Domestic and International Crises in the Early 1930s and Their Effects on Conditions in New York City Money Markets and in the Market for U.S. Treasury Bonds

Financial turmoil typically has large impacts on money markets, which are vital for managing immediate liquidity needs, and in the market for government securities, which are typically among the safest assets and often used as a source of secondary liquidity. The turmoil during the early 1930s in the United States was no exception and the central money market and US Treasury bond market, both located in New York City, both came under notable pressure. Some of those pressures may have originated aboard. During the 1920s, a variety of financial linkages between the US and the Europe were established as US banks also became notable players in providing credit to foreign firms through the bankers’ acceptance markets and as foreign investors placed a sizeable amount of short-term funds in the US, especially in New York City. These financial linkages may have transmitted to the United States the stresses from Europe associated with the German crisis of 1931 and the currency devaluation in the United Kingdom. Pressures on US money and Treasury bond markets could also have domestic sources resulted from heightened liquidity demands as many US banks experienced withdrawals, particularly during the banking panics. In this paper, we use relatively high frequency data (weekly) to examine the extent to which pressures arising from foreign and domestic sources affected NYC money markets and US Treasury markets. We find that both foreign and domestic stresses appear to have affected money markets while Treasury markets conditions seem the most strongly linked to foreign factors. In the historical literature concerning the US experience in the Great Depression there is some debate about the extent to which crises in Europe directly affected conditions in the US. Our results suggested that there were important effects on US financial conditions from foreign developments.