks in money
supply surpassed price shocks in explaining output declines as well as own shocks by the end of the period.
Relevant to the credit hypothesis, the liabilities of failed businesses had little or no negative impact on output declines in the period under study. By contrast, the deposits of
failed banks did not negatively affect output from July 1929 to January 1932, but thereafter began to gradually increase in importance in explaining the decline in output.
In the period February 1932 to March 1933, negative shocks to the deposits of failed banks gradually increased in terms of their effect on output declines. Focusing on March 1933,
actual output stood at 54.0 units, or 57.3 units below the expected output, which is explained by 19.2, 10.7, 17.5, and 11.9 unit negative innovations in output, prices, money
supply, and the deposit of failed banks, respectively as well as a 2.0 positive unit innovation in the liabilities of failed businesses. Notice that the influence of deposits of
failed banks exceeded prices at that time. We infer from these results that bank failures did not initially have deleterious effects on the real economy; however, years of continued
bank failures in combination with a surge in failures as the crisis deepened eventually did impose negative consequences for output.
Supporting this inference, we cite the following data for the number of failed banks and deposits of these institutions in the period 1929 –1933:
Year Number of Failed Banks
Deposits of Failed Banks in millions
1929 659
230.64 1930
1,350 837.10
1931 2,293
1,690.23 1932
1,453 705.19
1933 4,000
3,596.70
Notice that bank failures and losses were high from 1929 to 1932, and no doubt strained credit services in the nation. However, the subsequent surge in 1933 pushed losses beyond
a threshold and led to a substantial impact on economic output at that time. In this respect, Mason 1998 found that a period of four to five years was needed to resolve bank failures.
As such, we can infer that the deposits of failed banks was cumulatively growing during the Great Depression i.e., the figures above are the flow of failed bank deposits as
opposed to their stock in each year. The surge in 1933 added to the already considerable amount of failed bank deposits outstanding, due to the resolution process, which itself was
Table 3.
Criteria for Model Selection
Tests VAR
VEC Akaike information criterion
13.72 13.76
Schwarz criterion 14.61
14.70
226
A. Anari and J. Kolari
Table 4.
Historical Decomposition of the Index of Industrial Production Series During the Great Depression
a
Month Actual
Forecast Innovations in
IN PX
MS LB
DB 1929.07
114.0 96.4
30.3 25.9
28.9 0.0
2.0 1929.08
114.0 96.9
29.6 25.1
29.4 20.7
2.7 1929.09
112.0 97.3
26.2 26.0
28.9 0.0
3.4 1929.10
110.0 97.7
22.1 26.3
27.6 0.7
3.4 1929.11
105.0 98.2
14.8 25.9
26.7 1.2
3.4 1929.12
100.0 98.6
9.3 26.8
25.4 0.6
3.5 1930.01
100.0 99.1
7.9 27.0
23.4 20.1
3.5 1930.02
100.0 99.5
8.5 27.6
23.7 20.1
3.4 1930.03
98.0 99.9
7.0 28.1
23.7 20.2
3.0 1930.04
98.0 100.4
6.1 28.3
22.4 20.1
2.4 1930.05
96.0 100.8
2.0 28.0
21.4 0.2
2.5 1930.06
93.0 101.2
21.7 27.8
21.6 20.1
2.9 1930.07
89.0 101.6
25.7 28.5
21.6 20.8
4.0 1930.08
86.0 102.0
29.8 29.4
21.2 21.0
5.4 1930.09
85.0 102.4
213.1 29.1
20.3 20.5
5.5 1930.10
83.0 102.8
216.9 28.8
0.4 0.6
4.9 1930.11
81.0 103.2
217.1 29.6
0.4 0.9
3.2 1930.12
79.0 103.6
218.1 29.6
0.7 0.8
1.7 1931.01
78.0 104.0
218.9 29.4
0.5 0.5
1.3 1931.02
79.0 104.4
219.0 210.2
0.8 1.4
1.7 1931.03
80.0 104.7
219.9 210.7
0.5 2.8
2.6 1931.04
80.0 105.1
220.6 211.3
1.0 2.8
3.0 1931.05
80.0 105.4
219.5 211.6
1.4 2.1
2.1 1931.06
77.0 105.8
220.7 212.5
1.8 2.0
0.7 1931.07
76.0 106.1
219.3 213.3
1.3 1.8
20.6 1931.08
73.0 106.4
221.0 212.4
0.6 0.6
21.1 1931.09
70.0 106.8
225.1 212.2
1.0 0.3
20.8 1931.10
68.0 107.1
228.7 211.9
0.5 1.4
20.4 1931.11
67.0 107.4
230.8 211.1
21.0 2.7
20.2 1931.12
66.0 107.7
232.8 210.0
22.5 3.4
0.2 1932.01
64.0 108.0
233.3 210.8
23.5 3.6
0.1 1932.02
63.0 108.3
232.8 210.8
24.3 3.1
20.5 1932.03
62.0 108.6
232.1 210.9
25.6 3.0
21.0 1932.04
58.0 108.8
233.3 211.9
26.9 2.6
21.4 1932.05
56.0 109.1
233.5 211.0
28.1 1.4
21.9 1932.06
54.0 109.4
232.0 211.8
29.5 0.4
22.5 1932.07
53.0 109.6
232.1 210.7
211.0 20.2
22.6 1932.08
54.0 109.9
230.6 210.3
212.3 20.2
22.6 1932.09
58.0 110.1
226.5 29.9
213.4 0.2
22.5 1932.10
60.0 110.3
224.4 29.1
214.9 0.6
22.6 1932.11
59.0 110.5
223.9 29.0
216.3 1.2
23.4 1932.12
58.0 110.7
222.8 29.2
217.4 1.6
25.0 1933.01
58.0 110.9
220.8 29.4
217.8 2.0
26.9 1933.02
57.0 111.1
218.6 210.6
217.7 2.3
29.4 1933.03
54.0 111.3
219.2 210.7
217.5 2.0
211.9 1933.04
58.0 111.5
218.5 210.4
217.8 2.6
29.4 1933.05
68.0 111.6
217.2 210.0
218.9 3.6
21.2 1933.06
78.0 111.8
216.3 29.6
219.7 4.1
7.6 1933.07
85.0 112.0
215.1 28.9
219.4 3.5
12.9 1933.08
82.0 112.1
214.4 28.3
219.4 1.5
10.3
a
The variables are defined as follows: IN 5 index of industrial production; PX 5 price index; MS 5 money supply M1; LB 5
liabilities of failed businesses; and DB 5 deposits of failed banks.
Bank Failures and Economic Output
227
slowed by the steady pace of failures over a period of four or five years. Thus, chronic bank failures and threshold failure effects provided sufficient conditions to seriously disrupt the
financial intermediation process, as reflected by lowered economic productivity. Table 5 examines the historical decomposition of the price time series. As in the case
of the output series, at the beginning of the Great Depression, actual price level exceeded the forecast level. The higher than expected price level is explained by positive shocks in
output, prices and, to a small extent, by the deposits of failed banks. Negative shocks to money supply initiated the fall in prices, and these shocks lasted until August 1930. By
this time, negative shocks to output, which began to affect prices adversely from February 1930, were becoming increasingly more important and remained strong during the rest of
the period under study. Own positive price shocks were initially responsible for higher than expected price levels but gradually became weaker, and by November 1930, negative
own shocks started to affect prices for the remainder of the period. The fall in prices was exacerbated by negative shocks in money supply and deposits of failed banks beginning
in January 1932 and June 1931, respectively. The negative impact of failed banks on prices exceeded own shocks in the last month under study. These results suggest that bank
failures not only impacted output but also prices; indeed, prices were affected earlier than output by bank failures during the Great Depression. Consistent with discussion of the
sequence of events during the Great Depression in Friedman and Schwartz 1963, p. 355, as bank runs took place, banks sold off assets to pay depositors’ claims, but this caused
asset values and the general price level to fall sharply. Finally, shocks from the liabilities of failed businesses, again, had little impact.
Table 6 contains the results for the money supply time series. Here we see that the actual money supply was less than the expected money supply throughout the entire
period under study. This difference gradually increased over time and, by March 1933, reached 30, which continued in the months after the bank holiday. This persistent and
significant shortage implies that the prevailing levels of output and prices required a far greater supply of money than was being provided by the central bank. These results
strongly support the monetarist views of Friedman and Schwartz 1963 and others that money supply shortages over an extended period of time were a key factor in explaining
the collapse of output and prices in the Great Depression. According to Friedman and Schwartz 1963, p. 353, bank failures during the Great Depression caused deposits to be
much less desirable to the public and led to a sharp decline in money supply i.e., currency and deposits. The Federal Reserve viewed the bank failures as a result of poor manage-
ment and the excesses of the past, rather than as causes of the financial and economic collapse process. In other words, they viewed the banking difficulties as separate from
money and credit effects. Neither the liabilities of failed businesses nor the deposits of failed banks appeared to affect the decline in the money supply.
Table 7 presents decomposition results for the liabilities of failed businesses. Initially, the actual liabilities of failed businesses were close to their forecast. In the last few months
of 1929, the gap increased and later reached differentials of two to three times in some months. The difference was explained by positive shocks from output, and these shocks
7
In the period after government intervention in March 1933, the deposits of failed banks continued to have a negative effect on economic output in most quarters until mid-year 1941. This continued negative effect is
consistent with the notion that the deposits of failed banks had cumulative impact due to the slow failure resolution process. As mentioned in footnote 6, the results for the intervention period are difficult to interpret in
the context of the credit hypothesis, due to extensive government involvement in supervising the banking industry as a part of national policy aimed at economic recovery.
228
A. Anari and J. Kolari
Table 5.
Historical Decomposition of Wholesale Price Index Series During the Great Depression
a
Month Actual
Forecast Innovations in
IN PX
MS LB
DB 1929.07
98.0 88.7
5.8 6.8
24.5 20.2
1.4 1929.08
97.7 88.7
5.4 6.6
24.4 20.0
1.4 1929.09
97.5 88.7
5.0 6.5
23.9 20.2
1.4 1929.10
96.3 88.7
4.2 5.5
23.6 0.2
1.4 1929.11
94.4 88.6
3.3 4.2
23.4 0.1
1.4 1929.12
94.2 88.6
2.1 4.2
22.3 0.2
1.5 1930.01
93.4 88.6
0.9 4.6
22.1 20.1
1.5 1930.02
92.1 88.6
20.2 4.1
21.6 20.2
1.4 1930.03
90.8 88.6
20.9 3.4
21.3 20.3
1.4 1930.04
90.7 88.6
21.7 3.1
20.4 20.1
1.2 1930.05
89.1 88.5
22.6 2.8
20.7 0.0
1.1 1930.06
86.8 88.5
23.9 1.4
20.6 0.4
1.0 1930.07
84.0 88.5
25.0 0.1
20.9 0.1
1.2 1930.08
84.0 88.4
26.4 0.6
20.2 0.0
1.4 1930.09
84.2 88.4
27.5 1.5
0.0 0.2
1.6 1930.10
82.6 88.4
28.6 0.5
0.6 0.2
1.6 1930.11
80.4 88.3
29.5 20.3
0.6 20.1
1.2 1930.12
78.4 88.3
210.3 20.9
0.7 20.3
1.0 1931.01
77.0 88.2
210.9 21.8
1.1 20.3
0.6 1931.02
75.5 88.2
211.6 22.5
1.2 20.3
0.6 1931.03
74.5 88.1
212.0 23.6
1.7 20.2
0.5 1931.04
73.3 88.0
212.5 24.4
1.6 0.0
0.5 1931.05
71.3 88.0
212.8 26.4
2.0 0.3
0.2 1931.06
70.0 87.9
212.9 27.5
1.9 0.8
20.2 1931.07
70.0 87.9
213.4 26.7
1.7 1.1
20.7 1931.08
70.2 87.8
213.3 26.1
1.9 0.8
20.9 1931.09
69.1 87.7
213.5 26.1
1.7 0.4
21.2 1931.10
68.4 87.6
213.7 26.2
1.3 0.5
21.2 1931.11
68.3 87.6
213.9 25.0
0.7 0.3
21.4 1931.12
66.3 87.5
214.1 26.0
0.1 0.3
21.4 1932.01
67.3 87.4
214.2 24.7
20.1 0.5
21.6 1932.02
66.3 87.3
214.0 25.5
20.8 0.8
21.6 1932.03
65.5 87.2
214.0 25.3
21.2 0.6
21.8 1932.04
65.5 87.1
213.6 25.2
21.8 0.7
21.8 1932.05
64.4 87.0
213.5 25.6
22.1 0.6
22.0 1932.06
63.9 86.9
213.4 24.9
22.6 0.1
22.2 1932.07
64.5 86.8
213.2 24.1
22.9 0.4
22.5 1932.08
65.2 86.7
212.8 23.6
23.3 0.7
22.5 1932.09
65.3 86.6
212.3 23.0
23.9 0.5
22.6 1932.10
64.4 86.5
211.7 23.8
24.6 0.8
22.8 1932.11
63.9 86.4
211.0 24.1
25.2 0.9
23.0 1932.12
62.6 86.3
210.3 25.0
25.6 0.6
23.3 1933.01
61.0 86.2
210.0 26.0
26.0 0.8
24.0 1933.02
59.8 86.0
29.3 26.4
26.0 0.4
24.8 1933.03
60.2 85.9
28.5 25.6
26.0 0.1
25.7 1933.04
60.4 85.8
28.0 25.2
26.3 0.1
26.1 1933.05
62.7 85.6
27.4 24.8
26.6 0.5
24.7 1933.06
65.0 85.5
26.8 24.9
26.5 0.7
22.9 1933.07
68.9 85.4
26.3 24.0
26.5 0.6
20.3 1933.08
69.5 85.3
25.7 23.7
27.0 0.8
20.1
a
The variables are defined as follows: IN 5 index of industrial production; PX 5 price index; MS 5 money supply M1; LB 5
liabilities of failed businesses; and DB 5 deposits of failed banks.
Bank Failures and Economic Output
229
Table 6.
Historical Decomposition of Money Supply Series During the Great Depression
a
Month Actual
Forecast Innovations in
IN PX
MS LB
DB 1929.07
26.9 27.9
2.5 22.8
21.8 0.1
1.0 1929.08
26.7 28.0
2.3 22.8
21.9 0.0
1.0 1929.09
26.6 28.2
2.0 22.6
21.9 0.0
1.0 1929.10
28.5 28.3
1.7 22.7
0.1 0.1
1.0 1929.11
25.7 28.5
1.3 22.9
22.1 20.0
1.1 1929.12
26.7 28.6
0.9 22.9
21.0 0.0
1.0 1930.01
25.9 28.8
0.4 22.8
21.6 0.0
1.1 1930.02
26.2 28.9
0.2 22.9
21.2 0.1
1.1 1930.03
26.6 29.0
20.1 22.9
20.7 0.1
1.1 1930.04
26.2 29.2
20.4 22.8
21.0 0.1
1.1 1930.05
25.6 29.3
20.8 23.0
21.2 0.1
1.1 1930.06
25.6 29.5
21.2 23.1
21.0 0.2
1.2 1930.07
25.7 29.6
21.7 23.0
20.7 0.3
1.2 1930.08
25.4 29.8
22.0 23.1
20.9 0.4
1.2 1930.09
25.4 29.9
22.3 23.1
20.7 0.5
1.2 1930.10
25.3 30.0
22.5 23.0
20.9 0.5
1.2 1930.11
25.4 30.2
22.8 23.0
20.6 0.5
1.1 1930.12
25.3 30.3
23.1 23.2
20.4 0.4
1.1 1931.01
24.9 30.4
23.4 23.3
20.5 0.5
1.1 1931.02
25.1 30.6
23.6 23.2
20.3 0.5
1.1 1931.03
25.1 30.7
23.9 23.1
20.1 0.5
1.1 1931.04
24.6 30.8
24.1 23.2
20.3 0.3
1.1 1931.05
24.3 31.0
24.4 23.2
20.4 0.2
1.0 1931.06
24.3 31.1
24.6 23.2
20.3 0.3
1.0 1931.07
24.2 31.2
24.7 23.2
20.3 0.4
0.8 1931.08
23.8 31.3
24.9 23.2
20.8 0.6
0.8 1931.09
23.8 31.5
25.0 23.1
21.0 0.7
0.8 1931.10
23.1 31.6
25.3 23.1
21.5 0.7
0.7 1931.11
22.8 31.7
25.6 23.2
21.5 0.7
0.6 1931.12
22.3 31.8
25.8 23.3
21.7 0.6
0.7 1932.01
21.9 31.9
25.9 23.2
22.0 0.4
0.6 1932.02
21.7 32.0
26.0 23.1
22.1 0.5
0.5 1932.03
21.5 32.1
26.0 23.2
22.3 0.5
0.5 1932.04
21.3 32.2
26.1 23.0
22.7 0.6
0.4 1932.05
21.0 32.4
26.3 23.0
22.9 0.5
0.3 1932.06
20.9 32.5
26.4 23.0
23.0 0.5
0.3 1932.07
20.6 32.5
26.4 23.0
23.4 0.6
0.2 1932.08
20.6 32.7
26.3 22.9
23.6 0.7
0.1 1932.09
20.7 32.7
26.3 22.9
23.8 0.8
0.1 1932.10
20.7 32.8
26.2 22.8
24.0 0.8
0.1 1932.11
21.0 32.9
26.0 22.8
23.8 0.8
20.1 1932.12
20.8 33.0
26.1 22.9
23.8 0.8
20.2 1933.01
21.1 33.1
26.1 22.9
23.4 0.7
20.3 1933.02
20.4 33.2
26.1 22.8
24.0 0.6
20.4 1933.03
19.5 33.3
26.0 22.8
24.8 0.4
20.6 1933.04
19.5 33.3
26.0 22.7
24.5 0.2
20.8 1933.05
19.8 33.4
26.0 22.7
24.6 0.1
20.2 1933.06
19.6 33.5
26.0 22.6
24.7 20.1
20.4 1933.07
19.5 33.5
26.0 22.7
24.6 20.3
20.4 1933.08
19.5 33.6
26.0 22.6
24.7 20.4
20.3
a
The variables are defined as follows: IN 5 index of industrial production; PX 5 price index; MS 5 money supply M1; LB 5
liabilities of failed businesses; and DB 5 deposits of failed banks.
230
A. Anari and J. Kolari
Table 7.
Historical Decomposition of Liabilities of Failed Businesses Series During the Great Depression
a
Month Actual
Forecast Innovations in
IN PX
MS LB
DB 1929.07
32.4 31.1
4.1 2.0
5.9 211.5
0.8 1929.08
33.7 31.1
5.1 5.2
6.7 212.5
22.0 1929.09
34.1 31.1
6.6 0.6
5.0 28.5
20.7 1929.10
31.3 31.0
8.1 0.7
4.8 212.5
20.8 1929.11
52.0 31.0
10.9 22.2
4.2 9.7
21.5 1929.12
62.5 31.0
11.7 4.3
2.2 14.9
21.6 1930.01
61.2 31.0
16.4 5.4
2.6 7.9
22.2 1930.02
51.3 31.0
20.8 20.7
23.8 4.5
20.6 1930.03
56.8 31.1
22.4 1.3
2.3 21.0
0.7 1930.04
49.1 31.1
21.4 21.6
26.3 2.9
1.7 1930.05
55.5 31.1
20.8 21.7
22.2 7.5
0.1 1930.06
63.1 31.2
21.4 3.9
3.6 1.6
1.4 1930.07
29.8 31.2
22.5 2.9
26.4 219.3
21.1 1930.08
49.2 31.3
23.9 2.4
7.6 216.4
0.3 1930.09
46.7 31.4
22.7 3.8
211.2 0.2
20.2 1930.10
56.3 31.4
22.9 4.5
21.8 20.5
20.2 1930.11
55.3 31.5
23.9 1.9
22.0 22.7
2.8 1930.12
83.7 31.6
26.9 4.3
23.2 23.2
0.9 1931.01
94.6 31.7
29.2 4.7
20.9 27.2
2.7 1931.02
59.6 31.8
28.5 3.5
29.2 3.3
1.7 1931.03
60.4 31.9
28.3 4.2
23.1 23.9
2.9 1931.04
50.9 32.0
27.3 1.5
24.1 29.8
4.0 1931.05
53.4 32.2
25.9 4.1
22.7 211.1
5.0 1931.06
51.7 32.3
25.6 2.0
26.3 28.7
6.8 1931.07
61.0 32.4
23.3 2.7
26.4 3.2
5.7 1931.08
53.0 32.6
22.1 7.3
22.5 212.9
6.4 1931.09
47.3 32.7
20.2 4.7
24.8 211.5
6.0 1931.10
70.7 32.9
19.4 4.5
22.1 10.0
6.0 1931.11
60.7 33.0
21.0 3.3
22.4 20.6
6.5 1931.12
73.2 33.2
22.8 7.1
20.5 5.9
4.7 1932.01
96.9 33.4
23.2 6.5
20.4 27.8
6.5 1932.02
84.9 33.5
23.3 6.5
20.1 16.3
5.3 1932.03
93.8 33.7
21.4 2.6
1.9 26.1
8.1 1932.04
101.1 33.9
20.4 2.2
3.2 34.9
6.6 1932.05
83.8 34.1
19.2 2.1
4.7 16.6
7.2 1932.06
76.9 34.3
16.9 23.4
0.9 20.1
8.1 1932.07
87.2 34.5
15.7 3.5
3.2 21.7
8.5 1932.08
77.0 34.6
11.7 21.7
3.6 20.2
8.7 1932.09
56.1 34.9
8.4 22.9
5.6 1.9
8.3 1932.10
52.9 35.1
7.9 1.2
6.1 26.3
9.0 1932.11
53.6 35.3
5.0 24.7
5.8 2.1
10.2 1932.12
64.2 35.5
3.2 2.7
7.3 4.7
10.9 1933.01
79.1 35.6
3.9 21.4
7.0 20.6
13.3 1933.02
65.6 35.9
3.3 21.4
7.8 4.5
15.5 1933.03
48.5 36.1
2.7 20.9
5.3 212.6
17.9 1933.04
51.1 36.3
0.3 23.7
6.2 4.9
7.2 1933.05
48.0 36.5
0.1 22.0
5.0 8.1
1.1 1933.06
35.3 36.7
20.0 25.2
3.5 6.9
26.4 1933.07
27.5 36.9
21.1 23.9
4.2 2.8
211.3 1933.08
42.8 37.1
21.5 22.3
2.8 22.4
9.0
a
The variables are defined as follows: IN 5 index of industrial production; PX 5 price index; MS 5 money supply M1; LB 5
liabilities of failed businesses; and DB 5 deposits of failed banks.
Bank Failures and Economic Output
231
became increasingly more important over time. In other words, increased business failures were a response to falling output. The rise in the liabilities of failed businesses were worsened
by their own shocks as well as by shocks from the deposits of failed banks, the latter of which became the dominant force near the end of the period. Consistent with our earlier findings in
Table 4, we infer here that bank failures contributed to increased numbers of business failures, especially when bank failure became a chronic condition in the banking system.
Lastly, Table 8 shows the results of the historical decomposition of the deposits of failed banks. Prior to the bank holiday, actual figures generally exceeded the forecasted
deposits of failed banks and, in many cases, this difference was very large in magnitude. For example, in March 1933, the actual deposits of failed banks surged to 3,276.7 million
or 73 times expected deposits of 44.9 million. About 82 of the 3,231.8 million discrep- ancy is explained by own shocks, while shocks to output, prices, money supply, and
the liabilities of failed businesses explain 3.5, 2.6, 3.0, and 8.8, respectively.
V. Summary and Conclusions
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