Clearing and the Collapse of the Banking

Weaknesses within the check-clearing system played a hitherto unrecognized role in the banking crises of the Great Depression. Correspondent check-clearing networks were vulnerable to counter-party cascades. Accounting conventions that overstated reserves available to corresponding institutions may have exac-erbated the situation. The initial banking panic began when a correspondent network centered in Nashville collapsed, forcing over 100 institutions to sus-pend operations. As the contraction continued, additional correspondent systems imploded. The vulnerability of correspondent networks is one reason that banks that cleared via correspondents failed at higher rates than other institutions dur-ing the Great Depression. uring the Great Depression, banks failed in larger numbers than at any other time in United States history. Economists have long de-bated the reasons for the banking system’s collapse. A traditional school of scholarship maintains that the underlying causes were withdrawals of deposits, illiquidity of assets, and the Federal Reserve’s reluctance t