Ferguson and Temin criticize my article for only paying lip service to the notion of a twin crisis while providing a story of a pure banking crisis. In fact, I have never claimed that the crisis was a pure banking crisis. The question is whether and to what extent banks contributed to the crisis. Ferguson and Temin take the position that the crisis was a pure currency crisis. I argue that weaknesses in the banking sector existed, which interacted with the currency problems in numerous ways. The focus of my article on banks reflects the nature of the question, rather than any view that currency problems were unimportant.

A denial of problems in the banking sector stands in stark contrast to even the most obvious facts. Indisputably, the final panic was triggered by the breakdown of a very large bank that was insolvent due to imprudent lending. The idea that Nordwolle—and hence Danatbank—failed due to the rise in the discount rate in June 1931 is at odds with the facts.¹

Ferguson and Temin argue that the German crisis does not fit the picture of an “American-style banking panic.”²

However, that definition of a banking crisis is too narrow. In Germany, the banking problems manifested themselves in a protracted retreat of depositors from the great branch banks. Both before and during the crisis of 1931, these banks lost a much larger part of their deposits than other bank groups, such as the great nonbranch banks, even though the latter had higher shares of foreign deposits. Deposit losses at Danatbank of 5 percent from March to May 1931 following 13 percent from June 1930 to March 1931 cannot be regarded as negligible, especially when contrasted with the 2-percent increase at the great nonbranch banks from March to May 1931 following a 5-percent decrease in the earlier period. This heterogeneity cannot be explained on the basis of a pure currency crisis view.

The intensity of deposit losses was correlated with the banks' liquidity and solvency positions.³

Because the weakest banks were the largest banks in the system, their problems translated into noticeable deposit withdrawals. Given these banks' large shares of foreign deposits, the deposit withdrawals weakened the Reichsbank's reserve position and exacerbated the currency problems.

In discussing whether the Reichsbank was a “typical gold-standard central bank,” Ferguson and Temin stress the impact of the gold-coverage requirement in the crisis while neglecting the role of the discount window at times when the coverage ratio was not binding. The great banks' policy of attracting huge levels of foreign debt while relying on the Reichsbank for their liquidity set the stage for a vicious circle linking deposit withdrawals, discounts, and the Reichsbank's reserves. Political shocks and the prospect of currency disturbances created distrust of the Reichsbank's ability to support the banks and thereby contributed to the deposit losses. The political and currency disturbances thus had an additional impact on the banking sector, over and above the channel described by the proponents of the currency crisis view.

The bottom line is that the pure currency crisis interpretation is too simple to capture the various interactions between the banking and the currency problems in the German crisis.