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Bank Collapse and Depression

Staff Report 56 | Published July 1, 1980

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Bank Collapse and Depression


The recurrent banking panics of the 19th century and the Great Depression of the 1930s are widely viewed as failures of our economic system. A simple version of Samuelson’s overlapping generations model is used to generate such failures of Walrasian equilibrium. The spontaneous “panics” generated involve a collapse of bank credit, causing in turn a drop in investment demand. The model suggests that both the recent technological advances in the intermediation industry and the current move towards deregulation of that industry are ominous developments.

Published in: _Journal of Money, Credit and Banking_ (Vol. 13, No. 4, November 1981, pp. 454-464),