How Did Pre-Fed Banking Panics End?
93 Pages Posted: 21 Jan 2016
Date Written: 2016-01-14
How did pre-Fed banking crises end? How did depositors' beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility; that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.
Keywords: Financial crisis, bank runs, banking panic, clearing house, bank-specific information, currency premium
JEL Classification: E44, E58, N21
Suggested Citation: Suggested Citation