ECON 2200 Lecture Notes - Lecture 11: Bank Reserves, Procyclical And Countercyclical, Money Supply
14 May 2018
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Department
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Professor
ECON 2200
Lecture 11
• Uneven distribution of banks’/bank notes
o 1877 NB note circulation:
$77 per capita in RI
13 cents per cap in AR
o This led to limited credit in rural areas & South
• Susceptibility to panics & runs
o “Country” banks (small rural banks) & the call-loan market
▪ Country banks would hold their reserves at the big “City”
banks
1. This was a positive thing for “City” banks. They could
use these reserves for loans that they otherwise could
not make. The loans that they made with the “County”
bank reserves would be call-loans.
Call-Loan: amount loaned can be called-in for
repayment at any time.
So, “Country” banks supported the call-loan
market.
2. However, this made bigger banks susceptible to bank
panics at small seemly insignificant “Country” banks.
Panics tended to spread from “Country” banks to “City”
bank and on to individuals and firms who had taken out
call-loans.
• ie. People in small town panic about some money problem and run to
get their money out of their “Country” bank “Country” bank runs to
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