The Great Depression as a Savings Glut

Abstract

New data covering 23 countries reveal that banking crises of the Great Depression coincided with a sharp international increase in deposits at savings institutions and life insurance. Deposits fled from commercial banks to alternative forms of savings. This fueled a credit crunch since other institutions did not replace bank lending. While asset prices fell, savings held in savings institutions and life insurance companies increased as a share of GDP and in real terms. These findings provide new explanations for the fall in credit and aggregate demand in the 1930s. They illustrate the need to consider nonbank financial institutions when studying banking crises.

“There are today many well-wishers of their country who believe that the most useful thing which they and their neighbours can do to mend the situation is to save more than usual. […] It is utterly harmful and misguided – the very opposite of the truth.”

—J.M. Keynes (1931, II.6 p. 151).

An important question remains unanswered in studies on the Great Depression: what happened to savings? Conventional wisdom assumes that people lost their savings in bank failures or withdrew their bank deposits to hoard cash. The bank failures created a negative shock to the stock of money, which triggered or exacerbated the economic crisis (Fisher 1932; Friedman and Schwartz 1963; Grossman 1994; Mitchener and Richardson 2019). We paint a different picture based on a new dataset covering 23 countries. These data reveal that, during the banking crises of the Great Depression, savings accumulated in savings institutions at the expense of commercial banks. This phenomenon was an international feature of the Great Depression, and on a considerable scale.

Savings deposits increased not only as a share of income, but their nominal value increased, despite the economic crisis and deflation. In the 23 countries of our dataset, deposits in savings institutions increased on average by 111 percent between 1928 and 1933, while bank deposits collapsed by 15 percent.¹ This increase was stronger during banking crisis years. In some countries, the increase in savings also occurred through life insurance. We do not find that cash was the primary vehicle for savings.

Savers shifted their funds from commercial banks to other financial institutions because the latter were safer than the former. Savings institutions (including postal savings systems) first appeared in the mid-to-late nineteenth century. They took various institutional forms within and between countries. Despite their diversity, they were everywhere recognized to belong to a different category than commercial banks. They were primarily set up to promote savings, in contrast to commercial and cooperative banks, whose aim was to develop credit. They offered fewer payment and credit facilities but were perceived as safer because they were more regulated by governments, with most of their assets invested in safe long-term securities rather than lending to businesses.

The increase in deposits in savings institutions is the mirror image of the widely studied banking crises of the 1930s. This part of the story, which has long remained in the shadows, broadens our knowledge of the period for two reasons. First, it sheds new light on the relationship between banking crises and the fall in private credit. The reason is simple: the transfer of deposits from commercial banks to savings institutions mechanically triggered a credit crunch since the latter did not replace the former as lenders to businesses. Studying the U.S. economy, Friedman and Schwartz (1963) argued that the decline in the money supply associated with bank failures caused the Great Depression. Bernanke (1983) demonstrated the need to look beyond this monetary effect because the loan-to-deposit ratio of commercial banks fell. In his view, a rise in the cost of credit intermediation also drove the decline in credit. Our analysis brings a more institutional and systemic perspective to this debate. The aggregate loan-to-deposit ratio (credit multiplier) fell sharply because savings institutions that received deposits generally did not lend to businesses. Had savings institutions replaced banks as lenders, total lending might have remained stable in the economy (or the decline in lending would have been due solely to the asymmetric information problem described by Bernanke).

Second, our investigation raises new questions about precautionary saving during the Great Depression (Keynes 1931; Temin 1976; Romer 1990). Was the increase in deposits at savings institutions merely a reallocation of funds, or was it also driven by an accumulation of new savings at the expense of consumption (precautionary savings)? Since historical data are too limited to compute total saving flows or personal saving rates, we can only provide partial answers to this question. Moreover, there are in fact important difficulties with identifying precautionary savings even when a personal saving rate is computed by National Accounts. The first reason was already highlighted by Keynes (1936, p. 84): “Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself.”² Savings and GDP are jointly determined. The second is due to changes in asset prices that may affect the valuation of wealth (Guidolin and La Jeunesse 2007). The last is that aggregate or average personal saving rates hide the fact that some economic agents can save more at the same time as others increase their liabilities (Mian, Straub, and Sufi 2020).

Although it is impossible to estimate precautionary savings precisely by income groups, we can nevertheless provide evidence that savings increased for at least part of the population. The first piece of evidence is simply to add up all the forms of saving that we have been able to measure, including the commercial bank deposits that declined during the Great Depression. If the flight-to-safety had been merely a reallocation of funds from commercial banks to other forms of savings, we should not have seen an increase in the amount of these savings during the Great Depression.³ Yet, we do. This is true for the average ratio across countries as well as if we add up all the savings of the countries in our sample, expressed in constant dollars. However, this leaves aside the possibility that households or firms sold bonds, real estate, or shares and transferred the money to their savings accounts. We cannot distinguish between price and volume effects for asset and housing prices (although their decline in nominal terms was probably mainly due to a fall in prices). To address this issue, we estimate the relationship between the growth rate of savings on the left-hand side (including deposits in savings institutions, cash, and life insurance) and banking crises on the right-hand side, while controlling for the growth rates of equity prices, house prices, and commercial bank deposits. If the increase in savings on the left-hand side was only due to a transfer of savings captured by the variables on the right-hand side, we should see a negative coefficient on these variables and no significant relationship with banking crises. Instead, we find that banking crises are positively associated with an increase in our measure of savings, everything else equal. We do not ignore the fact that the fall in asset prices resulted in a loss of wealth for households. We nevertheless argue that this negative wealth effect was not incompatible with an increase in new savings at the expense of consumption.

Academic Literature on Savings during the Great Depression

The extensive literature on banking crises during the Great Depression has focused primarily on the monetary and non-monetary effects of bank failures. While first formulated in the context of the U.S. economy, these perspectives have been applied to international comparisons as well (Bernanke and James 1991; Eichengreen 1992; Grossman 1994; Grossman and Meissner 2010). More recently, the literature has shed light on the amplifying effect of network transmission through a flight-to-safety within the banking sector (Mitchener and Richardson 2019; Blickle, Brunnermeier, and Luck 2019; Calomiris, Jaremski, and Wheelock 2022. It remains focused on the commercial banking system. One reason why the role of nonbank savings institutions was neglected in the literature may be that—as our comparative dataset reveals—they were of more limited importance in the United States (see Table A1 in the Appendix), the country that has been and still is the basis for most macroeconomic theory of the Great Depression. The United States, however, was not spared the transfer of deposits from commercial banks.⁴ The growth in deposits in mutual and postal savings banks in the United States between 1930 and 1933 was already visible in the data published by Friedman and Schwartz (1963). Their analysis was nevertheless confined to a footnote: “The growth of postal savings deposits from 1929 to 1933 is one measure of the spread of distrust of banks.” (p. 308).⁵ Likewise, in their international study of banking crisis during the Great Depression, Bernanke and James (1991) devoted only a footnote to the phenomenon we fully characterize in the current paper: “Savings banks, in contrast, held mostly government securities and thus often gained deposits during panic periods” (p. 65).

Table 1 THE INCREASE IN SAVINGS DURING BANKING CRISES (RELATIVE TO NON-CRISIS YEARS)

Notes: The number in each cell is the mean of within-country differences between crisis and non-crisis years. All figures are in percentage points. The table reads as follows: on average, in each country, the growth rate of savings deposits was 6.3 pp higher during banking crisis years than in non-crisis years. Banking crisis years include both years of banking panics (our update of the series of Bernanke and James (1991)) and years of quiet crises (Baron, Verner, and Xiong 2021). We first take the difference within each country, and then we average it out across our sample. For the growth rate of savings deposits (Column (1)), the sample covers 23 countries. For the growth rate of savings deposits to GDP (Column (2)), the sample covers only the 19 countries for which we have nominal GDP data.

Source: See Online Appendix.

Thus, although the rise in savings deposits was not unseen by previous scholars, it was never the subject of a specific study. Its macroeconomic effects have not been appreciated. It is only recently that the role of savings institutions during the Great Depression gained new attention, in a case study focusing on France (Baubeau et al. 2021). It stimulated ongoing research on other European countries (see Jorge-Sotelo (2019, ch. 5) on Spain, Molteni (2021) on Italy, and de Vicq and Peeters (2022) on the Netherlands). In a similar vein, and following the earlier work of O’Hara and Easley (1979), Schuster, Jaremski, and Perlman (2020) noted that the U.S. postal savings banks served as a ”safe haven” during the banking crises of the 1930s, and Fleitas, Jaremski, and Schuster (2023) observed a negative correlation between U.S. postal savings and Building and Loan associations’ deposits.⁶ Our study elevates these recent observations to a full account by providing the first comprehensive international study of savings during the Great Depression. Moreover, we attempt to systematically assess the macroeconomic implications of the rise in some forms of savings. We track savings deposits across as many countries and institutions as possible, we study the effect of the flight-to-safety on aggregate credit, and we discuss the potential macroeconomic importance of precautionary savings.

As explained previously, our interpretation of the fall in private credit is complementary but distinct from those of Friedman and Schwartz (1963) and Bernanke (1983). We quantitatively assess the difference between the mechanism highlighted by Bernanke and ours by comparing the loan-to-deposit ratios of commercial banks and the overall financial system. The second difference between our perspective and Bernanke’s is that we consider that the flight-to-safety from commercial banks to savings institutions was associated with periods of banking distress but was not necessarily a mechanical consequence of bank failures. Commercial banks might face withdrawals but not necessarily fail. As the cases of Greece and the Netherlands illustrate, it is even possible to observe a sizeable flight-to-safety without major bank failures.⁷

Another strand of the literature on the Great Depression—also centered on the United States—has studied the debt-deflation (or “consumer balance sheet”) channel (Fisher 1933; Mishkin 1978; Olney 1999; Hausman, Rhode, and Wieland 2019), that is, how the increase in the real value of debt put a strong constraint on consumption. This perspective is different but complementary to ours, as the indebtedness of some consumers is compatible with the accumulation of savings by the wealthiest firms and households. Constrained consumers reduce their spending to pay off existing debt, while unconstrained consumers accumulate precautionary savings to stay away from the borrowing limit, as in Keynes (1931, 1936). In both cases, aggregate demand is pushed down and output falls (Challe et al. 2017; Guerrieri and Lorenzoni 2017; Mian, Straub, and Sufi 2020). We present further evidence that the number of accounts and the average volume of deposits in savings accounts increased. The number of savings accounts per capita indicates that not all of the population had access to savings deposits.

Despite the influence of Keynesian theory on the interpretation of the Great Depression, we are aware of very few attempts to quantify the increase in savings at the expense of consumption. Temin (1976) and Romer (1990) provided indirect evidence of precautionary savings by examining the pattern of consumption of several goods after the 1929 stock market crash in the United States, but they did not study the data on savings.⁸ We focus here on the link between banking distress and the accumulation of savings, a story more consistent with the fate of other countries where banking crises, rather than stock market crashes, first triggered economic crises (Grossman and Meissner 2010, p. 320). Our argument on precautionary savings is nevertheless conceptually similar to that of Romer (1990): financial uncertainty led people to forego consumption.

The international comparison covering more than 20 countries is both the strength and the weakness of this paper. Its strength is that it allows us to present the shift from commercial banks to savings institutions as a major macroeconomic and international feature of the Great Depression (although the extent varies from country to country). Only by considering the heterogeneity of financial institutions could we explain how an increase in savings could coincide with a large decrease in credit. Yet, macroeconomic comparisons across countries do not allow for a precise analysis of the motives for savings and the identification of the causal chain of events that led from savings accumulation to economic depression. In particular, the evidence on precautionary saving is much more suggestive than that on the link between flight-to-safety and the credit crunch. A more precise identification of precautionary saving and its economic effects remains necessary. We hope that our presentation of the broad macroeconomic picture and of the potential mechanisms at play will encourage further research at the regional or individual level when data are available. Once visible, the role of saving and savings institutions in the Great Depression can no longer be ignored.

SAVINGS INSTITUTIONS AND BANKING CRISES DURING THE INTERWAR

History of Savings Institutions

Savings institutions first appeared in the mid-to-late nineteenth century.⁹ They were typically set-up by local or central governments to encourage thrift among lower social classes. Yet, they soon started attracting funds from higher social classes and even from small businesses (Vogler 1991; Brück 1995; Mura 1996; Schuster, Jaremski, and Perlman 2020; Monnet, Riva, and Ungaro 2021). They were primarily set up to promote savings, in contrast to commercial and cooperative banks, whose first aim was to develop credit. This implied specific regulations and the holding of safer assets.¹⁰ Savings institutions’ deposits thus had three main advantages: they were safe (usually due to state guarantees), they were widely accessible (unlike commercial banks in most countries, savings institutions established branches in rural and sparsely populated areas), and they paid interest (unlike cash and other hoarded funds). The special status of savings institutions progressively disappeared in the second half of the twentieth century, as deposit insurance was extended to commercial banks. Starting in the late 1970s and early 1980s, most savings institutions were privatized or merged with commercial banks (Carletti, Hakenes, and Schnabel 2005; Bülbül, Schmidt, and Schüwer 2013). In the 1920s and 1930s, however, commercial banks were essentially unregulated (U.S. banking regulation being an exception), and savings institutions’ deposits were a unique haven for precautionary savings.

Savings institutions enjoyed a privileged relationship with the State. Still, the degree of state involvement varied widely between (and sometimes within) countries. Two broad groups of institutions can be distinguished. In the first group, savings institutions were set up as state-backed institutions under the direct responsibility of the Ministry of Finance. Their deposits were explicitly guaranteed by the State. Postal savings systems are included in this category. They were created by European states at the end of the nineteenth century, based on the expansion of the postal network, and transplanted to the United States in 1911 (National Monetary Commission 1910; Kemmerer 1911). As a rule, funds deposited at these institutions were invested in government securities or deposited at the Treasury Department.¹¹ Some private institutions’ deposits were also centralized by the state. The U.K.’s Trustee Savings Banks were private institutions, but their deposits were collected by the Bank of England and invested in government bonds (Horne 1947). Likewise, the French Caisses ordinaires d’épargne were privately owned, but, from 1837 onward, their assets were nevertheless managed by the Caisses des dépôts et consignations, a government-sponsored financial institution, and fully invested in government securities or deposits at the Treasury (Monnet, Riva, and Ungaro 2021).

The second group includes private savings institutions, which enjoyed more autonomy to manage their portfolio. They were however strictly regulated by the State, contrary to commercial banks at that time (with the exception of U.S. banking regulation). In Austria, savings banks had to report annually on their activities, and an imperial commissioner sat on their board (Lepelletier 1911). In Denmark and Norway, a supervision authority was created in 1880 and 1887 to monitor private savings banks and liquidate them if they lost more than 5 percent of deposits over a year.¹² In return, private savings institutions’ deposits enjoyed an explicit or implicit state guarantee. The founding act of the Spanish cajas de ahorros of June 1880, for example, stated that the cajas were “under the protection” of the government (Mura 1996; Casals 1991). Funds deposited at private savings institutions were primarily invested in government securities or in long-term mortgage loans. Discounting of commercial bills or other short-term loans similar to commercial bank loans were not their main business activity (see the later discussion and Table A2 in the Appendix). Starting in the 1920s, some private savings institutions became involved in commercial discounting, especially in Germany (Proettel 2017), but short-term loans to businesses remained the prerogative of commercial banks.

Table 2 BANKING PANICS, PRECAUTIONARY SAVINGS, AND TOTAL SAVINGS

* p<0.1 ** p<0.05 *** p<0.01

Notes: The dependent variable is the growth rate of total savings. The estimation period is 1920–1936. Except in Column (4), total savings is calculated as the sum of savings deposits, cash in circulation, and life insurance policies. In Column (4), we exclude life insurance policies from total savings. Column (2) controls for the return on equity, and Column (3) controls for the growth rate of housing prices. In the first four specifications, we use an updated version of Bernanke and James (1991) definition of banking crises (see footnote 18 and Online Appendix). In Column (5), we combine Bernanke and James’ coding with the coding of Baron, Verner, and Xiong (2021). We exclude the 1922 “quiet” crisis in Japan, which was mostly a crisis of the small savings banks (Shizume 2012). All estimations include country-fixed and year-fixed effects, and standard errors are clustered at the country level.

Source: See Online Appendix.

The ability to set the interest rate on deposits also varied across countries and institutions. In public savings institutions (and sometimes also in private ones), the interest rate on deposits was set directly by the Ministry of Finance, usually below market interest rates. A higher interest rate would have put considerable pressure on commercial banks. During the Great Depression, however, many governments failed to keep the rate on savings deposits in line with falling market rates (and deposit rate at commercial banks). More importantly, the risk-adjusted interest rate was clearly in favor of the savings banks once the commercial banks started to face deposit withdrawals. This generated intense criticisms on the part of commercial banks and considerable debate among the political class in many countries. Savings institutions were accused of unfair competition by commercial banks (see, e.g., Skulic (1936) on Yugoslavia, Monnet, Riva, and Ungaro (2021) on France, de Vicq and Peeters (2022) on the Netherlands, Sissman (1938), O’Hara and Easley (1979) and Shaw (2018) on the United States, and Horne (1947) on the United Kingdom).¹³

New Data on Deposits in Savings Institutions

We built a new international database of deposits at savings institutions in 23 countries, covering the 1920–1936 period. Our sample includes the richest part of the world and the countries hardest hit by banking crises during the Great Depression: North America, Japan, and most European countries. Overall, the 23 countries included in our sample accounted for 65 percent of world real GDP in 1930 (Bolt et al. 2018).¹⁴ Data are annual. We collected the data from national statistical yearbooks and, in a few instances, from the League of Nations statistical yearbooks. Whenever possible, we corrected and improved these series with more recent estimates built by other scholars or by going back to the original annual reports published by savings institutions (see Online Appendix). Both the League of Nations and national yearbooks clearly distinguished commercial banks from savings institutions. We relied on these categories built by contemporaries, rather than on our own assessment to construct our database (see Online Appendix for a country-by-country list of savings institutions). Data on commercial banks are from similar sources or from recent scholarship when available. Other data sources for financial institutions and macroeconomic variables are listed in the Online Appendix.

For the majority of countries, higher-frequency data were not available. Data on the flow of deposits are also absent, so we have to rely on the end-of-year balance sheets. In the absence of banking regulation in most countries (Grossman 2010), it is also impossible to find a continuous and representative series of deposit interest rates for commercial banks.

The Evolution of Savings during the Great Depression

Savings institutions thrived during the Great Depression.¹⁵ Table A1 in the Appendix shows the growth rate of deposits between 1930 and 1932—the years of the great banking panics (country-by-country plots are presented in the Online Appendix). Commercial bank deposits declined everywhere, whereas most countries experienced a strong increase in savings institutions’ deposits. As we will see later, the exceptions (6 out of 23 countries) were either countries with a major sovereign debt crisis or countries without a banking crisis. The increase in nominal deposits is all the more striking given that, as is well known, the years 1930–1932 were characterized by global deflation and falling output.

Figure 1 plots the average ratio between savings institutions’ deposits and commercial bank deposits over the 1920–1936 period for 23 countries. The average ratio increases from 71.4 percent in 1928 to 115.8 percent in 1932. This means that, on average, in our sample of countries, the early years of the Great Depression saw savings institutions’ deposits become the dominant form of deposit. Figure 1 also suggests that the increase in the ratio started before the Great Depression, as early as 1926. This increase is driven by a few countries (notably Japan and Scandinavian countries), which experienced banking instability in the mid-to-late 1920s. Excluding these countries, we find that the ratio was stable at around 35 percent from 1925 to 1928 and then increased to 45 percent in 1929, reaching 84 percent in 1932 and 95 percent in 1935.

Figure 1 RATIO OF DEPOSITS IN SAVINGS INSTITUTIONS TO DEPOSITS IN COMMERCIAL BANKS, 1920–1936

Note: Unweighted average of the data for the 23 countries in our sample.

Source: See Online Appendix.

The 1928–1933 increase in the ratio is not only due to a fall in commercial bank deposits, but also to a sharp increase in savings deposits. On average, bank deposits decreased by 14.5 percent between 1928 and 1933, while savings institutions’ deposits increased by 111 percent.

Figure 2 RATIO OF BANK DEPOSITS, SAVINGS INSTITUTIONS DEPOSITS, AND CASH IN CIRCULATION TO NOMINAL GDP, 1926–1936

Note: Unweighted average of the data for the 19 countries for which we have nominal GDP data.

Source: See Online Appendix.

In terms of GDP, the figures are equally striking (Figure 2). Note, however, that our sample is reduced to 19 countries in this case because of the lack of GDP data for several countries. Deposits in savings institutions increased from 13 to 20 percent of nominal GDP, while the share of commercial bank deposits remained constant. The cash-to-GDP ratio increased more modestly, and the increase is mostly driven by the drop in GDP. The nominal quantity of cash increased in only 6 countries out of 23.¹⁶ Cash hoarding explains little of the rise in savings (contrary to the widely held belief that precautionary savings were put “under the mattress,” Fisher (1932)).¹⁷ As can be seen from Table A1 and from the Online Appendix (which provides country-by-country graphs), the increase in savings institutions’ deposits is especially visible in countries that experienced a banking crisis, although its extent varied from country to country.

Savings Institutions and Banking Crises

The link between the occurrence of banking crises and the rise of deposits at savings institutions is confirmed by descriptive statistics. On average, in each country in our sample, the growth rate of savings deposits was 6.5 percentage points higher during banking crisis years. If we look at the growth rate of the savings deposits to GDP ratio, the difference is 10.7 percentage points.

To code banking crises, we started with the definition of banking panics provided by Bernanke and James (1991) (also used by Grossman (1994)). It covers the largest share of countries in our sample, and it is the most documented and consistent with scholarship on specific countries. In a few instances, we supplement their data using more recent studies. For France, we coded the year 1932 as a “non-crisis year” (contrary to 1930 and 1931) based on recent research by Baubeau et al. (2021). For Spain, we coded the year 1931 as “crisis year” based on the work of Jorge-Sotelo (2020). Portugal and Bulgaria are not covered by Bernanke and James, so we instead rely on Reinhart and Rogoff (2009) for Portugal, and on Kossev (2008) for Bulgaria.

The difference between crisis and non-crisis years holds if we also include episodes of banking crises that were not associated with banking panics or bank failures (see Table 1, bottom line). These episodes were defined and named “quiet crises” by Baron, Verner, and Xiong (2021). These are years when the equity prices of banks underperformed markedly compared to the rest of the stock market. Considering “quiet crises” in our sample is important since waves of bank failures were not always necessary to trigger a reallocation of savings from commercial banks to savings institutions. The Netherlands is a clear case of an increase in savings deposits without major banking panic (see Table A1 in the Appendix and de Vicq and Peeters (2022)), but with a “quiet banking crisis” identified by Baron, Verner, and Xiong (2021). So is Greece. By contrast, we see no flight-to-safety in Canada, a country that is known as a notable exception during the Great Depression because banks remained strong despite the economy being also affected by the international slump in trade and production (Bordo, Redish, and Rockoff 2015).

Table 1 shows that, in each country in the database, the growth rate of savings deposits was 6.3 percentage points higher during years of banking crises (including quiet crises), while the growth rate of the savings deposits to GDP ratio is higher by 11 percentage points.¹⁸ Focusing only on the Great Depression crises (1929–1933), we find similar results.

Although not recorded in international accounts of the Great Depression (Kindleberger 1973; Bernanke and James 1991; Eichengreen 1992), the increase in savings institutions’ deposits during banking crises is not surprising given the lack of financial insurance in the interwar period. The absence of public unemployment insurance and, more importantly, of financial insurance meant that consumers had to self-insure against risk. When credit dried up, financially unconstrained consumers had a strong incentive to accumulate savings as a buffer against future shocks.¹⁹

To be sure, part of the increase in savings deposits during a banking crisis was driven by portfolio reallocation (by a flight-to-safety from commercial bank deposits to safe savings institutions), rather than by an increase in precautionary savings. The last section of the article will discuss this issue extensively. This potential reallocation is almost impossible to track precisely, however. Aggregate capital stock data such as those compiled in Piketty and Zucman (2014) are not well suited to address these issues because most of the changes in financial wealth may be driven by a price effect rather than by savings flows. If stock market prices decrease and individuals do not sell their stocks, their nominal savings decrease. This decrease should not be interpreted as a reallocation toward other forms of savings. At this stage, it is sufficient to say that, for this reason, we cannot include in our study data on the stock of housings, bonds, and stocks.

Last, it is worth remembering that interwar banking crises were often independent from stock market crises (see Grossman and Meissner (2010) for a recent survey). After the U.S. stock market crash of 1929, the Great Depression was characterized by a series of banking crises in the early 1930s, not by stock market crashes. Our first graphical and statistical investigations suggest that savings institutions’ deposits strongly reacted to the uncertainty surrounding banking crises, rather than being a consequence of the 1929 international stock market crash.

Savings institutions that were privately owned often invested in mortgage loans. Contrary to business and commercial loans, they were considered very safe. We still lack a comparative history of housing and mortgage markets during the Great Depression, but—except in the United States—we are not aware of any major mortgage crisis that would have destabilized savings institutions. Starting from a similar observation, Eichengreen and Mitchener (2004) hypothesized that countries where the mortgage market was primarily financed by savings institutions and where rent controls were prevalent in the 1920s escaped a construction and mortgage boom. The mortgage crisis in the United States affected Building and Loan associations, which were not considered saving banks because they were financed by equity rather than deposits. Their equity decreased when borrowers defaulted on their loans. The unique Building and Loan share installment contract encouraged borrowing members to postpone dissolution and made it almost impossible for investors to recover their funds (Fleitas, Fishback, and Snowden 2018). At the same time, U.S. savings institutions (mutual savings and especially postal savings) attracted new funds from savers that, otherwise, could have gone to Building and Loan funds (O’Hara and Easley 1979; Schuster, Jaremski, and Perlman 2020). The 1930 crisis of Building and Loan associations led to the creation of Savings and Loan institutions during the New Deal era and of the Home Owners’ Loan Corporation (Rose and Snowden 2013).²⁰

Sovereign debt crises, on the contrary, had more important consequences for savings institutions since they turned government securities into risky assets. In a few countries (see Table A1 in the Appendix), a banking crisis hit, but deposits in savings institutions did not increase (in nominal terms). These were the three countries that suffered very strong public debt crises starting in 1931: Austria, Germany, and Hungary. Note, however, that the growth rate of nominal savings deposits was still much less negative than that of commercial bank deposits in these countries. The situation was especially difficult for savings institutions that had invested in government securities. Austria’s postal savings bank lost 13 percent of its deposits during the year 1931. Savings institutions that invested a lower share of their assets in public securities suffered less from debt crisis. Key examples include Germany’s public savings banks (Sparkassen), which invested a large fraction of their assets in short-term loans to the economy and mortgages (Lehmann-Hasemeyer and Wahl 2021).

Number of Depositors

How many depositors increased their savings during the crisis? If the increase in savings was driven by a small share of the population, then the increase in savings deposits might not be associated with an increase in total savings, or in the average saving rate. To discuss if the increase in savings deposits was a widespread phenomenon within the population, we collected data on the number of savings accounts for a sub-sample of 7 countries. First, it is worth looking at how many accounts were open. As can be seen from Panel (a) in Figure 3, the number of savings accounts per inhabitant in 1933 was well below 10 percent in Greece and Romania and barely above 10 percent in the United States. By contrast, the ratio of savings accounts per inhabitant was equal to more than half in Belgium and France. The differences between these countries can be explained quite easily. Greece and Romania are typical examples of countries that were still poor at that time. Savings were unlikely to be widespread in the population despite state policies to import financial institutions from the wealthiest European countries. The low number of accounts in the United States—already a rich country—can be explained by the fact that government policies to develop savings institutions have been more modest than in Western Europe. Postal savings were created there in 1911 only, and mutual savings banks were usually created through private initiatives. On the other side of the spectrum, Belgium, France, and the Netherlands were rich countries where the state had pushed the development of savings institutions since the nineteenth century, whereas commercial banks were not regulated. Italy could be included in this group, but the lower number of accounts is probably due to weaker economic and financial development than in the other three countries.

Figure 3 NUMBER OF SAVINGS ACCOUNTS AND AVERAGE SAVINGS DEPOSIT

Notes: Panel (b) focuses on the 1928–1936 banking crises. We calculate—for each country—the growth rate between the year before the first banking crisis and the year after the last banking crisis. For countries that did not have a banking crisis (here, only Greece), we take the growth rate between 1930 and 1933.

Source: See Online Appendix.

These accounts were not limited to individuals and could also be used by firms. Thus, it cannot be interpreted strictly as the number of accounts per inhabitant. Considering the existence of accounts opened by firms (although we cannot estimate their exact share), it is safe to state that less than half of the population had a savings account, even in countries like Belgium and France where savings accounts were widespread. Moreover, except in Greece, the growth of the volume of deposits per account was larger than the growth of new accounts during the crisis (see Panel (b) in Figure 3). Although there were some new entrants, the increase in savings deposits occurred significantly at the intensive margin: people who already had an account repatriated their funds from other institutions or saved more. This type of behavior shows that these people were not over-indebted or in hand-to-mouth households. The increase in savings during the Great Depression was unequal. Poor households, all the more those who faced debt repayment and/or unemployment, were unlikely to increase their deposit accounts.

Life Insurance

Life insurance policies were also an important vehicle for savings in the interwar period. They had emerged later than savings institutions but became prominent in the late nineteenth century (Radice 1939; Goldsmith 1969; Hautcoeur 2004). We collected data on life insurance companies for 16 countries in our sample (in the remaining 7 countries, life insurance companies were either non-existent or not sufficiently organized to report aggregated data). A list of the sources used is given in the Online Appendix.

In these 16 countries, life insurance policies increased on average by 42 percent in nominal terms between 1928 and 1933, while savings deposits increased by 48 percent. Figure 4 shows that, in these 16 countries, the ratio between life insurance policies and nominal GDP increased in the early 1930s, but less than the ratio between savings deposits and nominal GDP.

Figure 4 LIFE INSURANCE POLICIES TO NOMINAL GDP (1929=100)

Notes: Unweighted average of the data for the 16 countries for which we have data on the assets of life insurers. The base year is 1929.

Source: See Online Appendix.

Caution should be exercised when using data on life insurance in international comparisons. Life insurance policies often took the form of investment accounts. The value of an investment account depends on the value of stocks and bonds in which the capitals are invested. Since both the composition of life insurance companies’ assets (e.g., government securities, corporate bonds, or stocks) and the fluctuation of the prices of these assets differed widely from one country to another during the Depression (Snowden 1995; Baker and Collins 2003; Hautcoeur 2004), it is quite difficult to present reliable cross-country comparisons that would capture the true increase in savings and exclude valuation effects. We therefore prefer to focus mainly on savings institutions in the rest of our analysis, while checking that our main conclusions do not differ if we also consider life insurance.

Still, it is remarkable that life insurance policies increased on average by 42 percent between 1928 and 1933, while the price of stocks and junk bonds decreased and the price of safest government and corporate bonds remained stable (for data on the United States, see Basile et al. (2017)).

SAVINGS INSTITUTIONS AND THE CREDIT CRUNCH

From a macroeconomic perspective, the inflow of deposits into savings institutions raises two main questions. First, how has the transfer of deposits from commercial banks to savings institutions affected overall credit? Second, is there any evidence of an increase in precautionary savings, in addition to the flight-to-safety? This section addresses the first question (credit multiplier), while the following will discuss the second one (precautionary savings).

The Assets of Savings Institutions

Savings institutions lent less to private businesses than commercial banks. A larger share of their assets was invested in safe government bonds or Treasury deposits.²¹ Nevertheless, some savings banks were involved in short-term credit markets (such as the Sparkassen in Germany, see Lehmann-Hasemeyer and Wahl (2021)), and could potentially have taken over the role of commercial banks during the crisis. Whether the flight-to-safety led to a decline in the credit multiplier therefore remains an empirical question.

To evaluate this claim, we assembled data on savings institutions’ assets using annual balance sheets, which we then compared to commercial banks’ assets. We managed to collect this data for the 23 countries in our sample, covering the 1923–1936 period. For most countries, we rely on national statistical yearbooks (see Online Appendix). These sources generally report the yearly balance sheets of each type of savings institution. We focus on two categories of assets: loans and securities. Loans include discounts of commercial paper, advances, overdraft credit, and long-term loans (mortgages, long-term loans to the State, long-term loans to agriculture, etc.). Securities include stocks and bonds (importantly, we consider sight deposits at the central bank or at the Treasury as short-term securities, to reflect their high degree of liquidity). For each savings institution, we thus compute two annual series: loans and securities. Then, we split each category into two sub-categories: private and public. The purpose of these two categories is to isolate the lending activities of savings institutions that were potentially similar to commercial banks in that they could finance private businesses.

“Private loans” are comparable to the loans granted by commercial banks (short-term loans to businesses or individuals), while “public loans” are mostly granted to central or local governments or as mortgages. We choose to include mortgages in this second category, because in most countries, the mortgage market was highly organized by the State (with specific regulations and guarantees) while commercial banks were little involved in it.²² Private securities are stocks and bonds issued by businesses, while public securities are essentially government (central or regional) bonds and short-term claims on government institutions. So, according to our definition, deposits invested in public loans and securities could not replace bank credit to businesses.

For a few institutions, balance sheets are not available. This is often the case for postal savings and for savings institutions that were required by law to hold mostly or only government securities. We then rely on available institutional information to characterize their assets. For example, funds collected by the French Caisse Nationale d’Epargne (CNE) had to be deposited at the Treasury or invested in government bonds. In this case, we compute loans as equal to zero and securities as equal to the deposits of the CNE. Here, all securities are public securities (private securities are equal to zero). A country-by-country description of the choices made to construct asset series for savings institutions is provided in the Online Appendix.

For commercial banks, a standardized series of assets were published by the League of Nations.²³ As for deposits, we also used more recent historical studies when possible. Assets are classified into five different categories: cash, commercial bills discounted and bought, investment and securities, participations, and loans and advances. We classify bills discounted and bought, loans and advances under “loans,” and investment and securities and participations under “securities.” All banking loans are classified as “private” loans, and all securities are assumed to be private securities. This assumption cannot be verified by our sources and is very likely to be false in some countries.²⁴ Yet, it will only underestimate the private credit crunch if banks purchased government securities during the crisis.

The Credit Crunch

We expect that the total loan-to-deposit ratio (covering both commercial banks and savings institutions) decreased during the early 1930s when depositors shifted their money from banks to savings institutions. Panels (a) and (b) in Figure 5 compare the credit multiplier (loan-to-deposit ratio) of commercial banks to the aggregate credit multiplier (which also includes savings institutions). The latter is calculated as the sum of “private” loans by commercial banks and by savings institutions divided by the sum of deposits at both types of institutions.

Figure 5 FLIGHT-TO-SAFETY AND THE CREDIT MULTIPLIER

Notes: Unweighted average of the data. Panels (a) and (b) include the 23 countries in our sample. Panels (c) and (d) include the 16 countries for which we are able to distinguish between private and public securities held by savings institutions.

Source: See the text for the definition of private loans and securities.

Bernanke (1983) looked at the loan-to-deposit ratio of U.S. commercial banks to conclude that the fall in bank loans was not simply a balance sheet reflection of the decline in deposits, but was also driven by the rise in information asymmetries after bank failures.²⁵ In the same spirit, Panel (a) in Figure 5 displays the mean of this ratio in our sample of countries. By contrast, a fall in the aggregate credit multiplier (Panel (b)) also reflects a decrease in loans to private businesses driven by the flight-to-safety from commercial banks to savings institutions.

Two comments are in order. First, the pre-crisis aggregate multiplier is significantly below the commercial banks’ multiplier (80 vs. 110 percent). Second, the drop in the aggregate credit multiplier during the Great Depression outweighs the drop in the commercial banks’ multiplier. The aggregate multiplier indeed drops from 80 percent in 1930 to 65 percent in 1935 (an absolute decrease of 15 percent), while the commercial bank multiplier decreases from 110 to 100 percent (an absolute decrease of 10 percent). In relative terms, the 1935 aggregate multiplier is 19 percent below its 1930 value, while the commercial bank multiplier is only reduced by 9 percent. As shown in Panels (c) and (d) in Figure 5, this result is even stronger if we take into account private securities. This time, the aggregate multiplier drops from 92 percent in 1930 to 77 percent in 1935 (–15 percent in absolute terms), while the commercial bank multiplier only decreases from 129 to 124 percent (–5 percent in absolute terms).²⁶ The differences between multipliers are even stronger if we consider 1936 rather than 1935. Thus, a key message of Figure 5 is that the drop in the national loans-to-deposits ratio is larger if we include savings institutions.

By switching their funds from commercial banks to savings institutions, depositors therefore impaired the ability of the financial system to create credit. This is because, indeed, savings institutions provided less credit to businesses than commercial banks. Figure 6 reminds us of this fundamental difference, consistent with the pattern of the ratios in Figure 5. The average share of “private loans” in total assets of savings institutions was around 20 percent and had even slightly decreased during the 1920s, reaching 19 percent in 1929 (Figure 6, Panel (a)). This was in striking contrast with commercial banks, whose loan-to-deposit ratio was above 100 percent (loans exceeded deposits). Not only was the loan-to-deposit ratio of savings institutions low but it continued to decrease slightly during the crisis. The pattern is similar when we include private securities in Panel (b). The savings institutions did not attempt to replace the commercial banks by increasing the share of “private loans” in their balance sheet. This explains why the aggregate credit multiplier fell so much. As can be seen in Table A2, only 33 percent of the assets of savings institutions were invested in private loans similar to those of commercial banks.

Figure 6 COMPARISON OF LOAN-TO-DEPOSIT RATIOS: COMMERCIAL BANKS VS. SAVINGS INSTITUTIONS

Notes: Unweighted average of the data. Panel (a) includes the 23 countries in our sample. Panel (b) includes the 16 countries for which we are able to distinguish between private and public securities held by savings institutions.

Source: See Online Appendix.

Figure 7 highlights the heterogeneity across countries in response to banking crises. It displays the first difference between both the aggregate multiplier (black) and the commercial bank multiplier (grey) before and after banking crises (in percentage points). The first difference is thus calculated over a specific period for each country, depending on when it was hit by a banking crisis (in the case of several banking crises, the last one is considered). For countries that did not have a banking crisis, we take the growth rate between 1930 and 1933 (the years when most banking crises were concentrated in other countries).

Figure 7 CHANGE IN THE LOAN-TO-DEPOSIT RATIO DURING BANKING CRISES

Notes: Difference between the year before the first banking crisis and the year after the last banking crisis (in pp). We focus on the 1928–1936 banking crises. We calculate the difference of both ratios between the year before the first banking crisis and the year after the last banking crisis. For countries that did not have a banking crisis, we take the growth rate between 1930 and 1933. Data for Bulgaria is not available before 1932; hence, Bulgaria does not appear in the graph (Bulgaria experiences one banking crisis in 1931). For Italy, asset data for the casse di risparmio ordinarie are not available for year 1936, so we calculate the growth rate between the years 1930 and 1935 instead (Italy experiences two crises, one in 1931 and one in 1935). Finally, Romania appears as a clear outlier, with an increase in both multipliers of more than 30 percent (driven by a 50 percent fall in commercial bank deposits). In the Appendix, we present the same graph, including Romania.

Source: See Online Appendix.

It is important to note that, since the loan-to-deposit ratio was always higher for commercial banks, a decline in both ratios of the same magnitude (in pp) means that the decline in the aggregate ratio was caused by more than the decline in the commercial bank ratio.²⁷ In the U.S. case, where the fall in both ratios is of similar magnitude, a flight-to-safety to savings institutions was also at work (and the loan-to-deposit ratio of these institutions plunged), in addition to the fall in the commercial bank credit multiplier observed by Bernanke. Figure 7 shows that the change in the commercial bank multiplier was sometimes very small (or even positive), which did not prevent a large fall in the aggregate credit multiplier (Netherlands, Italy, Poland, and France). This fall was driven by the flight-to-safety. In fact, the commercial bank credit multiplier can remain stable (or even slightly increase) even if there is a commercial banking crisis. Friedman and Schwartz’s argument, for example, did not require a decrease in this ratio, but simply that loans and deposits plunged together. For several countries (Hungary, Yugoslavia, and Norway), the commercial bank multiplier even increased while commercial bank deposits fell. The aggregate multiplier also increased in such cases. Consistent with the observation and motivation of Bernanke (1983), the United States—together with Belgium—experienced the largest fall in the commercial bank credit multiplier. In all other countries, the aggregate multiplier decreased more (or increased less) than the commercial bank multiplier.

Comprehensive data on life insurance’s assets for all countries in our sample are altogether missing for the interwar years. However, the investment strategy of life insurance companies in a limited number of countries was studied by Baker and Collins (2003), Hautcoeur (2004), and Stalson (1942). Much like savings institutions, life insurance companies invested primarily in safe assets. In France, on the eve of the Great Depression, life insurance companies, for example, held nearly 70 percent of their assets in state-guaranteed bonds and in real estate. In the United Kingdom, public sector investments accounted for 43 percent of total assets (the rest being mainly held in mortgages and shares). This share remained broadly constant during the Great Depression. Data for the United States show that about one-third of the assets of life insurers were invested in bonds in 1930 (no detail is available on the types of bonds held) and only 3 percent in stocks (see Goldsmith (1969, vol. 1, table I5, p. 450)). The largest share was mortgage loans (40 percent). These shares remained stable in the early 1930s. It is therefore unlikely that the absence of data on life insurance companies’ assets biases our conclusion on the drop of the aggregate credit multiplier.

Why Did Savings Institutions Not Increase Lending to the Private Sector?

Most public savings institutions were required by law to invest exclusively in safe public assets (long-term government debt or deposits at the Treasury) and could therefore not replace banks as lenders to businesses and households. Thus, only a change in their legal statutes or government policy could have allowed them to lend to the private economy. However, political support for such reforms was lacking. Governments believed that using savings deposits to invest in the economy would damage the credibility of the State and those of savings institutions themselves (see, e.g., Tournié (2011) and Monnet, Riva, and Ungaro (2021) on the French debates, de Vicq and Peeters (2022) on the Dutch ones, and Shaw (2018) on those about the assets of postal savings in the United States). Parliamentarians and governments feared that giving more lending power to savings institutions would trigger runs on these institutions, similar to those experienced by commercial banks. They were also sometimes reluctant to increase the competition with the commercial banks. In the United States, after debates on whether the money deposited in postal savings should be used to finance the New Deal, the government eventually decided to create Federal lending programs mostly financed by bond issuance, rather than by savings accounts, and reinforce the banking sector by organizing deposit insurance (Shaw 2018).²⁸ It was only in the late 1930s, and most of the time during and after WWII, that governments in Europe (Bülbül, Schmidt, and Schüwer 2013; Monnet 2018) or Japan (Park 2011) started to use savings institutions to direct credit to some specific sectors or firms. This post-war development coincided with a greater role for government in industrial policy and economic planning, as well as strict banking regulations that reduced the lending role of commercial banks (Monnet 2023).

Portugal is the only country where the government openly asked the public savings institution to take over the role of banks and lend to businesses during the Great Depression. As a result, the decline in the aggregate multiplier was small compared to the commercial bank multiplier. Starting in 1929, Portugal’s national savings bank, the Caixa Geral de Depositos, was involved in a government policy designed to modernize agriculture and industry (Lains 2008). This is the only case in our sample where the loan-to-deposit ratio of savings institutions increased during a banking crisis. Between 1930 and 1932, the Caixa increased its credit to the economy by 58 percent, even more than the 46 percent increase in deposits. Still, counter-cyclical lending by public savings institutions remained the exception rather than the rule.

Private savings institutions enjoyed more autonomy from the state to manage their portfolios. Yet, their business model crucially depended on being perceived as a safe haven by depositors. Unlike public savings institutions, they could not always count on an explicit state guarantee to elicit depositors’ confidence. For this reason, they followed prudent lending policies (Andersson and Rodriguez 2013; Martin-Aceña 2013), by keeping a relatively large share of their assets in cash or public bonds. In France, some members of the private savings institutions asked in 1931 (but did not succeed) to be given more freedom regarding asset management. But they asked for being granted the right to finance long-term safe investments, especially mortgage bonds, rather than to start lending short-term to businesses (Tournié 2011). From the point of view of private savings institutions, not increasing lending to businesses was therefore justified. From a macroeconomic perspective, however, it had disastrous consequences.

PRECAUTIONARY SAVINGS

Our previous argument about the flight-to-safety and the credit multiplier is valid even if there is a constant saving rate. A different matter is whether the transfer of deposits during banking crises was associated with a rise in precautionary savings. If banking crises made consumers and businesses worry about their future ability to borrow, they could have reacted by saving more than before, at the expense of consumption. Whereas neoclassical theory postulates that a rise in the saving rate pushes investment and economic growth up, Keynesian theory predicts that—in the short term—an increase in savings depresses aggregate demand. More recent theories consider that these two views are not incompatible as long as we consider heterogeneous economic agents. The negative effect of an increase in precautionary savings on economic growth can occur at the same time as a decrease in the average savings rate or in total net savings if the richest save while the debt of the poorest increases (Challe et al. 2017; Guerrieri and Lorenzoni 2017; Mian, Straub, and Sufi 2020).

In this section, we present and discuss pieces of evidence showing that the savings flows discussed previously were unlikely to be explained only by a transfer of funds. Instead, some households and firms may have saved more than before, especially when banking crises hit. Before presenting the quantitative evidence, it is necessary to explain the theoretical and empirical difficulties of measuring precautionary savings.

We face several important problems when decomposing the rise in savings deposits between the reallocation of existing funds and new precautionary savings. The first one is that banks create money when they lend (or eliminate it if they do not renew the loan). Thus, commercial bank deposits can decrease both because they are withdrawn by depositors and because loans are not renewed at maturity. In times of economic crisis and banking panic, the two are probably happening at the same time, especially if a commercial bank tries to restore its reserve ratio by reducing lending.²⁹ It follows that the drop in commercial bank deposits is greater than the rise in deposits at savings institutions, even if the increase in the latter is entirely explained by a transfer from the former.

The second issue is that we cannot know if individuals or firms sold other assets (possibly at a depreciated price) to increase their savings deposits. In the handful of countries in which we have estimations of nominal financial wealth (Piketty and Zucman, 2014), it is impossible to distinguish between price and volume effects. This prevents us from measuring the aggregate wealth of different groups and from determining if the rise in savings deposits was driven by the sale of securities. Considering capital losses (or gains) due to changes in the price of securities or housing would run counter to standard practices for calculating savings flows and savings rates (Guidolin and La Jeunesse 2007; Mody, Ohnsorge, and Sandri 2012; Mian, Straub, and Sufi 2020).

The third problem is that an aggregate or average saving rate in fact tells us little about precautionary saving and the Keynesian mechanism. As emphasized by Guerrieri and Lorenzoni (2017) and Mian, Straub, and Sufi (2020), the Keynesian effect of precautionary savings is compatible with a significant part of households (or firms) being debt-constrained while another part of the population saves more. This can be illustrated by the case of the United States, where household debt during the Great Depression has received a substantial amount of attention and for which we have better data on assets and liabilities than in other countries. Olney (1999) shows that households were shouldering an unprecedented burden of installment debt in the early 1930s. This led them to cut consumption in order to repay the debt. Total liabilities of households increased in 1930, 1931, and 1932 by 10 percent a year on average (Mishkin 1978).³⁰ If we exclude equity securities (preferred and common stocks) whose nominal value was mostly driven by a fall in prices, financial wealth actually increased (Goldsmith 1969, vol. 1, table W18), together with indebtedness. It follows that the net saving of households does not decrease when we exclude debt and stocks (Goldsmith 1969, vol. 1, tables S20–21), that is, when we excluded potential asset valuation effects and indebted households.³¹ This is consistent with Goldsmith (1958, ch. 4), who found that, in real terms, total assets of all financial intermediaries increased during the Great Depression in the United States. Put differently, those who accumulated debt were not the same as those who accumulated savings. And if the wealthiest have a greater propensity to save, a coincident increase in savings and debt may even be consistent with a higher savings rate (Mian, Straub, and Sufi 2020). Thus, the U.S. case in fact shows that a decrease in total net savings and an increase in debt are compatible with a greater accumulation of savings by a part of the population in savings deposits and life insurance.

In what follows, we rely on two different (still imperfect) methods to show that the increase in deposits at savings institutions and life insurance companies was not simply a reallocation of funds (i.e., flight-to-safety). Given the data limitations outlined previously, we cannot provide a precise measure of precautionary savings. Instead, we assess whether the pattern of savings is consistent with an increase in new gross savings for at least part of the population or, on the contrary, whether the savings potentially destroyed in bank failures clearly outweigh the increase in funds in other savings institutions.

Attempting an Evaluation of Precautionary Savings

Figure 8 presents the evolution of total savings, calculated as the sum of commercial bank deposits, savings institution deposits, cash in circulation, and life insurance policies. This is intended to measure approximately the financial wealth of households and firms (excluding securities). The key feature is to include commercial bank deposits that decreased during the period. Thus, if all the increase in savings deposits, cash, and life insurance was driven by the fall in commercial bank deposits, this measure of total savings should not grow. If it grew at a faster rate than total income, we interpret this as evidence of precautionary savings.³² This method deliberately understates precautionary savings because it assumes that the entirety of the decrease in bank deposits was driven by withdrawals. Moreover, looking at the growth of real savings also understates precautionary savings because of the “paradox of thrift” emphasized by Keynes (Chamley 2012; Eggertsson and Krugman 2012): the initial increase in savings causes a fall in GDP so that both real savings and real GDP eventually grow less than their potential.

Figure 8 SAVINGS DURING THE GREAT DEPRESSION (DEPOSITS, CASH, AND LIFE INSURANCE)

Notes: Total savings is calculated as the sum of savings institution deposits, commercial bank deposits, cash in circulation, and life insurance policies. Panel (a) shows the unweighted average of the ratio total savings to nominal GDP across the 16 countries for which we have life insurance data. Panel (b) presents the evolution of the ratio of global savings to global nominal GDP. To obtain this ratio, we first convert each country’s total savings in dollars using yearly exchange rate data (see Appendix). We do the same for national GDPs. Then we add up savings to create a yearly measure of world savings, which we divide by the sum of national GDPs. The sample is the same as in Panel (a). Panel (c) plots the cross-country average of the ratio of real total savings to GDP. Unlike in Panel (a), the GDP is held constant (at its 1929 value). Panel (d) looks at real global savings. We use the same measure of world dollar savings as in Panel (b), but instead of scaling it by nominal GDP, we deflate it with the U.S. price index (constant 1929 prices). The sample is the same as in Panels (a), (b), and (c).

Source: See Online Appendix.

We first look at the ratio of savings to GDP in order to check if economic agents decreased their savings to compensate fully for the decrease in income. It is clear that they did not. In Figure 8, Panel (a) presents the cross-country average of the ratio of total savings to nominal GDP. The sample is limited to the 16 countries for which we have data on life insurance. Starting in 1929, the ratio increased very sharply. The ratio indeed jumps from 69 percent in 1929 to 79 percent in 1930, finally reaching a maximum of 102 percent in 1934. To rule out the possibility that outliers are driving this result, we also calculate the ratio of savings to GDP at the global level, that is, for all countries in our sample. To do so, we convert national series into dollars using yearly exchange rate data. We then compute a series of total savings, which we divide by total nominal GDP. This method gives larger economies a larger weight. This property is particularly interesting to capture how precautionary saving may have affected aggregate demand at the international level during the Great Depression. Panel (b) plots the ratio of global savings to global GDP. Once again, the ratio jumps from 60 percent in 1929 to 94 percent in 1932 and 117 percent in 1935.

We now look at the real growth rates of our measure of savings. Panels (c) and (d) confirm that the evolution presented in Panels (a) and (b) is not only driven by the fall in GDP during the Great Depression. While GDP and prices collapsed, total savings accumulated in financial institutions continued to grow. Panel (c) looks at the cross-country average of the real savings to GDP ratio with GDP kept constant (at its 1929 value). We still scale savings by GDP in order to obtain comparable values across countries. Yet, as savings are divided by the value of GDP in 1929 for each year, the increase in the series after 1929 cannot be due to the fall in GDP. Like in Panel (a), the ratio increased markedly in 1930 (from 69 to 84 percent) to finally reach 103 percent in 1934. It is not surprising to see that real savings (expressed as a share of 1929 GDP at constant 1929 prices) increased in the 1920s in line with real GDP growth. It is striking to see that it continued to rise in the 1930s while the world entered an economic depression and real GDP fell.

Panel (d) provides a similar picture looking at the evolution of the world’s real savings (in dollars). To obtain this series, we calculate total nominal savings by year in dollars (like in Panel (a)), which we then deflate using U.S. prices. The series is thus expressed at constant 1929 prices. As Panel (d) shows, world real savings more than doubled between 1929 and 1935 (930 to 2150 billion constant U.S. dollars). Consistent with studies that have underlined the deflationary international context (Eichengreen 1992), we thus show that the increase in precautionary savings was a global phenomenon, which means that it could affect aggregate demand across countries. All series in Figure 8 decreased markedly in 1936, when the last European countries (Gold bloc) left the gold standard.

Banking Crises and Precautionary Savings

We now test directly whether a rise in savings was associated with a banking crisis. Following the literature, the usual method is simply to regress a measure of precautionary savings on a measure of banking crisis (Mody, Ohnsorge, and Sandri 2012). In accordance with the previous discussion, it is important in our case to control for reallocation between different types of savings. Otherwise, we could wrongly interpret the positive coefficient on the banking crisis dummy as evidence of a positive correlation between precautionary savings and crisis, whereas it in fact captures the reallocation between different forms of savings during banking crises. Thus, we use the growth rate of the sum of savings deposits, cash, and life insurance policies on the left-hand side, and we include the growth rate of commercial bank deposits, equity return, and the growth rate of housing prices on the right-hand side. If a banking crisis triggers only a reallocation of funds from the variables on the right-hand side to those on the left-hand side, then the correlation between these variables should be negative, and the coefficient on the banking crisis dummy should equal zero. By contrast, if the coefficient on the banking crisis is positive despite the aforementioned control variables, we conclude that a crisis was associated with a rise in precautionary savings, at least for a part of the population. Finally, since our dependent variable is the nominal growth rate of savings, we control for the nominal growth rate of GDP on the right-hand side. This prevents the correlation between banking crises and savings from being driven by the direct effect of banking crises on output and prices.

(1) $$ Saving{s_{i,t}} = {\beta _0} + {\beta _{\rm{1}}}BankPanic{s_{i,t}} + {\beta _{\rm{2}}}Ban{k_{it}} + {\beta _{\rm{3}}}GD{P_{it}} + {\beta _{\rm{4}}}Equit{y_{it}} \\ + {\beta _{\rm{5}}}Housin{g_{it}} + {y_t} + {d_i} + {\varepsilon _{i,t}} $$

Savings is the growth rate of our measure of total savings (savings deposits + cash + life insurance). An alternative specification will exclude life insurance from this measure. BankPanics is a banking crisis dummy; Bank is the growth rate of commercial bank deposits; GDP is the growth rate of nominal GDP; Equity is the return on equity (calculated as the growth rate of the stock market index by Baron, Verner, and Xiong (2021)); and Housing is the growth rate of housing prices.³³ Bank controls the reallocation away from commercial bank deposits, while Equity controls the reallocation from stocks, and Housing controls the reallocation away from real estate. All specifications include country-fixed and year-fixed effects. Standard errors are clustered at the country level. Year-fixed effects capture common global shocks, including the international contagion of the U.S. stock market crash of 1929.

Column (1) estimates our model without the control variables Equity and Housing. The sample is limited to 16 countries because of the availability of GDP and life insurance data. In Column (2), we add Equity as control variable. In Column (3), we estimate the full equation by adding Housing as control variable. Adding housing prices to the equation decreases the sample to 12 countries. Column (4) replicates the specification from Column (3), but it excludes life insurance policies from our measure of total savings. The first four specifications are estimated using an updated version of Bernanke and James’ definition of banking panics. In Column (5), we look at the effects of banking crises, which include both panics and “quiet” crises.

According to the benchmark specification, banking panics lead to a significant increase of 2.5 percentage points in the growth rate of our measure of total savings (Column (1)). The coefficient is larger (3.1 pp) when adding control variables (Columns (2) and (3)) and increases again (4.5 pp) when excluding life insurance policies from total savings (Column (4)).³⁴

In the fifth column, we combine Bernanke and James’ coding of banking panics with the recent coding of Baron, Verner, and Xiong (2021), which includes banking crises without panics. Compared to Column (3), the coefficient is slightly larger (3.5 pp vs. 3.1 pp). In line with previous discussions, considering such episodes confirms that bank runs and bank failures were not a necessary condition for banking crises to produce an increase in precautionary savings.

Did Precautionary Savings Predict Banking Crises?

A different interpretation of the results displayed in Table 2 would be that banking crises were themselves due to a drop in aggregate demand in the preceding years, driven by precautionary savings. This could have weakened the economy and hence the health of the banking system, as argued by Temin (1976).³⁵

To account for this potential problem, we run a regression with a banking crisis dummy as an independent variable and the lagged value of the growth of savings deposits as an explanatory variable. If Temin’s argument were valid, a banking crisis at date T could be accurately predicted by the increase in savings at date T–1. The results presented in Table 3 invalidate this hypothesis. The coefficient on lagged savings deposits is never significant (and usually negative). In Columns (1) and (3), we consider the logarithm of savings deposits and, in Columns (2) and (4), their growth rates. In Columns (3) and (4), we add control variables (commercial bank deposits, cash, and GDP). In the Online Appendix, we consider alternative specifications where we also include life insurance with a smaller sample size or use the extended definition of banking crises. We still find no evidence that the previous values of the level or growth rate of savings predicted banking crises. This invalidates the Keynesian interpretation that the banking crises of the Great Depression were the consequence of a decline in aggregate demand in the preceding years.

Table 3 THE INCREASE IN SAVINGS DOES NOT PREDICT BANKING CRISES

* p<0.1 ** p<0.05 *** p<0.01

Notes: The dependent variable is our banking panic dummy. The estimation period is 1920–1936. All variables are lagged by one year. Columns (1) and (2) do not include any controls. In Column (3), we control by the lagged value of log bank deposits, log banknote circulation, and log nominal GDP. In Column (4), we use the growth rate of the same variables as control. All estimations include country-fixed and year-fixed effects, and standard errors are clustered at the country level.

Source: See Online Appendix.

CONCLUSION

The banking crises of the Great Depression shifted the world economy from a regime of easy credit to a regime of tight credit (Eichengreen 1992; Eichengreen and Mitchener 2004; Schularick and Taylor 2012). This change has been widely studied—at the national or global level—as the consequence of the decline in money and of the increase in the cost of financial intermediation caused by bank failures (Friedman and Schwartz 1963; Bernanke 1983; Bernanke and James 1991). Our investigation points at an additional mechanism: credit collapsed because banking crises were associated with a transfer of funds from commercial banks to other institutions that collected savings but did not lend (or lent much less) to businesses. This paper has provided evidence of such transfers and of their significant effect on the total credit multiplier, considering both banks and non-banks. The overall picture is one of a decrease in credit, despite the rise of real gross savings.

We hope to have demonstrated that the aggregate effect of banking crises during the Great Depression can no longer be studied without considering jointly the savings institutions to which depositors turned during bank failures. Data from more than 20 countries illustrate the international character of this phenomenon. More research is now needed to understand the precise country-specific mechanisms behind these transfers and new savings flows, and how governments and banks responded differently across nations. A key question that emerges from our research is why governments did not actively act to redirect accumulated savings toward business investment.

Studying the transfer of savings from commercial banks to savings institutions and life insurance, we also found evidence that the increase in savings was not only a reallocation of funds. Here we relate to the Keynesian interpretation of the Great Depression, which emphasizes the decline in aggregate demand (Temin 1976; Eichengreen 1992; Romer 1990; Bernanke and James 1991). Our contribution to this line of thought is to present some first-hand evidence of an increase in savings where the literature previously focused on consumption or macroeconomic fiscal and monetary (gold standard) constraints. While an increase in savings caused by banking crises may have aggravated the Great Depression, there is no evidence that an increase in savings predicted the banking crises. The rise in savings does not contradict the debt-deflation channel that may also have been at work in several countries. The two are compatible as long as we take into account household and firm heterogeneity (Guerrieri and Lorenzoni 2017). Given the data problems and limitations inherent in cross-country analyses, however, we recognize that there is still much to be written on the distribution of savings and on financial inequalities during the Great Depression, and on how it may have contributed to the deepening of the global economic crisis.