The Bank Failures of 1930-31: Comment

Abstract

Peter Temin [4] has provided empirical evidence that the bank failures of the early years of the depression were induced by falling farm incomes. He therefore argues that bank failures and related disturbances were not an independent cause of the depression, but rather a mechanism by which the money supply was equilibrated to a rapidly falling money demand. This analysis is an important building block in Temin's spending hypothesis which is offered as an alternative to the monetary hypothesis of Friedman and Schwartz. The Friedman and Schwartz [2, pp. 308-12, 355] explanation of the 1930-31 bank failures emphasizes the role of bank panics and Federal Reserve passivity, along with a suggestion that poor loans and investments made in the 1920s ould be a factor. Cagan [1, pp 223-29, 265-68], after a general historical review of bank panics and business contractions, concludes the inexplicable nature of bank panics is of most importance while the contractions themselves have not been a major factor The purpose of this comment is to present the results of additional empirical tests on bank failure causaflon in 1930-31.