The central money market during the Great Contraction of 1929 to 1932: The behavior of banks in New York City

This dissertation analyzes the banks in the central money market of New York City during the Great Contraction of 1929-1932. The banks of New York City are an often-overlooked sector of the banking industry during the Contraction, as many of the bank failures in this era occurred elsewhere in the nation. Using a unique data set of quarterly balance sheets on all state banks and trust companies and previously unpublished failure data from the Federal Reserve, I investigate the behavior of the banks in New York State. Banks in New York City were actively engaged in mergers and consolidations throughout the Great Contraction. Liquidation rates peak in New York City in July and August of 1931, during the time that Germany experiences a large banking panic and two months before Britain abandons the gold standard. Banks increased their probability of failure if they were heavily leveraged in speculative activities before the stock market crash in 1929. An investigation into the liquidity management of banks in New York City during the Contraction finds that state banks which were not Federal Reserve members increase their ratio of assets as excess reserves after the first banking panic. This difference is statistically significant and remains throughout the Contraction. I also find support for the competing theories of excess reserves of alternative costs and precautionary demand. Finally, the behavior of interbank balances in New York City and the rest of the state indicate that nonmember banks maintained higher balances than member banks, even in periods of panic.