The central bank as safe haven: Flight-to-safety, democratization, and credit contraction in the Spanish Second Republic

Abstract

In the past, central banks were also retail institutions, directly accepting deposits from the public. This article studies a historical episode of flight-to-safety during a banking crisis in which large depositors withdrew their deposits from banks, moving them not only abroad or into cash, but also into the central bank. I ask how this safe-haven channel shaped the financial backdrop of democratization in interwar Spain. The 1931 proclamation of the Second Republic turned long-repressed demands for redistribution into a credible, if uncertain, redistributive threat to large depositors, triggering a run on bank deposits and capital flight, to which authorities responded by restricting capital mobility. Because opening and using a Banco de España (BdE) retail account required a very high initial deposit and subsequent contributions, access was formally open but effectively restricted to large bank depositors. Using new branch-level balance-sheet data, I document a stronger flight-to-safety to BdE deposits in cities where banks lost more deposits, show that this inflow was persistent, and find that the BdE did not use it to expand credit or replace banks’ lost intermediation due to the run on their deposits. Flight-to-safety into central bank liabilities thus let large depositors preserve the nominal value of their wealth, but without an offsetting expansion of public (central bank) money, the resulting fall in private money went uncompensated — contributing to the credit contraction that marked the democratic Republic’s first months.