Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta&Apos;S Dissenting Policy

33 Pages Posted: 13 Jul 2015 Last revised: 25 Apr 2021

See all articles by Eugene N. White

Eugene N. White

Rutgers, The State University of New Jersey

Date Written: July 2015

Abstract

During the 1920-1921 recession, the Federal Reserve Bank of Atlanta resisted the deflationary policy sanctioned by the Federal Reserve Board and pursued by other Reserve banks. By borrowing gold reserves from other Reserve banks, it facilitated a reallocation of liquidity to its district during the contraction. Viewing the collapse of the price of cotton, the dominant crop in the region, as a systemic shock to the Sixth District, the Atlanta Fed increased discounting and enabled capital infusions to aid its member banks. The Atlanta Fed believed that it had to limit bank failures to prevent a fire sale of cotton collateral that would precipitate a general panic. In this previously unknown episode, the Federal Reserve Board applied considerable pressure on the Atlanta Fed to adhere to its policy and follow a simple Bagehot-style rule. The Atlanta Fed was vindicated when the shock to cotton prices proved to be temporary, and the Board conceded that the Reserve Bank had intervened appropriately.

Suggested Citation

White, Eugene N., Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta&Apos;S Dissenting Policy (July 2015). NBER Working Paper No. w21341, Available at SSRN: https://ssrn.com/abstract=2629946

Eugene N. White (Contact Author)

Rutgers, The State University of New Jersey ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

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