Banking and Financial Crises in United States History: What Guidance can History Offer Policymakers?
Ellis W. Tallman
Indiana University Bloomington
July 20, 2010
FRB of Cleveland Working Paper No. 10-09
This paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, precursor to the modern investment bank. During the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which had only indirect access to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises of the Great Depression as relevant comparisons to the recent crisis. This paper argues that such an analogy is inaccurate. The previous banking crises in U.S. history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears and large counterparty exposures among large complex financial intermediaries. In historical incidents, monitoring counterparty exposures was standard banking practice and the exposures were smaller. From this perspective, the lessons from the past appear less directly relevant for the current crisis.
Number of Pages in PDF File: 47
Keywords: Financial panics, bank runs, lender of last resort, too big to fail
JEL Classification: N11, N12, N21, N22, E42, E44, E58working papers series
Date posted: August 11, 2010 ; Last revised: August 27, 2010
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